The Environment for Optical Components

May 2002

Presented on Behalf of the

Manufacturing Engineering Department, Boston University

LightWave Advisors, Inc.

Johndex@optonline.net
John Dexheimer
Where are we?
 Optical Component Industry is the “big 4” plus 400+ wannabees
 New Entrants plus consolidation will change the landscape
 2002 rhk forecast of $4B vs. $5.3B in ’01 and $8.9B in ’00
• End of 2000 forecast for 2002 was $17B

 US Carrier Capex to decrease again in 2002

 Down 17% in ’01, down 21-25% in ’02
 Incumbents dominate Capex for several years

 Component industry slowdown will last 1-3 years

 Inventories still high
 Light new channels or improve : 1-2 years; transponders, line cards
 Light new fiber : 2-3 years; EDFAs, WDM
 Metro growth returns earlier, but not large enough to “pull up” entire sector
Notable Moves and Trends
 International might lead in deploying New Systems Architectures
 Over 60% of CAPEX budget; 7 of 10 top carriers are non-NA
 Growth in 2001 and 2002
 Not overcapacity in legacy systems; not “restricted” by Telcordia
 Pushout of Advanced Systems Deployments
 Cancelled large scale switches, tunable system projects, 40GB projects
 Current demand to have working and reproducible betas
 High growth resumes when a new cost paradigm succeeds : Is there a leader
among carriers as innovator?
 EMS players – The real “500 pound gorilla”
 Acquistions – Systems Plants: Alcatel, Nortel, NEC, Lucent, etc.
 Emerging Optical capabilites – Solectron, Flextronics, Celestica, Pemstar,
Plexus, Sanmina
 Hypothesis: a return to high growth requires their active involvement
 Monitor effect of Industry Groups
 US regulatory, CSPP
 Standards – OIF,GMPLS, Metro Ethernet Forum, PONS,NEMI, IPC,PMA, etc.
 No Quick Fixes

U.S. long-haul capacity (Tbps)

 Fiber Glut
 Metro vs Long Haul Installed lit capacity Required capacity

227
 Carrier profitability
 “Revenues per bit should drop
much more rapidly than in the
past, on the order of 25-30% per 150
year. Consequently,…., carriers 151

will have to reduce total costs 25-

30% per year to achieve a 93
100
targeted 12% return on invested
capital by 2005”1 50
55
62
32
41 37
20
22
 FUD(Fear , Uncertainty, Doubt) 13
End 2000 2001 2002 2003 2004 2005
of
Year
2000
Range of Estimate

1
U.S. Communications Infrastructure at a Crossroads/Goldman Sachs/McKinsey&CO
 –ez:
––Add
Addline
linefor
for
number of
number of
Rapid
private Decline of Funding (Communications Equipment)
privatedeals
deals
Survival vs. Innovation

35 800

# of Companies Receiving Financing

Disbursements
30 700

Private Companies Receiving Funding

Disbursements ($BN)

600
25

500
20
400
15
300

10
200

5 100

0 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001*
* Annualized estimates based on YTD actual results

Source: Venture Source

There is Still a Healthy Capital Base vs. History

Total Dollars Committed to Venture Capital Funds

$ millions
75,000

70,000

65,000

60,000

55,000

50,000

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0
1993 1994 1995 1996 1997 1998 1999 2000 2001
Early-stage Late-stage Multi-Stage Other

Source: The Private Equity Analyst

* Figures as December 31, 2001
 Technology Transformation Will Continue
 Investment in operating efficiency must occur
 Electronic to Optic adds another layer of price performance
 Mesh networks versus ring networks
 Multiple segments of opportunity – BUT TIMING IS BEING PUSHED OUT
Systems OSS
 Modularized  Multivendor
 40 Gbps Systems  IP/MPLS routers IP
 True optical  MSPPs OSS Platform equipment NMS for
 Integrated CRM NGN
switches

High
 Grooming switches
High

 QoS management
 GigE
solutions
equipment
 IP billing
 Ultra long-haul
 Middleware
Expected Size systems Expected Size
of Opportunity  OADMs of Opportunity  Inventory
 Packet telephony Management
 Terabit routers

