All of the previous, unusual amount of commotion going on in the telecom/datacom optical market has been further complicated with the ban on sales to ZTE. Yet, it cannot be ruled out that there may be at least small opportunities for growth in the space for contract manufacturer, Fabrinet, as a result of the potential moves of the large component companies in dealing with the crisis of a major drop downward in margin generation in their traditional businesses. Of course, if the US federal government’s investigation into Huawei gets escalated to another level, then all bets are definitely off until after the bargaining of these chips is completed, as this writer has commented on earlier.
Fabrinet would have the most to gain from possible shifts in direction by Finisar, which also has the benefit of having the least exposure to China of the four big US componentry firms. Of course, its new CEO, Michael Hurlston, in coming from Broadcom, would be extremely comfortable in moving to a model, which is based on farming out more of the production.
The biggest impetus would be our expectation that the upcoming plan for Finisar, which will be announced in June of this year, will reflect a determination that the optical ecosystem has been so damaged that vertical integration can no longer offer a significant cost advantage in producing transceivers. Hurlston will also likely be inclined to move downstream as quickly as possible to focus manufacturing/development efforts at the chip level in which the potential for profitability would be the greatest.
Hurlston can reasonably make the argument that such an atypical acceleration of this kind of change is necessary as market conditions have not been this bad since the bubble burst almost 20 years ago. Moreover, the combination of Lumentum planning to use Oclaro’s fabs increasingly for consumer applications along with the former looking to concentrate further upstream in its traditional business, may provide greater opportunities for Finisar to offer modules with a greater amount of sophisticated integration, which can demand a better premium, and hopefully provide Fabrinet with a decent amount of volume business.
Concerning the Lumentum/Oclaro merger in the short term, the former is already its largest customer, and we had heard through the grapevine that before the announcement of the marriage that the latter was considering moving at least some, if not all of its contract manufacturing for its IPBU (Incubated Photonics Business Unit) from Venture, in Penang, Malaysia to Fabrinet. A lot of the work on its line-side offerings, including its ACOs and coherent optics has been performed at Venture. Fabrinet has been getting business from Oclaro’s PCBU (Photonic Component Business Unit) for client-side apps.
The key point is that after closing the purchase, Lumentum will likely want to simply matters (as well as reduce its costs) as speedily as feasible in order to more efficiently absorb the acquisition by moving the Oclaro portion of the operation to just using Fabrinet.
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[written by Mark Lutkowitz]