Building a presence in Asia

Optics manufacturers find low-cost labor with strings attached

Hassaun A. Jones-BeySenior Editor

A very large and cost-effective optics manufacturing base once existed in Japan. Then, a rising cost of living and shifting exchange rates drove that manufacturing base to migrate over time—first to Taiwan, then to Singapore and Eastern Europe. As a result, most of the low-cost, high-volume optics manufacturing now takes place in China, according to Lynn Strickland, director of marketing in the photonics components division of Melles Griot (Irvine, CA).

But even with the shifting cost story, the historical optics experience in Japan is still of value to firms like Melles Griot because of the company's focus on high-end custom optics, such as wide-angle lenses for high-definition TV (HDTV), as opposed to commodity optics such as collimating lenses for bar-code readers, Strickland said. "You're talking about a difference between 50 cents apiece and $5000 apiece," he said. "Also, as you get into semiconductor metrology equipment, lenses used in these short-wavelength applications require very high precision."

Many firms cite some variation of the theme of cutting costs as the primary motivation for setting up manufacturing operations in Asia. Yet North American optics manufacturers that go over there also say they've found more than they bargained for—both in terms of meeting expectations for cost-effective production and in terms of the need to establish strong and effective channels of communication.

Establishing relationships
The Melles Griot manufacturing facility in Japan is located outside Tokyo and hails back to 1989 with the acquisition of a Japanese optics manufacturer, Kino. Optomechanical assemblies such as camera lenses were manufactured there initially, and now Melles refers to its production work, which includes HDTV optics and complete digital cameras, as "optomechatronics" or modules that integrate optics, mechanics, and electronics, Strickland said.

The initial motivation for Melles Griot to manufacture in Japan was twofold: to tap the optics design and manufacturing expertise residing there and to establish the engineer-to-engineer interactions required for successful manufacture of custom optics assemblies. Another reason for the Melles Griot presence in Japan is that the "vast majority" of what the company makes in Japan is also sold in Japan.

"We manufacture some components in Japan that are exported to other Melles Griot manufacturing units," Strickland said. "For example, we make single-element lenses in Japan that are then shipped to Melles Griot Rochester [NY] and Melles Griot Rochester incorporates those into telecentric machine vision systems. Melles Griot Japan selling directly outside of Japan is just a fraction of the business." For that reason, the company also maintains a distribution center in Tokyo that is separate from its manufacturing facility.

About 16% of Melles Griot global revenue is generated in Asia, which is not based just on products manufactured in Asia. "Also the accounts are very large," Strickland said. "It goes back to relationships. If you develop a good business relationship with a large company they'll do a lot of business with you."

In terms of pros and cons, Strickland chose cross-fertilization of both market information and technical expertise as the number one benefit. The number one downside of global manufacturing, he said, is the need for redundancy. "You're a little less efficient because you are duplicating infrastructure," he said. "In some cases it's just because it makes sense to do that, in other places by law you must have certain positions existing."

Despite "tough going for a few years" due to the Japanese economy, Strickland said, "we wouldn't want it any other way. The operation has been successful and in some periods extremely successful." He also attributes a major portion of the success to entering the market through acquisition of an existing Japanese optics company. "We bought and grew a company," he said. "We didn't try to grow one organically, so we didn't have to reinvent the wheel."

Accordion effect
Edmund Industrial Optics (Barrington, NJ) also has avoided "reinventing the wheel" in Asia, but based on a slightly different approach. "Our Asian vendor structure is a fairly strong portion of our manufacturing base," said Wallace Latimer, director of OEM sales." We use a combination of what we call captive (or wholly owned) manufacturing and of our virtual manufacturing network of partnerships that are qualified, evaluated, and managed."

The actual vendor structure consists of a management and procurement office in Tokyo that produces an Edmund Industrial Optics catalog in Japanese and sells directly into the Japanese market (see Fig. 1); a quality assurance and project management facility in Shanghai for the handful of Chinese vendors that comprise the company's virtual manufacturing network; and a wholly owned manufacturing facility in Singapore that became part of Edmund Industrial Optics last November with the acquisition of Plummer Precision Optics (Pennsburg, PA).

The Singapore facility produces precision prisms, flat work, and spherical lens work from 6 mm to 5, 6, or 7 in., Latimer said (see Fig. 2). The Shanghai network consists of close ties Edmund Industrial Optics maintains with three to five vendors by providing a minimum of 30% to 50% of their business. The virtual network allows the company's manufacturing capacity to follow the market with what Latimer described as an accordion effect. "We take those resource capacities and expand them greatly for volume jobs and then they compress back down as volume comes and goes."

The Tokyo office sells into the Japanese market but the majority of what is produced in Asia comes directly back for sale in the United States, Latimer said.