Low
 PON
Low

Components
 40 Gbps TxRx  Tunable laser
 Optical switching  Integrated
High Low High Low
fabrics subsystems
High

Difficulty of Difficulty of
Adoption/Commercialization Adoption/Commercialization

Expected Size
 PMD  DCM (chromatic)
of Opportunity
 VCSELs  Raman amplifiers
Low

High Low
Difficulty of
Source: Goldman Sachs/McKinsey & Co
Adoption/Commercialization
Advanced Optics Materials and Integration Have Been Active

Post “proof of technology” requires substantial funding

to be a player in market penetration

Timing is a BIG ??
total
last round Valuation date invested employees Est. 01 Rev. comme nts/status of company

Axsun 101.0 750.0 Jan-01 157.0 90 7 micro integration

Cierra Photonics 40.0 110.0 Oct-00 56.0 80 3 25Ghz 5 cavity filter, wafer scale integration
Cisilias na na Jul-00 na na na amp array, NKT backed
Gemfire 63.0 214.0 Mar-01 85.0 110 3 planar arrays; Cisco, Corning, Triquint, Finisar, Inte
Genoa 74.8 400.0 Sep-00 95.0 140 5 SOA
Gigabit Optics 20.0 na Oct-01 26.0 na 0 integrated transceiver, down round
Haleos 12.0 70.0 Mar-01 13.0 180 15 OMS focused
Intelcore 25.0 37.0 May-01 31.0 25 0.5 specialty fiber
Kamelian 18.0 na Dec-00 na 35 0 SOA
MOEC 20.0 110.0 Dec-00 40.0 100 4 amplets, VOAs
Northstar Photonics 11.0 35.0 Oct-01 22.0 30 0 Lasers, amplets ; ADC relation
Onetta 56.0 200.0 Feb-01 68.0 200 5 new 52,000 sq. ft., Sumitomo investment
Optical Crosslinks 6.0 24.0 Jun-00 6.0 30 1.6 polymer interconnects
Southhampton Photonics 35.0 85.0 Nov-01 55.0 100 0.8 recent close on May, 2000 deal
Symmorphix 23.5 80.0 Oct-00 41.4 55 0 planar ICs, amp gain
TEEM 34.0 70.0 Oct-00 36.0 80 2.5 amplets
Telephotonics 10.0 na Sep-01 28.0 50 0 bridge $, planar Ics

Median 24.3 85.0 40.0 2.1

 Current optical component manufacturing economics
are unsustainable

500,000

400,000
Rev ($) / Employee

• Successful semiconductor companies

300,000
have consistently improved their
revenue productivity over the last
200,000 20 years

100,000 • The current manufacturing economics

of photonics components appear to be
0 prohibitively inefficient
De 1

De 2

De 7

De 2

De 3
De 3

De 4

De 5

De 6

De 8

De 9

De 0

De 1

De 4

De 5

De 6

De 7

De 8

De 9
00
8

8
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c-

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c-

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• In order to grow efficiently, optical
De

components companies will have to

Intel Vitesse JDSU SDL consider alternatives to current
manufacturing strategies
“Unless a large portion of the population is willing to work without
pay…the prevalent manufacturing approach will lead to a broken
business model in ten years - one that yields only $4,000 annual
revenue per employee…Even if the photonics companies outsource
most of their manufacturing to low labor cost countries such as China
or Malaysia, this seems to be an unsustainable business model to
us”

- Eric Chen, Ph.D. & Donald Lu, Ph.D., JPMorgan H&Q Equity Research
Source: JPMorgan H&Q Equity Research
How Did We Get Here?

