EDITORIAL
		Still Plenty of Opportunity in M3 Roger Grace, Roger Grace Associates

The past 12 months have been pivotal in the history of MEMS/Microsystems/Micro-machines (M3, a.k.a. micromachined devices or solid-state sensors). Never before has so much hope, expectation,

The current jewel in the crown of telecom M3 is radio frequency.

excitement, or money been invested in this arena. Table 1 provides the latest update of my annual industry evaluation, using the commercialization of M3 technologies as a measure. You will note that while some grades have remained unchanged, the remainder continue to improve—and none have dropped.

TABLE 1
MEMS Commercialization Report Card
MEMS Report Card Subject	1998	1999	2000	2001	Change
R&D	A	A	A	A	0
Marketing	C-	C	C+	C+	0
Market Research	C	B-	B-	B-	0
Design for manufacturing	C+	B-	B	B	0
Established infrastructure	C+	B	B+	A	+1
Industry association	Inc.	Inc.	Inc.	B	-
Standards	Inc.	Inc.	Inc.	Inc.	Inc.
Management expertise	C	C	C+	C+	0
Venture capital attraction	C	B-	B+	A	+2
Creation of wealth	C	B-	B+	A	+2
Industry roadmap	N/A	B-	B	B+	+1
Profitability	C-	C-	C-	C-	0
Overall grade	C	B-	B	B+	+1

The biggest changes, in the areas of venture capital (VC) attraction and wealth creation, have centered around the application of high-density optical cross-connect switches to relieve the Internet’s bandwidth bottleneck. More than 20 companies have formed in the past 18 months to exploit this opportunity. Major VC and industrial funding of these high-profile start-ups proliferated between March 2000 and January 2001. Then, correlating with the implosion of the NASDAQ, stock prices in the telecommunications sector fell >75% from their peak. A colleague in the process of selling his optical MEMS company told me his valuation dropped more than 60% in the past six months. All this translates into decreased company capitalization and stock value for buying optical M3 companies.

But all is not doom and gloom. The strong do survive; having a well-defined, differentiated product that is superior to the competition and attractively priced is one way to rise above. Following is an example of how one company achieved this.

How Joe Hit a Home Run
When Joe Mallon, Jr., president and CEO of Measurement Specialties (MSI) asked me six years ago to help him create a new industrial pressure sensor, my first thought was, “That’s crazy, there are 500 other people doing the same thing!” But it wasn’t crazy. Joe’s idea was to repurpose the M3 technology MSI used in consumer bathroom scales to address unfulfilled needs in the industrial market. The company used an all-media pressure sensor with a stainless-steel-to-media interface and placed the “micro-fused” silicon sensor bridge on the back of the measurement diaphragm. The company secured low-cost offshore production and testing, and targeted applications areas in which media corrosion had been a major problem.

The result of MSI’s solid market research; competitive analysis; intelligent, low-cost manufacturing and testing; and well-considered promotion and sales distribution strategies was this: Sales grew from $0.3M in 1996 to $7M in 2000. Even better, gross profit margins came in at more than 60%.

Niche market opportunities similar to this one abound in the M3 industry—and in fact any technology can be exploited using similar approaches.

In on the Action
Given this, what kind of M3 business should you create or invest in? My efforts to answer this question have led me to develop a volatility factor, or beta (see the Table 2), to measure the risk of various market sectors based on several criteria: the number of customers, applications, and competitors; dollar volume of the market; compounded annual growth rate (CAGR); breadth of segmentation; and potential for niche solutions. The higher a sector’s rating, the higher the volatility for M3; a rating of 5 is average. Let’s look at some examples.

TABLE 2
Market Sector Volatility Ratings
Appication Sector	2000*	2004*	CAGR(%)	Volitility Factor
IT/Peripheral	$8,700	$13,400	11.5	7
Medical/Biochemical	$2,400	$7,400	32.5	3
Industrial/Automation	$1,190	$1,850	11.6	1
Telecommunications	$130	$3,650	128.1	6
Automotive	$1,260	$2,350	16.9	4
Environmental monitoring	$520	$1,750	35.4	4
Total	$14,200	$30,400	21.0%

*Worldwide MST shipment in $Millions

The industrial application sector, with a rating of 1, has the most diverse application of M3, including process control pressure transmitters, pneu-matic/hydraulic control systems, and heating/ventilation/air conditioning systems. The M3 technologies appropriate for these applications are also diverse: pressure, force, temperature, etc.

Environmental monitoring and medical/biochemical applications, with ratings of 4 and 3 respectively, enjoy a wide variety of current applications, and have great future potential. The relatively few companies competing in these spaces have intelligently “niched out” product offerings in such areas as drug discovery, food/water screening, and DNA analysis.

The automotive sector earns a rating of 4 due to the exploding number of new applications of M3 in production vehicles plus existing applications. Of the six true “killer applications,” two—manifold absolute air pressure (30 million units) and airbag accelerometers (>70 million units)—were fitted into the 50 million+ vehicles produced worldwide in 2000. At last count there were ~70 application opportunities for M3 in the automotive arena to measure such things as pressure, fluid quality, acceleration, force, proximity, temperature, humidity, and gas composition.

The sectors with the highest ratings are computer peripherals (7) and telecommunications (6). The former area boasts two applications that together constitute >90% of the total sector sales: read/write magnetic heads (>1 billion units in 2000) and inkjet printer nozzles (>500 million in 2000). Both of these applications are dominated by a few 800 lb. gorillas.

Telecommunications has received the greatest attention from investor, trade, and popular press over the past year, and I expect this will continue in the short term. While the feeding frenzy has abated, optical M3 will continue to receive funding from VCs and industrial partners. I believe that new investing into these companies will be made more judiciously and only after significant due diligence regarding the uniqueness of the proposed solutions. While many opportunities for commercial success exist, I think success will require a vertical, systems-oriented, multitechnology approach.

The current jewel in the crown of telecom M3 is radio frequency (RF). Although applications are currently somewhat limited (e.g., cellular handsets, Bluetooth, RF in the home), these applications offer immense volume opportunities: >400 million handsets were sold worldwide in 2000. RF M3 has the potential to be in every wireless device because of its incredible performance advantage over existing solutions. This, coupled with extremely low-cost manufacturing and the potential for monolithic integration, makes RF M3 a truly enabling technology.

I have not included infrastructure (M3 packaging, testing, and assembly) in the volatility index because it is not a classic application sector. But it is all pervasive—and relevant to all market sectors and M3 devices. Talk about a diverse portfolio: Infrastructure is analogous to the kinds of stocks that make up schoolteacher retirement funds! And, there’s a lot of action in that arena. I’d give it a volatility rating of 2.

Plenty of opportunity means plenty more to observe and talk about. Stay tuned!

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Roger H. Grace is President, Roger Grace Associates, 83 Hill St., Ste. 101, San Francisco, CA 94107; 415-436-9101, fax 415-436-9810, rgrace@rgrace.com.

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