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Optical components

Fabrinet Gets a Flying Start

After all the tales of financial woe in the startup community, it's refreshing to hear about a startup that's actually making money -- lots of it.

Based in Thailand, Fabrinet Company Ltd. is a contract manufacturer of optical components. In the 18 months since it was founded, the startup has recorded revenues of more than $190 million, it claims.

Fabrinet also took an undisclosed amount of investment from H&Q Asia Pacific, money that's still in the bank, according to Mark Schwartz, Fabrinet's senior VP of strategy and corporate affairs.

What's the secret of Fabrinet's success? In a word: Seagate, as in disk drive powerhouse Seagate Technology Inc..

Fabrinet's founder, Tom Mitchell was a co-founder, former president and COO at Seagate. He spotted a gap in the outsourcing market -- in optical components -- and decided to fill it. The logic goes that the manufacture of disk drive subassemblies (Seagate's forte) demands skills similar to those required in the optical components industry, and has to meet similar tolerances. If anything, the tolerances for making disk drives are tighter, according to Fabrinet.

Right now, most contract manufacturers like Celestica Inc. (NYSE, Toronto: CLS) and Solectron Corp. (NYSE: SLR) stick to systems work -- "plunking things down on printed circuit boards," as Schwartz puts it. It's hard for them to move down the food chain and start assembling, aligning, and packaging optical components, because that requires completely new skills and equipment, he contends.

But that's starting to change. The photonics division of Flextronics International Ltd. (Nasdaq: FLEX), which has recently signed contracts with laser vendors K2Optronics Inc. and W.L. Gore & Associates, appears to have made the biggest inroads into the components space. Schwartz is sure that other companies will soon follow this lead, as demand for outsourcing of component manufacturing grows (see Future Avanex CEO: Outsource it!).

Fabrinet, however, appears to have gotten a headstart on the competition, thanks to its strong Seagate connections. Here's how.

The startup's first move was to buy a 200,000-square-foot manufacturing facility in Thailand from Seagate, along with its 1600-strong labor force. Part of the deal was that Fabrinet took over manufacturing of the disk drive subassemblies made there. In fact, ensuring continued supply of those parts was more important to Seagate than getting the meanest deal on the purchase price of the factory, says Schwartz, implying that Fabrinet got the facility for a knockdown price.

What's more, the contract with Seagate to manufacture disk drive subassemblies has kept the startup afloat while it's been transferring production of components over from new customers, a process that can take up to nine months. That contract has accounted for about 75 to 80 percent of the revenues so far, according to Schwartz.

On top of the experienced staff that came with the factory, Fabrinet also managed to capture a number of executives who had previously worked at Seagate. A key post that was filled was that of VP of materials. Mike Alarid, who took up the position, previously spent 10 years as Seagate's VP of operations, overseeing all materials procurement and day-to-day manufacturing operations.

Alarid's existing relationships with materials vendors in Asia makes it possible to source materials more cheaply and to find the best quality supplies, Schwartz says. Fabrinet is a "turnkey materials management company." In other words, it takes over all materials procurement for its customers.

Fabrinet also implements "Six Sigma" manufacturing disciplines, a method of controlling quality that requires all Fabrinet's suppliers to follow the same code. "Using Six Sigma disciplines has been proven to lower defect rates dramatically," Schwartz notes. That means higher yields and more cash saved.

The bottom line is that Fabrinet figures it can save its customers a lot of money, although that's not the only thing it's boasting about. "Our customers don't just partner with us because Asia is a low-cost labor pool," contends Schwartz. "They partner with us because we have an excellent process engineering team that works on continually improving the process."

And he crows about the favorable tax rate of 10 percent that Fabrinet has negotiated with the Thai authorities. "If you save a penny on materials or save a penny on taxes it's still a penny saved."

So far customers aren't prepared to be named. But Schwartz does say that they are all Tier 1 vendors locked into three-year supply contracts.

Fabrinet has also appointed JP Morgan H&Q as lead investment banker, which might indicate that an IPO is in the offing.

— Pauline Rigby, Senior Editor, Light Reading
http://www.lightreading.com
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