Bloomberg News

Infinera Counts on Local Plant for Alcatel Showdown

September 06, 2011

(Corrects speed of new chip in second paragraph.)

Sept. 6 (Bloomberg) -- Infinera Corp., bucking the trend of moving factories out of Silicon Valley, is keeping its Bay Area plant humming in a bid to catch up with Alcatel-Lucent and Ciena Corp. in the market for networking gear that speeds Web traffic.

The Sunnyvale, California-based company built a new factory in 2001, just as the dot-com boom fizzled, using some of the $300 million it raised before the bust. Now it’s counting on that facility to produce a new chip that will send data at 500 gigabits a second -- fast enough to stream more than 100,000 high-definition movies simultaneously. The device will power a line of gear that can transfer data at 100 gigabits per second.

By keeping its manufacturing nearby, the company is able to fine-tune its components, which convert digital bits into photons for long-distance treks over fiber-optic cables, said Chief Executive Officer Tom Fallon. While Infinera is trailing Ciena and Alcatel in offering 100-gigabit gear, those companies cobble together chips and other components from other suppliers. A Silicon Valley factory helps Infinera maintain closer control over high-precision technology.

“Infinera is unique in the industry in that they are vertically integrated,” said Blair King, an analyst at Nashville, Tennessee-based Avondale Partners LLC. He has a “market outperform” rating on Infinera shares.

Infinera is preparing to introduce its new 500-gigabit chip at a Sept. 15 analyst meeting at its headquarters, according to three people familiar with the company’s plans. That’s an earlier unveiling than the company had previously discussed, though the chip won’t ship until next year.

Stock Slump

Still, many investors have grown tired of waiting for Infinera to deliver on its goals. The company has lost money in all but one year since its initial public offering in 2007, including $24.2 million last quarter.

The shares declined 32 percent this year. Infinera rose 3 cents to $7.02 at 4 p.m. New York time on the Nasdaq Stock Market.

That’s turned the new release into a make-it-or-break-it product for the company. Infinera is trying to regain the edge it had four years ago when it held its IPO. At the time, it was selling gear that transmitted data at 10 gigabits a second. Customers included telephone and cable companies, and Internet service providers.

Ciena and Alcatel then got a jump on Infinera by selling 40-gigabit gear. The company was racing to produce a similar product when Fallon, a former Cisco Systems Inc. executive, took over as CEO in 2010. Rather than playing catch-up, he canceled the 40-gigabit project and began focusing on 100 gigabit.

Staying Local

Getting out the new product soon will reassure investors that the company is back on track, King said.

“A lot of people will be relieved,” he said.

Infinera is a rarity. Most of the big chip factories that gave Silicon Valley its name have moved overseas to cheaper locales. The few that remain are typically older facilities that were picked up for pennies on the dollar by companies making low-end devices.

Infinera’s 40,000-square-foot fabrication plant, or fab, is cutting edge for the optical industry, though it’s smaller than the multibillion-dollar chip factories built by Intel Corp. or Samsung Electronics Co.

Infinera’s approach is to apply advanced chip-manufacturing methods to optical networks, which send data in the form of light. Using a material called indium phosphide, rather than silicon, engineers are able to etch tiny 3-D lasers and other elements into the chips. The new component stuffs more than 600 such elements onto a chip that is 2 square millimeters.

Pulling It Off

The 100-gigabit industry is still in its early stages, said Andrew Schmitt, an analyst at Campbell, California-based Infonetics Research. He expects the market to grow from “close to zero” today to $3.2 billion in 2014. That would be a quarter of total sales of optical networking gear.

“A lot of people were apprehensive about Infinera’s ability to pull this off,” Schmitt said. “What they’re doing is hard.”

Fallon expects carriers to embrace the new technology as they cope with surging Web traffic. The next generation of optical equipment also helps companies use fewer routers, potentially saving them money.

“We take deep technology risks,” Fallon said. That helps make up for the advantage of low-cost manufacturing, he said. “Deep innovation beats commoditization if done right.”

Schmitt, the Infonetics analyst, says competition in the 100-gigabit industry is just getting started. Phone companies usually don’t start buying new kinds of gear until there are multiple suppliers. There will be seven or more makers of the gear by 2014, he said.

“Infinera’s not late,” he said.

--Editors: Nick Turner, Marcus Chan

To contact the reporter on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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