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Component Cannibalism?

Light Reading
News Analysis
Light Reading
7/30/2002

Haleos Inc., a onetime optical subassembly manufacturer in Virginia, is entertaining bids for its assets from 3M Company and Shipley Company LLC.

According to Mike Hastings, bankruptcy attorney for Haleos, U.S. Bankruptcy Court in Harrisonburg, Va., is set to review these and other bids on August 28, after which bidders will get a chance to revise and finalize their offers. It looks as if the price will hover in the $2 million range (small potatoes, given the $22 million Haleos roared through in its two short years of life).

The news reflects an ongoing trend toward consolidation in the optical components market, whereby larger industrial players with manufacturing experience may be key to rescuing the industry.

Haleos has been seeking a buyer or financier for months (see Haleos: Final Days?). Like a handful of other optical components startups, most notably Zenastra Photonics, whose work was also snatched from history's dustbin earlier this year (see Zenastra Reborn?), Haleos appears to have tried to do too much. It planned to design both active and passive optical components and to offer its own fabrication services.

It's a model that's proven anathema for startups. Indeed, the offer of independent fab services seems to be a near-guarantee of disaster. Making photonics components to order is prohibitively costly -- even more so in these times when optical networking designs are being shelved. This was evident in the closure of the U.K.'s OMD earlier this month (see UK Components Foundry for Sale) and in the jettisoning of foundry facilities by Zarlink Semiconductor Inc. (NYSE/Toronto: ZL).

And here's where the speculation on the future of the optical components industry comes in: Even though many startups have failed at the charter to make optical parts, experts say medium and large companies like 3M and Shipley may find a boon in doing so. By buying up companies like Haleos, particularly now that they are going at fire-sale prices, they can take advantage of a newly emerging market for integrated optical components (see Photonic Integrated Circuits).

Experts say that when the market returns, it will be led by demand for these components, which combine multiple functions on a common substrate or platform, saving a range of costs for supplier and buyer. The goal is to mimic the efficiencies of the electronic semiconductor industry.

"Optical components were always a mix of cottage industries, all sub-critical and on different platforms," writes Greg E. Blonder, general partner at Morgenthaler, in an email to Light Reading. He says acquisition now, when assets are cheap, could be key to the future of companies like JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU), which already have large, substantial component-making machinery in place and therefore don't have to invest billions to start from scratch. "JDSU should leverage their position as a complete product line supplier to integrate disparate components into one coherent (lower cost) whole."

Others say that the ability to make cheaper integrated components will eventually enable large optical component players to realize the vision some startups had of making parts to order.

"Passive [components] will all be made in China... Standard actives will be mostly manufactured in Japan... U.S. component companies will need to focus more on specialty components, kind of like the ASIC model in electronics," says the head of an optical components startup, who asked not to be named (see US to China: Do You Copy?).

Analysts say it will take a while for components companies to make their mark this way. Indeed, JDSU CEO Jozef Straus was taken to task by some analysts after this week's earnings conference call (see JDSU's Rationalization Process), during which he indicated the company would pursue the market for specialized parts. "The company's vertical integration and formative modules strategy is powerful, but may take several more quarters to prove out," wrote James Jungjohann and his colleagues at CIBC World Markets in a note to investors afterward.

3M has a sizeable business in passive optical components, and Shipley makes microelectronics materials. Neither will give specific reasons for its interest in Haleos. But both are interested in expanding their businesses and keeping up with trends in telecom demand. Both also are in a position to buy cheap assets.

Given the risks and possible rewards, it will be interesting to follow up on sales like this one -- and see just what the buyers make of them.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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FiberGuy
FiberGuy
12/4/2012 | 10:01:53 PM
re: Component Cannibalism?
I do agree that in the near term, companies are focusing on purchasing passive & actives in Asia due to the added cost savings. However, I do not believe that, once the industry recovers, the overall lack of quality in these components will not come back to haunt each company who installs them (I know from experience).

My thoughts are that U.S. component companies will stay alive by introducing new technologies and "specialty components", but will be back in the drivers seat once a recovery is in sight.
52534
52534
12/4/2012 | 10:01:50 PM
re: Component Cannibalism?
It's typical of those with sour grapes to trash the quality from China. However, the Chinese learn perhaps faster than we do, and the quality of many shops is high. We just purchased thousands of SC Duplex MM patchcords for $6 and the quality was perfect...we couldn't make them for that.

If you are in the patchcord or connector business in the US with a manufacturing base...be very scared...shut your operations down and import before you lose more money!

jacket353
jacket353
12/4/2012 | 10:01:49 PM
re: Component Cannibalism?
I agree with gfiber, why make the stuff here when you can have little kids and slave laborers making the stuff for peanuts?
brahmos
brahmos
12/4/2012 | 10:01:49 PM
re: Component Cannibalism?
um,what can one call 'startup alpha studs' who
work 7 days 12 hr workdays including national hols?
we are all enslaved to an extent and open to
browbeating depending on circumstance.
FiberGuy
FiberGuy
12/4/2012 | 10:01:48 PM
re: Component Cannibalism?
Exactly jacket353... and why have a qualified technician or engineer looking over the parts when you can have someone coming to work after watching cartoons make them?
FiberGuy
FiberGuy
12/4/2012 | 10:01:47 PM
re: Component Cannibalism?
gfiber... this may be the case, but making patchcords and connectors are very different from making a highly integrated active and passive module.
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