"Almost all of our volume manufacturing is done in the Asian market in Singapore in Japan in Shanghai," he said. Some of the precision work is done in Singapore as well as in Pennsylvania, while a lot of the flat work and big-mirror work, such as big precision parabolic and spherical mirrors, are done at the headquarters in Barrington, NJ. In addition to the lure of low cost and high volume, Edmund Industrial Optics was drawn to Asian manufacturing by the product flexibility provided by the job-shopping nature of its virtual manufacturing partners.

"Manufacturing people want to set up to do something and then do it continuously," Latimer said. "That's how they get the efficiencies in a process and move through and get their yields up. The job shopping concept is one in which you start and stop various jobs on a continual basis. So I might run 100 of something, tear that down and then set up to run 300 of something else, then tear that down and so on." The flexibility to do small runs can provide a crucial enabler for larger projects, Latimer said. "You can't get to make 500,000 of something if you don't make five at first to make sure the process works."

Latimer emphasized the importance of commitment on the part of North American manufacturers seeking to work in Asia. "You have to commit to understand the culture, the work habits, the equipment available, the processes available; and then either change the things that you need to change or work with the things that work well," he said "And a lot of times you are learning from these people who have been doing something for years and years and years. You learn techniques to help make yourself more efficient."

One of the lessons for Edmund Industrial Optics in Asia had to do with the Japanese approach to process and metrology. Latimer said that, by setting up a much better process than the actual product requires, the Japanese set themselves up to be successful in meeting all their process goals and yields. Areas in which strong commitment from his company has been necessary include providing abundant training, investing in equipment that may be lacking in smaller markets, and finding and developing indigenous managerial talent.

"You don't change people's culture," he said. "What you try to do is augment tools they have to make sure that you get what you are looking for."

Mirror images
II-VI (Saxonburg, PA) was looking for increased capacity to meet a growing demand as well as labor cost savings when it initially set up a production facility in Singapore in 1989. In 1996, as demand continued to grow, the company established another production facility in Suzhou, China. II-VI also maintains a sales subsidiary outside Tokyo, because about 20% of the company's infrared optics business comes through its Japanese sales office.

The II-VI Singapore facility has about 160 employees with full optical fabrication facilities and a full coating facility almost exclusively devoted to the infrared optics product line, according to Craig Creaturo, company treasurer. "It is in many ways a mirror image of some of the facilities that we have at our headquarters in Saxonburg, PA, but primarily focusing on smaller diameter optics," he said. "When we first started the business, we could not make those small optics cost effectively. The cost of labor and the man-hours per part were too great for us to even address that segment of the business."

In addition to allowing the company to address a new business segment, the similarities between Asian and US facilities provided a level of redundancy that II-VI and at least one other US optics company have found useful (see "Demands include planning, flexibility and communication," p. 102). "It gives us extra capacity as we are able to shift operations between Singapore and Saxonburg," Creaturo said. Actually the manufacture of optics that are 1 in. or less in diameter is routinely sent to Singapore, while optics that are greater than 3 in. in diameter are routinely sent to Saxonburg. Assignment flexibility comes in between 1 and 3 in.

About an hour or so from Shanghai, the Suzhou facility employs about 200 people in an industrial park run jointly by the Singapore and Chinese governments. It focuses entirely on fabrication but does not have coating technology or capabilities, partly for political reasons. So most of the optics that are fabricated in China end up being coated in Singapore.

Unlike Melles Griot and Edmund Industrial Optics, II-VI did not acquire existing companies but started from scratch with its Asian production facilities. The governments of both countries were very accommodating, however, wanting to attract the kind of high-tech enterprises that might serve to upgrade the national labor pool. "We were given some nice tax advantages in Singapore," Creaturo said. "One was a ten-year tax holiday. And we were able to obtain some favorable tax treatment in China as well." The company was also invited to set up the China facility based on the very positive results that had been achieved in Singapore, he said.

The primary challenge in achieving positive results however is communication. "For us it's always a challenge because we're here in Pennsylvania and they are in Singapore and in China," Creaturo said. "We're literally halfway around the world. So when we're present during normal business hours they are not and vice versa. Managing the time of individuals and working around these kinds of conflicting or opposite schedules has been our biggest challenge."

Despite all of that, Creaturo said the biggest surprise is how well both facilities have achieved II-VI standards of quality (see Fig. 3). "I think both of them have blossomed probably much more than we anticipated when we started them in '89 and '96."

Factors that have contributed to that success include a compensation program with performance-based bonuses similar to the one in North America; approaching quality improvement as an interactive growth process; and increased use of e-mail rather than faxes or telephone calls to optimize communication over the disparities in time zones. One unique aspect of the II-VI relationship with its Asian subsidiaries is that II-VI grows its own zinc selenide crystals. "So you have a large group here that's making the starting material that our Singapore and China facilities use to create their optics. It's kind of a synergistic relationship," he said. "And so we are their biggest customer, but we are also their biggest supplier as far as starting material."

Offshore telecommunication
Of course there is nothing bigger in optics nowadays than telecom, and one sign of that is the erection in China and Singapore during the last few years of several modern manufacturing and office buildings by companies such as New Focus Photonics (Santa Clara, CA), Blue Sky Research (San Jose, CA) and JDS-Uniphase (San Jose, CA, and Ottawa, Ontario, Canada).

