Micralyne may be a model
for making money in MEMS

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TORONTO — A Canadian company claims it is the exception to the general rule that MEMS companies will not become profitable until after the financial gray skies clear up.

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A couple of months ago, Chris Lumb, chief executive of Edmonton, Alberta-based Micralyne Inc., wrote in a letter to Electronic Business magazine that Micralyne was “the only profitable MEMS developer and manufacturer in North America and possibly the world.”

Profitability, however, depends on whose measurement you’re using and how the MEMS portion of a business is defined. Combine that with the fact that most MEMS companies are private, and Lumb’s claim for Micralyne is difficult to prove or disprove.

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So, in Lumb’s eyes, what makes this MEMS firm different?

“We haven’t looked for the killer-app,” Lumb said. “But I can tell you our year-over-year revenues grew by 33 percent in 2001 to almost $6.4 million (U.S.). We’re expecting similar growth for this year.”

Micralyne set course as a private company in 1998, when it broke away from its origins as a University of Alberta-linked nonprofit research and fab facility known as the Alberta Microelectronic Center. From the beginning, Lumb said, a decision was made to weigh every move on the basis of profitability.

The company decided on this philosophy because predictions of explosive demand for MEMS in sensors, medical tools and optical switches have come and gone. While there are applications in those areas, he added, none are as big as the dreams.

As a result, Micralyne focused its efforts on profitability “from day one,” he added. Gone were any R&D projects for purely research purposes. If the project didn’t lead to a product for its fab facilities, Lumb turned the work away. As a result, he said, the company has produced a positive balance sheet every year.

While bypassing the killer-apps, Micralyne did target the killer markets –telecommunications and bioanalysis/biotechnology. The company now has six product lines — optical switches, silicon optical bench systems, generic bioanalytic products, a microfluidic tool kit and micro-optic chips — as its beachhead to future growth.

Micralyne supplies JDS Uniphase with optical components, MDS Inc. and Signature Bioscience Inc. with microfluidic chips, and sells optical switch products to a number of major telecom instrument manufacturers.

Paul Turner, a MEMS and telecom research analyst at Venture Development Corp., estimates the current market for MEMS at $20-$25 billion, but the question of profitability “all depends on what you count and how.”

Most MEMS companies, like Micralyne, are privately owned and don’t release financial statements. Others have nondisclosure agreements with clients. Some companies don’t break out the cost of the MEMS component from that of the overall product.

MEMS firms like Micralyne got a “good head start” on the industry because of their academic roots, but most MEMS companies that started this way were also burdened with high expectations and tens of millions of dollars in research costs for products that are still seeking a major market, Turner said.

Marlene Bourne, a MEMS analyst for In/Stat MDR, laughed when asked about MEMS profitability.

“There are whispers that most MEMS companies are not profitable, but I don’t look at the financials, just the technology,” she said. But there are two main reasons why the whispers persist.

MEMS “have a long development life cycle” between idea, research and commercial development, which means a lot of time and a lot of money, she explained. Killer-apps with high volume sales may sound good, she added, but high volume also means low cost and narrow profit margins.

Micralyne’s instinct to unite the efforts of its research and fab units gave it a good starting point, Bourne said. “The bottom line is that you either have an in-house (fab) capability with extensive experience, or you work with an outside company with extensive experience,” and some MEMS companies struggled with that in the beginning, she said.

MEMS companies have also been hurt by cutbacks in the whole telecom industry, said analyst Lawrence Gasman, president of Communications Industry Researchers Inc..

Face it, he added, “MEMS is not ready for prime time. We’re getting there. But not yet.”

The 1,000-port optical switch may be possible, but the demand isn’t there yet, Gasman said. Concerns about reliability come into play when a company looks at choosing MEMS over some other technology, and they don’t want to be the guinea pigs, he said.

Jesko von Windheim, vice president and general manager for Cronos, the MEMS business unit of JDS Uniphase, said MEMS is a profitable industry.

Individual MEMS companies may not be profitable, “but for sure Texas Instruments has a pretty huge business based on MEMS technology,” he said, referring to TI’s Digital Light Processing technology, which uses micromirrors.

“You can’t tell me Hewlett-Packard is not making money on $40, throw-away printer cartridges — and they’re full of MEMS,” he said.

Cell phone companies like Nokia and Motorola “have to redesign their products to take on higher bandwidth and turn the phones into handsets. They might well integrate MEMS into their phones because the R&D budgets will be there. It’s cheap, reliable and conserves power,” he said.

That redesign phase, he predicted, will hit within the next two years.

While some analysts tout biotech as the divining rod for MEMS profitability, Lumb said Micralyne’s revenues are 60 percent from telecom and 40 percent from biotech devices. Looked at another way, 75 percent of its income comes from its fab operations, and 25 percent from its research and development projects.

In its previous life as a nonprofit organization, the company racked up 10 years of invaluable experience working with organizations like Applied Biosystems in California and the hospital at the University of Pennsylvania, before taking those customers and others as a solid base for its move to the private sector.

Micralyne now employs 80 people, and has a 40,000-square-foot fab. Its clients include JDS Uniphase, Creo Products Inc. and MDS, Canada’s largest integrated health services company.

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