Roger H. Grace, President
Roger Grace Associates
109 Greenfield Court • Naples, FL 34110
(415) 436-9101 • (415) 436-9810 (fax)
rgrace@rgrace.com
www.rgrace.com

Abstract

Microelectromechanical Systems (MEMS), Microsystems Technologies (MST), and Micromachines, collectively known as M3, have experienced a slowdown in growth in the year 2002. This has been the first slowdown of this industry in the last decade. In addition to the changing market dynamics, especially evident in the high technology sector, many M3 companies have been plagued with numerous shortfalls associated with early stage business even though many of them have been in business for many years. This paper discusses the major factors necessary for successful development and survival of companies involved in the M3 industry and objectively tracks the past performance of these companies and the industry itself to help overcome the barriers to the commercialization of M3. The "Industry Report Card" assigns grades to these various critical success factors and tracks their change during the 1998-2002 timeframe. A product evolution timetable charts its development from early R&D stages to full commercialization of key M3 technologies. Finally, a volatility index (beta) is developed which assesses investment risk associated with various application sectors along with worldwide market numbers and growth rates associated with each sector.

Market Statistics

It is a generally accepted fact that the aggregated MEMS/MST/Micromachine industry which we have defined as M³ has been slow to mature and has not met industry expectations. The numerous market studies [1] that have been published show M³ growth to exhibit a "hockey stick" shape. The major problem here is that the "knee" in the curve appears to occur later in time for each successively newer publication of the study. This fact hastens possible issues leading to successful commercialization efforts. A June 2000 Roger Grace Associates/NEXUS market study establishes the MST market to be $14.2B (U.S.) in the year 2000, growing to $30.4B (U.S.) by 2004, constituting a compounded annual growth rate (CAGR) of 21% [2]. The major growth areas were reported to be medical/biomedical (CAGR 32.5%), telecommunications (CAGR 128.1%) and environmental monitoring (CAGR 35.4%). This report is currently being updated and will reflect the overall downturn in the high technology marketplace.

Product Evolution Timetable

The first major commercial success of MEMS/MST devices appeared in the mid 60’s with the development of silicon piezoresistive pressure sensors [3] used in military avionics applications. These first devices achieved full commercialization by 1990. Many companies produce various versions of these products and sell them into a diverse number of applications including automotive, medial, industrial, process control, and consumer.

In 2001, over 600 million inkjet printer heads (nozzles) were produced by a number of suppliers. These reached full commercialization in 1996. Automotive airbag accelerometers were fully commercialized by a number of suppliers worldwide and were produced at the 70 million-unit value in 2001 [4]. Figure 1 provides a timetable for various M³ products to achieve full commercialization.

Product	Discovery	Product Evolution	Cost Reduction	Full Commercialization
Pressure Sensors	1954-1960	1960-1975	1975-1990	1990
Accelerometers	1974-1985	1985-1990	1990-1998	1998
Nozzles	1972-1984	1984-1990	1990-1996	1996
Photonics/Displays	1980-1986	1986-1998	1998-2005	2005
Bio/Chemical Sensors	1980-1994	1994-2000	2000-2005	2005
Radio Frequency (R.F.)	1994-1998	1998-2002	2002-2006	2006
Gyros/Rate Sensors	1982-1990	1990-1996	1996-2004	2004
Micro Relays	1977-1982	1993-1998	1998-2004	2004
Figure 1: M3 Product Evolution Timetable

Commercialization Report Card

The M³ Commercialization Report Card (Figure 2) has been updated yearly in June since its inception in 1998[5] at the Hilton Head Conference. The Report Card is an attempt to define the criteria for success for M³ companies and provides an objective grade of performance to date. The change is the difference in grade between 2001 and 2002. As can be seen, the most significant changes in the grades are associated with the financial aspects of the business. Venture capital attraction and creation of wealth changed most dramatically. The gains created during the 1998-2001 "bubble" were downgraded to "C" in 2002. Other changes that occurred were positive. Market research changed from "B-" to "B+" and industry roadmap changed from "B+" to "A-". The following paragraphs provide the author’s rationale for these changes. Details on the rationale for the previous years are given in [2].

