Essential to the turnaround of Finisar were decisions which were much different than those being made by competitors, and different than prevailing popular trends. Ultimately, these decisions were also the right ones for Finisar’s survival.
SM: And there were lots of process innovations along the way? JR: Exactly. So sharing all of that with a contract manufacturer meant that you were giving away your intellectual property. We bought a beautiful factory from Seagate. It was a head assembly factory in Malaysia, and Ipoh was the town half way from Penang and Kuala Lumpur.
We got a 640,000 sq ft plant that was less than five years old. We got 200,000 sq ft clean room, $25M of scientific equipment, scanning, electron microscopes, optical microscopes, chemical analysis equipment, x-ray, you name it… fabulous laboratories, and 20 acres of land and we got it for $10M. In California it would have cost us $400M.
It was a surplus head assembly factory for Seagate because they had been able to increase the bit density of their disks to such a level that they needed fewer disks in each disk drive.
So, we bought a factory but we had no people. So, we started hiring people and moving operations. The next thing we did was look at our cost structure, and our variable costs of manufacturing. About 85% of our costs is in materials, lasers, IC’s, etc. We started an IC Design Group in 2001, so instead of buying IC’s from the merchant semiconductor companies and paying them 70% gross margin to sell us devices, we could go to foundries, and buy them for a lot less money and we could improve the performance because we knew more about the optics than the semiconductor companies did.
SM: You could optimize chips for your products. JR: Exactly, we could optimize the performance.
SM: How much optimization in your cost structure did you get out of this factory you bought from Seagate, and vertically integrating the chip manufacturing, and how much more cost shaving did you still need to do? JR: We focused on the Malaysian assembly operation – it was all about assembly and labor – and being efficient there. We have cut our costs of manufacturing, of producing an individual unit, by almost two thirds now since that time. We have probably taken 70% of the material cost out of our product since then as well.