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Finisar Gives II-VI Design Arm to Apple

November, 2018

In fibeReality’s last blog piece we stated that Apple “had benefitted from its association with…technologists, [including those that have been part of Finisar’s 3DS (3D Sensing) division]…on design work of all kinds, well before the delivery of any VCSEL chips.” We also pointed out the high probability that this customer perceived a threat to this long-term alliance, especially relating to the inadequate management of the supplier’s Sherman, TX plant, and thereby likely pressed II-VI to acquire Finisar. In fact, it would not be an exaggeration at all to characterize the work from some of the engineers at the latter as Apple’s design arm. This deeper capability, which Finisar possessed also applied to it in getting to the market first with 3DS VCSEL wafers for smartphones, as well as being the initial supplier (which definitely at the beginning, excited the buyer) considered for this application by Apple. For example, the former dealt with PrimeSense before it was acquired by the latter. The optical vendor’s reputation at the Cupertino firm has also been the only conceivable reason it was allowed it to get away with a series of strategic errors and other blunders, including a couple we addressed previously: Lumentum using a superior process order through WIN Semiconductors, and Finisar’s loss of important engineers.

So, apparently, Apple discovered that Finisar could turn designs faster than any other players as well as do a better job of executing on them. The list included the creation and construction of characterization equipment as well as making many unusual items.

In short, Finisar helped Apple to explore the engineering space. Undoubtedly, the iPhone provider realized relatively quickly that such a task is difficult in producing VCSEL chips a long distance away in Taiwan. Finisar’s seemingly compelling pitch was a vertically integrated fab in one place in the US with experienced engineers on site, which allows for a greater amount of efficiency not just for the VCSEL design purposes, but for a lot of fairly complicated optical testing that needs to be done as well.

Unfortunately for Finisar, in addition to its mishaps, there were complex circumstances, which allowed Lumentum to grab the lion’s share of this VCSEL wafer market. It was a new technology, Apple did not fully understand the specifications at the beginning (one might even say there may have been a certain amount of laziness on the part of the customer), and there was less demand than originally anticipated for the iPhone X. In addition, the manufacturing of modules was also less mature at Apple, and the engineers responsible for building them did not want to handle more than one VCSEL chip (even though they were all the same specs) from more than a single supplier. 

Of course, Finisar was secretly hoping that Lumentum was going to fall on its face on the six-inch wafers, and believed that going after that size was too aggressive, and so it earlier remained conservatively committed to four-inch devices. Also, at one point, Finisar thought it could get Apple to pay for the new manufacturing plant. Most ironically, although Apple supposedly was about to to sign such a deal, at around the same time, it was announced that II-VI spent approximately $80 million of its own funds on the Anadigics factory.

Perhaps Finisar was naïve about Apple ever being willing to make such a purchase. Regardless, the two companies had a falling-out, and Finsar stopped working on 3DS for four months. Then they reached the very public, compromise on a purchase agreement, which stated that Apple would buy material, if Finisar built the factory.

fibeReality understands that it turned out that the document was not really worth anything because Apple has somewhat gone back on that commitment, mostly for supply reasons. Most critically, the pause mentioned above, gave Lumentum the chance to get ahead of Finisar.

Yet, although Lumentum should be congratulated on its excellent selection of Win Semi, being located in Taiwan, it is not that far from China, and people easily move back and forth between the two countries. Once again, from an IP perspective, it is a lot safer for Apple to have everything done in the US. In addition, II-VI should be able to take advantage of the solid relationship established between Apple and Finisar, with the optics player evidently coming through impressively on various projects in prior years.

As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

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[written by Mark Lutkowitz]

 

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