Market Research (Grade = B)

Nexus published in February 2002 its follow-up study "Market Analysis for Microsystems II: 2000-2005 [6]. This study was largely developed from the Nexus User Supplier Clubs and as such provides both a "top down and bottom-up" classical approach to market research. It appears to be the most comprehensive study on the topic yet.

At least ten other studies have been published since 1990, when the seminal Microsystems Market Study by Batelle Frankfurt was published. Most, if not all, of these were conducted before the downturn in the economy and before the extreme downturn in the optical telecom sector. The Nexus report, because of its recent publication, tends to avoid this error.

Industry Association (Grade = B+)

Our prior report gave an "incomplete" grade to this subject. Since that time the MEMS Industry Group (MIG) has been formed as an industry association to support the advancement of M³. Also, the founding of the Micro and Nanotechnology Commercialization Education Foundation (MANCEF) in 2000, although not established as a formal industry group, has set out to perform many of the functions of a classical trade group. Those include the development and management of the annual Commercialization of Micro and Nanosystems Conference (COMS), creating and developing an extensive industry roadmap, and being a major supporter of M³ standards with the Semiconductor Equipment and Materials International (SEMI) organization. MANCEF has over 500 members worldwide. Although Nexus has not been formed as a trade association, many of its functions, especially its very successful ‘user-supplier groups" have appearances similar to those of classical trade associations. It's membership has grown to 1400 members since its inception in 1992.

Venture Capital Attraction (Grade = C)

Before 1999, virtually all M³ companies had been considered too risky for most investors, especially venture capitalists. Most MEMS companies did not satisfy a number of the critical criteria for venture capitalist and private investor ("angel") funding. Among these are a unique product concept, a strong management team with demonstrated industry successes, a large and well-defined (vis-à-vis formal market research) market size and growth rate, a served market, a target market definition and a significant return on the investors’ capital within the first five years of operation. However, with the advent of MEMS-based cross-connect optical switches, this situation has changed dramatically. BioMEMS companies including Aclara, Affymetrix, Caliper, Cepheid, and Orchid have all gone public over the past three years and some have enjoyed large capitalization due to the explosive stock market and generous valuations associated with biotechnology stocks.

That occurred in early 2000; however, the downturn in the US securities market, especially in the technology-rich NASDAQ market, has greatly reduced their values. Venture capital spending has moved from an "A" grade in 2001 to its present grade of "C". First round funding is minimal in all sectors of the high tech community, especially in telecom. This is also so in the M³ sector. Many of the acquiring companies’ stock prices have fallen between 75-80% since their highs of March 2000 to their current values. Cronos, having previously been sold to JDS Uniphase for $750M in early 2000 was sold to MEMSCAP in July 2002 for $8M. JDS stock lists for less than 10% of its previous high.

Venture capital investment in all business areas in 2002 is expected to be the worst in the last decade projected to be iin the $20-30B (US) range down from $55B in 2001 and $108B in 2000, the record year. In early 2000, seed and first rounds accounted for 60% of total investments, it is currently running at the 30% rate. A Price Waterhouse Cooper/Venture Economics/National Venture Capital Association Money Tree Survey in August, 2002 shows that for every dollar invested in a new company, 5 to 7 times this amount was invested in existing portfolio companies. However, new deals in biotech received 1/3 and software received 1/4 of all new funding in their respective categories. This is not good news for startups in general and certainly not for M³ startups.

The year 2000 saw the creation of the first MEMS-specific venture capital/technology accelerator firm, Ardesta, which funded and helped launch a number of exciting MEMS-based startups. Ardesta has taken the strategy of licensing unique and commercializable intellectual property from leading institutions including Sandia National Laboratories, University of Michigan, and University of California Berkeley as a part of its new venture strategy. Ardesta has made a number of significant contributions to accelerate companies including Sensicore, IonOptics, and Tessera into the marketplace.