 Multiple technology platforms

 Small product volumes
 Short product life cycles
 Under-developed supply chain
 Rapid demand increases and shortages
 It was easy to fund “capacity duplication”
 Manufacturing excellence was a “luxury”
Manufacturing Infrastructure for Reliability has Lagged

Materials/Process Packaging

Volume / $$$ Outsourcing

Needs

Modelling Metrology

The Dream meets Reality

Source : OIDA/LAI
Lessons from Electronics – OSA/OFC Forum 3-02 : Tom Mitchell
 Disk Drive Technology Shares some Attributes with Optics
 Price/ Performance unmatched by any another technology
 Over $100 per megabyte in 1980 to less than a penny per megabyte today
 Phenomenal Technology Growth
 Drive capacity has been doubling every year for the last 5 years!
 Dependency on a complex supply chain
 Manufactured at low cost with high reliability
 Location is a key factor for success
 Key functions should not necessarily be centrally located
 Technology Centers vs. Operations Centers
 R& D and Product Design
 Must focus on time and cost to market requirements
 Must be prepared to accommodate technology challenges
 Manufacturing
 Excel in product and process transfers
 Achieve Cost Objectives & Operational Excellence
 Simplify supply chain
 Maximize Manufacturing Outsourcing
Veeco - OIDA Workshop Observations

Silicon Industry Optoelectronic Industry

 Industry-supported roadmaps  No industry-supported roadmaps
 Industry drivers— Moore’s Law  Industry drivers—(OC 12/OC 768)
 Broad Licensing technology  Licensing technology

approach  Little; “secret sauces”

 GaAs-on-Silicon with Motorola;

SiGe with IBM

 Agree on GaAs and InP wafer size
 Industry-supported SEMI
standards  No agreement on crystal
planarization
 No standard on dopants
 No standard on equipment

Some aspects of the Silicon Industry Should be Applied

JDSU – OIDA Workshop Observations

 Test methods reduce cost by driving consistency in

measurement and equipment
 Reliability specifications raise bar for new Entrants. Costs
for testing and time required provide advantage for existing
suppliers
 Package specifications can drive down cost by increasing
volumes and allowing for automated equipment
 “5-9s” Reliability for the Network is the “Standard”

Substantial implications for components and subsystems in cost, test and design-accept cycles

Reliability Terminology

Analysis Process
Bottom-up Network Availability (%)
Approach
System Level Downtime (minutes/year)

Circuit Packs Level MTBF (hours)

Component Level Failure Rate (FITS)

Current Reliability “Telcordia Standards” – What is the Cost?

Product Reliability Analysis

 Detailed architecture review to determine conformance to Telcordia
 GR and/or “customer” reliability requirements (i.g., “5-nines”).

Scope:
 Perform Detailed Architecture Assessment
 Identify Design Deficiencies
 Develop RBDs and Markov Models
 Verify models by Fault Insertion Testing
 Summarize results in failure mode tables
 Provide Technical Analysis Report for Distribution
 Reduce maintenance and repair costs by identifying potential reliability
problems before product reaches the field
Telcordia Reliability – The FDA of Optical Telecom

 Component Reliability
– GR-357-CORE, Generic Reliability Requirements for Assuring the
Reliability of Components Used in Telecommunications Equipment
– GR-468-CORE, Generic Reliability Assurance Requirements for
Optoelectronic Devices
 Circuit Pack Reliability
– SR-332, Reliability Prediction Procedure for Electronic Equipment
 System Reliability
– GR-512-CORE, LATA Switching Systems Generic Requirements
(LSSGR) Reliability, Section 12
– GR- 1110-CORE, Broadband Switching Systems Generic
Requirements
 Network Reliability
– GR-418-CORE, Generic Reliability Assurance Requirements for Fiber
Optic Transport Systems
Standards and Best Practices Efforts are Just Beginning
IPC, NEMI, PMEA are trying to identify packaging standards

