Everybody may seem hungry for bandwidth, but the parts needed to build the pipes continue to be in short supply. Optical equipment manufacturers continue to find themselves handcuffed by a shortage of optical components, which range from thin-film filters to lasers.

"The supply can't keep up with the demand," says Windsor P. Thomas, III, product-line manager for Dense Wave Division Mutiplexing (DWDM) components for Corning Inc. http://www.corning.com (NYSE:GLW). "All it takes is for one part to be missing," says Thomas. "It's like selling a car without the wheels; its worthless."

The shortage has resulted in delays in filling orders to systems vendors such as Alcatel SA http://www.alcatel.com (NYSE:ALA), Lucent Technologies http://www.lucent.com (NYSE:LU), Nortel Networks http://www.nortel.com (NYSE:NT), as well other DWDM vendors. The issue has even come up in quarterly earnings conference calls with Wall Street analysts who are concerned about the effects of the component shortage on company growth. In some cases, the shortage has meant delays in filling orders to carriers.

The problem has not only affected vendors' capability to manufacture and ship existing products, but it has also delayed the testing and qualification of new ones.

"We need to test the product before it goes to market," says Isabelle Paranteau, a systems engineer for Nortel's Optera Long Haul DWDM product line. "But we're delayed because we can't get the filters. Everything is held up at that point."

Alcatel officials claim they've ramped up production of their own optical components group to supply their production needs. But optical equipment start-ups generally don't have the cash or expertise to get into the component business; they must rely on third parties to provide the components, modules and subsystems. Start-ups also have another strike against them: because they can't buy the volumes that bigger players buy for their multiple product lines, they are often at the bottom of the list to get necessary parts.

"Someone who buys 10,000 parts a month is going to get more attention from a supplier than someone who buys 10 a month," says Steve Alexander, Chief Technology Officer (CTO) of Ciena Corp.http://www.ciena.com (Nasdaq: CIEN). "We're a large consumer, so we tend not to have too much trouble getting what we need."

The short supply and high demand for these parts has also sent prices sky high. In a recent conference call with investment analysts, Ciena officials noted the rising cost of components could cut into profits. Some cite these high costs as a barrier to the acceptance of WDM technology in metropolitan areas markets. Much like the fiber shortage, the shortage of components puts the control of pricing solely in the hand of suppliers (see Fiber Queues Put Cablers in Control).

In an attempt to keep up with the growing demand, vendors like JDS Uniphase Inc.http://www.jdsu.com (Nasdaq: JDSU), Lucent Technologies and Corning have all announced multimillion dollar plans to add hundreds of square footage to manufacturing facilities and hire thousands of new workers to help increase production.

But such measures can only go so far toward solving the problem. The root cause is likely in production lines reminiscent of the old economy. For some components, like WDM filters, the assembly and packaging is still done manually. For example, thin film filter technology, the most widely used technology for WDM systems today, requires a technician to manually glue separate pieces together, which can take as much as 45 minutes per device. After the device is assembled, it has to be tested. The entire process from start to finish can take anywhere from four to six hours for a single three-port package.

"If you go into any thin-film manufacturing plant," says Thomas, "all you'll see is rows and rows of people."

Large components manufacturers such as JDS Uniphase, which has added much of its new capacity through acquisitions, will not be able to survive on sheer man-power, say experts. In order to keep up with the explosive demand, the optical component industry needs to develop automated assembly processes, just as the semi-conductor industry evolved over 20 years ago.

Corning is one of the first to move in this direction. Through a partnership with Samsung Electronics Co.http://www.samsung.com, the company announced in January 2000 that it was completely automating its thin film filter facility in Marlborough, Mass. The new facility, which has already begun shipping its first batch of qualified components cuts down the assembly time from hours to minutes.

"It will improve the productivity by an order of magnitude at least," says Thomas.

Lucent has spent $30 million to automate facilities in the Allentown, Pa. area. Even with increased yields through automation, there will be plenty of business to go around.

Wall Street clearly recognizes this point and has kept component vendors stock flying high as the rest of the tech market sags. (see Portfolios on Fire).

by Marguerite Reardon, Senior Editor, Light Reading

(http://www.lightreading.com)