Creation of Wealth (Grade = C)

Down considerably from the grade of "A" in the 2001 report card, the creation of wealth grade has been significantly reduced to a "C." Many of the "millionaires on paper" as a result of optical telecom buyouts saw their fortunes sublimate over the last two years since their buyout was largely in stock and based on future performance. Acquisitions still continue with companies like General Electric acquiring M³ companies including TRW Novasensor in early August 2002. The IPO of MEMsCAP S.A. (France), the first in 2001 and the first in the history of M³, has not faired well as a result of the downturn in the high technology market, especially in the worldwide stock markets.Industry Roadmap (Grade A-)An M³ roadmap has been developed by three organizations: Nexus, issued in late 2000, MEMS Industry Group, issued in late 2001, and MANCEF, to be issued in late 2002. All of these organizations have taken different approaches with the MANCEF roadmap being the most thorough with 14 chapters addressing the significant factors on the commercialization of microsystems, including foundries, standards, EDA tools, market analysis, and reliability.

The Opportunities for M3- The Volatility Index (beta)

Many people ask me what kind of a M³ business should they create or invest in? I have thought long and hard for an answer to this question, and there truly is no easy answer. I set out to attempt to answer this question in a quantifiable fashion by creating a concept that I conveniently call the volatility index (beta). Similar to a volatility factor for a stock, which determines the price movement sensitivity of a specific stock to either its industry sector or the overall market, the beta that I have defined looks at the level of risk associated with specific M³ market sectors based on a number of critical criteria. These include the diversity of the sector from a total number of customers and total number of applications point of view, total size of the market, and compounded annual growth rate (CAGR). Other factors include the breadth of segmentation in each specific market sector, the potential opportunity for niche solutions, the number of competitors playing in the market sector, projected profitability, and the extent of the barriers to entry including the availability of capital. Size, market growth, and beta by market sector is given in Figure 3.

From a numerical value, a beta of 5 is average - the higher the beta the higher the volatility. Let's look at some examples: The industrial application with a beta of 2 has the most diverse applications of M³ from process control pressure transmitter, pneumatic/hydraulic control systems, heating ventilation air condition systems to name a few. Also many kinds of M³ can be used in these applications, e.g. pressure sensors, force sensors, temperature sensors. The environmental monitoring and medical/biochemical application sector for M³ with a beta of 3 enjoys a wide variety of current (and many potential future) applications with relatively few companies competing in this space. The interesting thing is that these current players have intelligently "niched out" their product offering. Drug discovery, food/water screening, gene sequence, DNA analysis, patient monitoring are some of the current application of M³ with a boundless number of new potential applications coming to the fore in the next few years.

The automotive application sector currently enjoys a beta of 3 due to the exploding number of new applications of M³ in production vehicles tied in with the existing number of current M³ applications. Of the only six true killer M³ applications, two i.e. manifold absolute air pressure (over 30 million) and airbag accelerometers (over 70 million) were fitted into the over 50 million vehicles produced worldwide in 2001. At last count, there were over 70 opportunities for M³ in automotive applications [4]. The other good news is that these sensors can be pressure sensors, fluid quality sensors, accelerometers, gyros, force sensors, proximity sensors, temperature sensors, humidity sensors, and gas composition sensors plus many others. The major problem here is the extreme cost issues and associated low profitability of this business.

Finally, I would like to address the high beta application sectors, computer peripherals and telecommunications. Computer peripherals boast two killer applications . . . read/write magnetic heads (over 1 billion in 2001) and inkjet printer nozzles (over 600 million in 2001). These two applications constitute over 90% of the total sector sales and each of these sectors is dominated by a limited number of "800 lb. gorilla" companies. Hewlett Packard inkjets and Seagate in read/write heads are excellent examples of 800 lb. gorillas that dominate an application sector.