10.1 Fiber arrangement and routing

10.2 Fiber splicing and test
10.3 Handling of photonic components and fiber optic cable
10.4 Connector socket design and assembly
10.5 Optical Power loss budget requirements
10.6 Optical fiber identification or coding systems
10.7 Optoelectronic coupling design for long term reliability
10.8 Hermetic control for Optoelectronic packaging
10.9 Quality Assurance of Optoelectronic components and Assemblies
10.10 Cleaning and cleanliness/contamination testing
10.11 Moisture absorption precautions for optoelectronic packages
10.12 Optoelectronic thermo-mechanical engineering requirements
10.13 Material requirements for optical interconnecting substrates
10.14 Optical board interconnection performance requirements
10.15 Attachment materials for optoelectronic assembly
10.16 Design requirements for optoelectronic assemblies
10.17 Configuration management of optoelectronic assemblies
10.18 Methods for optoelectronic component attachment and alignment
10.19 Heterogeneous optoelectronic assembly requirements
10.20 Tools and procedures for optoelectronic assembly and repair
10.21 Test methods for optoelectronic components
10.22 Test methods for optoelectronic assembly verification
Celestica – OIDA Workshop Comments

 No optical equivalents of pin-probe, in-circuit test (ICT),

boundary scan, or built-in self test (BIST)
 DFT required to provide optical test access
 Hierarchy of test spec ranges not always met
 False fails: difficult to distinguish between tester failure &
product failure, due to lack of repeatable, self-diagnosing and
self-calibrating optical test equipment
Celestica- Optical Packaging Challenges

 Fiber optic inteconnects, variability

 Adhesive bonding, mtrls/process optimization
 Materials properties, thermal, mechanical
 Mechanical models, optical properties f(stress)
 Standards: form factors, pin-outs, reliability testing
 Photonics packaging design tools
 Automated assembly, process optimization
 Reliability testing, physics of failure
 Reliability modeling & lifetime prediction
EMS industry evolution

Late 1980’s Early 1990’s Mid/Late 1990’s Year 2000 & Beyond

Core Competency Manual PTH / PCBA SMT Supply Chain Mgmt Virtual Manufacturing
Capacity-Driven Turnkey Sales Process Engineering Process Development
Consignment Sales Increased Emphasis on Precision Engineering
NPI / Prototype Integration Capabilities
Box Build Global Service Offering

Business Horizontal Horizontal Horizontal and Select Bifurcation (Horizontal

Model • most overflow capacity Vertical Models vs. Vertical) Models
• primary capacity • increased control of supply
• expanded services chain

Growth Drivers OEM Need for Additional Select OEM Divestitures Organic Growth Organic Growth
Capacity Organic Growth EMS Acquisitions Large-Scale OEM
Limited OEM Divestitures Large-Scale OEM Divestitures
Divestitures Industry Consolidation
New Markets (Optical)

Industry Size $15 Billion $30 Billion $90 Billion $150 Billion in 2003E

Growth Rate 15-20% 20-25% 25-50% 25-30%

Market Focus PC PC Computing Infrastructure Data / Voice Infrastructure

Peripherals Peripherals Data Networking Next Generation Telecom
Datacom Wireline / Wireless Digital Consumer Devices
Telecom Infrastructure Post-Sale Service / Repair
 EMS has now become the manufacturing engine of the
electronics sector

The Supply Chain is a Work in Process

Component
Distributors Networking
 The EMS Industry has
PCBs become the manufacturing
Other
Third-Party Distributors engine of the new economy
Logistics Computers &
Backplanes
Providers Peripherals  20% of electronics
manufacturing is currently
Semiconductors
Datacom/
outsourced which could
Telecom reach 40% in the next 5
Passives
EMS years
Providers  The Industry is still in the
Medical
Connectors early stages of
development with strong
Cable Assemblies Enclosure
Manufacturers
Consumer
growth prospects over the
OEMs next 3-5 years
Power Supplies
Special
Industrial &
Transportation
 Telecommunications
Subassembly
Manufacturers
outsourcing is just getting
started

Increasing Share Current Relationship Strategic Partnership

Industry leaders will have to focus on their core
capabilities and seriously consider outsourcing