In September of last year, New Focus began production of its passive products in a 250,000-sq-ft facility in Shenzhen, China, that employs 400 people. "We felt that to be competitive long-term in the passives business you have to be producing your product offshore," said Ken Westrick, New Focus CEO. "There are several key benefits. The first of course is labor, which costs about one-tenth of the cost in the United States. Second, it's just lower infrastructure costs. And third, you're able to easily run your factories 20 hours a day, six days a week. So your utilization is very high."

And despite an often difficult government bureaucracy and the need to overcome the obvious factors of time and distance, the operation has been highly successful. "Within several months, we've achieved yields in China comparable to our yields in the United States." Westrick attributed much of the New Focus success in China to a highly flexible, disciplined, and motivated workforce and to maintaining control of the operation by establishing a wholly owned foreign enterprise as opposed to a joint venture. With the exception of some initial prototyping and beta products that are still in the United States, New Focus has moved all of its passives manufacturing to Shenzhen and is planning to do more of the active production in China as well.

"Most of the complicated work and the work that has the most sensitive IP [intellectual property] is still done in the United States," he said. "But our intent is to have the bulk of our production offshore."

In April, Blue Sky Research announced the startup of volume production of its erbium-doped fiber amplifier (EDFA) pump modules and optical crossconnect switches for delivery in the fourth quarter followed by programmable lasers in the first quarter of next year, with the help of its Singapore-based volume-production subsidiary, Blue Sky Systems.

Blue Sky president and CEO Daniel Hu emphasized that even though labor costs in Singapore are not as low as they once were, the combination of a well-educated and cosmopolitan population, a substantial infrastructure, and manufacturing experience in data storage and semiconductors provide significant advantages for high-volume, and low-cost production of relatively complex devices and systems.

Responding to the charge that manufacturers are going to Asia in search of "Chinamation" to escape the need for automation, Hu said that the combination of relatively high skill levels and relatively low labor costs in Singapore will allow Blue Sky to combine automation at the front end of the process with manually assisted operations at the back end where factors such as precision alignment require it.

Hu looks to this approach to help move modern optical technologies, which often exist only in the laboratory or in prototype, into large-scale manufacturing. "Blue Sky Systems is the company's engineering and operations center for transfer to component production, while front-end research and development continues to be conducted at Blue Sky Research in San Jose, CA," he said.

JDS-Uniphase (JDSU) made its first manufacturing foray into Asia about three years ago in a joint venture with a Taiwanese company. And the joint venture went so well that JDSU bought out its partner to form JDSU-Taiwan, according to Phil Anthony, JDSU general manager and vice president of amplifier components. Last January JDSU announced the opening of a 320,000-sq-ft facility in Shenzhen to handle some of its passive manufacturing. JDSU had started this facility in leased headquarters about two years ago while the new plant was under construction. And about a year ago JDSU bought crystal maker Casix in Fuzhou, China, which is now JDSU-Fuzhou.

The motivation for these acquisitions includes driving down cost, access to a talented labor pool and an engineering staff well-trained in optics, Anthony said (see Fig. 4). But some of the optical experience appears to predate modern concepts of optical engineering and low-cost labor. "Fuzhou is across the Strait of Taiwan from Taipei," said Hu. "And they have thousands of years of stone sculpting and polishing culture in the region."

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The initial motivation for starting the facility was to take advantage of a lower cost base for optics, said CVI president Jim Higdon. "But it has turned out to be an extremely high-quality operation," he said. "As the people got more skilled, we hired more engineers. So now in addition to providing excellent quality for a reasonable price, they also do a lot of process innovation and even some product development. We got a lot more out of it than we initially felt we were going to get."

Deciding which jobs get handled in Seoul and which ones go to Albuquerque is part of what Higdon described as a worldwide production planning function. "Based on our knowledge of the capacity and capabilities of each location we assign work to each of our four fab shops," he said. "For instance, a few years ago we decided that were going to expand our cylindrical lens capacity significantly, and we decided to do it in Korea because they were already the largest lens facility that we had. I'm not going to say that originally we had some grand plan. It just kind of evolves over time."

Communication and transportation issues involved with foreign subsidiaries make long-term planning essential, Higdon said. "We give them a production plan and then we provide them with the material for production, because few sources for optical-grade material exist in Korea. You have to put more effort into planning with a foreign subsidiary than with a local one, and we have people here and in Korea who are assigned full-time to planning production for the Korean facility."

But communication also goes back into the planning process. For instance, the multivendor distribution capability in Korea grew out of a proposal made by a handful of Korean salesmen who were representing CVI in the Korean market. Another innovative communication idea that originated with the Korean staff was the use of videotape as a process development tool. "When they install a new piece of equipment, they make a video of the process they're using and send it to us," Higdon said. "Then we study it to see if we can spot anything different to do, or spot anything they've learned to do that we don't know how to do."