Telecommunications M³ had received the greatest attention from investor, trade, and popular press over the past two years, but has fallen on bad times, as have its telecom industry customers, e.g. JDS Uniphase, Corning, Cisco Systems, and Worldcom. Optical M³ funding has slowed dramatically with first round funding virtually non-existent. It is my opinion that new investing into these companies will be made more judiciously and only after significant due diligence in the uniqueness of the proposed solutions. There are still many opportunities for commercial success in this sector but it will take, in my opinion, a vertical, system-oriented, approach similar to the Transparent Network approach. The current beta of 8 was changed from its previous value of 6 largely due to the contraction of the telecom industry and the failure of many M³ optical telecom startups.

The current jewel in the crown of telecom M³ is Radio Frequency (RF) M³. Although the applications are currently somewhat limited - cellular handsets, blue tooth, RF in the home - these applications offer immense volume opportunities (there were over 380 million handsets sold worldwide in the year 2001). RF M³ has the potential to be in every wireless device because of its incredible performance enhancements over existing solutions. This, coupled with extremely low cost manufacturing and the potential for monolithic integration, make RF M³ a truly enabling technology. Handset sales figures are on the decline however, with 360 million units projected for 2002.

A final comment on "Where Is The Action In M³" is, in a word, infrastructure - i.e. manufacturing, packaging, testing, and assembly. Although we have not included this in our volatility index since it is not a classical application sector, I would have to give infrastructure a "2". Why? Because infrastructure is all pervasive.. it applies to all application sectors and all M³ devices. This significantly mitigates risk.

Conclusions/The Future

The year 2002 is expected to be a pivotal year in the worldwide high technology community as well as in the M³ community. Expansion continues in many of the important areas including infrastructure, roadmaps, standards, and industry associations. This signals that a maturation process is in progress.

Regrettably, the general business climate worldwide is in a turbulent state as of the writing of this document in Q-3, 2002. Many M³ companies in the US who had high hopes of emulating the early successes of Cronos, Xros, and Intellisense find themselves out of business or canceling development activities in optical MEMS telecom systems. Among the most significant of these are OMM, Tellium, and Nanovation.

The years 2002-2003 will be trying for most high technology-based companies. A good indicator of forecasting M³ future sales is the sales in ICs, especially microprocessors that have received nominal growth projections (3% gain in worldwide sales from 2001's value) by semiconductor industry analysts. At this point in time, we project the compounded annual growth rate (CAGR) for M³ to be significantly less than reported in Figure 3, i.e. 21% during the period 2000-2004. Stalwarts including automotive applications and IT peripherals will buoy this number.

If M³ companies are to be successful during these trying times they must do their homework in defining exactly what the market wants and what are their competitive and sustainable advantages. These are basic tenets of "Marketing 101."

References

[1] S. Marshall, "MEMS Market Data: Another Case of Sorry, Wrong Number?", Micromachine Devices, August 1997, pp. 6-7.

[2] R. Grace, "Commercialization Issues of MEMS/MST/Micromachines: An Updated Industry Report Card on the Barriers to Commercialization", Sensors Expo Spring Proceedings, San Jose, CA, May, 2002.

[3] Business Week, "Where Electronics Makes Sense a Bonanza," May 23, 1970, pp. 122-123.

[4] R. Grace, "Application Opportunities of MEMS/MST in the Automotive Market," Proceedings of the 2002 Advanced Microsystems for Automotive Applications Conference, Berlin, Germany, March, 2002.

[5] R. Grace, "Making Money With MEMS: How to Become a MEMS Millionaire", Solid State Sensor and Actuator Conference, Hilton Head Island, SC, June 10, 1998, www.rgrace.com.

[6]R. Weschung, et. al, "Market Analysis for Microsystems II: 2000-2005," Nexus Report, February, 2002.