Components
TF Filters Array Wave Guides Optical Switch Arrays GRIN Lenses • Back end OMS foundries focus on
Interleavers VCSE Lasers Fiber Bragg Gratings assembly, packaging and test on the
GF Filter FP Lasers Interleavers
component and module/sub-system
DFB Lasers Isolators
LiNb Modulators Circulators levels and on developing automated
InP Modulators GF Filters manufacturing processes
LEDs Wavelength Lockers
APDs • Pure play OMS and big EMS firms are
KEY COMPETENCE: DESIGN, INTEGRATION & CUSTOMER INTERFACE emerging on the back end due to the
immediate need for assembly and
Thin Film Semiconductor MEMS Microoptics packaging efficiencies
Technology Technology Technology Technology
Material Material Material Material
Deposition MOCV Deposition Deposition Metrology
• Startups with assembly and test
Mapping Lithography Lithography Polishing expertise in wafer mapping, cleaving,
Cutting Etching Etching Splicing bonding, pigtailing, etc. will be
Die Testing Ion Implantation Recoating advantaged as back end OMS foundries
Cleaving
Coating
Wire Bonding • Front end OMS foundries will focus on
KEY COMPETENCE: YIELD MANAGEMENT & LOAD BALANCING the four core process technology
domains
Assembly and Packaging Technologies
Alignment, Welding and Micromachining
Pigtailing: fiber-to-fiber, fiber-to-waveguides, waveguides-to-waveguides • “Migrators” with integrated device design
Packaging and fabrication skills (i.e. SciVac, Amkor,
KEY COMPETENCE: COST MANAGEMENT & PACKAGING INTEGRATION AXT) from the core domains will be
advantaged as front end OMS foundries
Testing and Measurement
DWDM module testing
Burn-in testing of laser chips and modules
Metrology testing of micro-lenses Source: JPMorgan H&Q Equity Research
RSoft – OIDA: Photonic CAD tools provide design optimization
to solve manufacturing problems, reduce cost, shorten product cycle

Strategic Analysis

Network Layer
Network Planning and Design

Optical Communication Links

Planar Lightwave Circuits

Physical Layer

Photonic Passive/Active Devices

Manufacturing Features are Important in CAD Tools

• More material/process related information needs to be incorporated

in design and simulation
•Promote standardization on component specs
•Cost-cutting for system vendors

• Existing manufacturing related

features in component level tools:
- Litho roughness, Litho resolution
- Mask files input, output and editing
- User profiles
- Tolerance study on design variables

Broader & Deeper collaborations are needed

Summary

 Carriers and systems firms Next-Generations are pushed out

 The “year of – tunables, All optical, 40GB” is not clear
 Private capital is still moving into these areas, but scaled back
 Planar Integration - nice concept, a long way from achieving cost targets
and performance specs
 Need huge volume to justify – standard packaging
 Semi players may be best positioned : Intel, Vitesse, AMCC, Broadcom, Pac
Rim
 Hybrid integration is the clear focus for the next several years
 More in line with Volume needs over the next 3,5,7 years
 More in line with Process evolutions from carrier to systems food-chain
 The EMS players are a Key in the future of the Industry
 Global sourcing and capacity
• Process expertise
 Success and Credibility in serving the big systems firms and carriers Buys
big firm plants and improves them; only solution for a small systems firm to
ramp
Crossing the Chasm to Volume

Who’s going to lead the way?

US Incumbent Telcos & Telcordia?
Component –system innovation : new carriers & international?
What’s the timeframe to get there?
Is there a need for an Industry effort? (a SEMATECH “lite”)
The Challenges to You

 Heavy needs in “Engineering”

 Design, Test, Manufacturing Processes
• Move out of the Lab and into “Fab”
• Borrow Semiconductor methodologies in engineering and production
management processes
 New “Standards” needed
• Customer needs driven, but reflective of “the food chain” and substitute
solutions
• Major needs for Modeling and statistical processes
• Need to change from “Test for Reliability” to “Design for Reliability”, with
well defined Test
 A New Industry–Government-Academia Linkage
 Road-mapping, Best Practices, Collaboration
• Understanding the true costs throughout the food-chain
 Updated and Open Standards
• Differentiate by Application/Customer Segments
 A “SEMATECH” Like Organization for Optics?