18 Jun 2004
Having weathered the telecoms storm, Thorlabs is currently pursuing an aggressive expansion plan that has seen it acquire three European businesses in the past 12 months. Oliver Graydon speaks to Alex Cable - the firm's founder - about its strategy.
From Opto & Laser Europe June 2004
Over the past 15 years Thorlabs has grown to become a major catalogue business that, this year will ship optical products to the value of about $50 m. Now the New Jersey-based enterprise has turned its eye to Europe, and in the past 12 months it has made acquisitions in the UK, Sweden and Germany. Oliver Graydon talks to Alex Cable, the company's founder and president, about its origins and business plan.
OG: How did Thorlabs come about?
AC: I always planned on having some kind of start-up business. I originally trained as a chef and had thought of starting a restaurant. However, looking at the restaurant business I decided that it wasn't an ideal model. I was in my late twenties when I went back to university to get a technical degree, and I entered Bell Labs with an eye towards it being a finite stay. There, I worked with Steve Chu, the Nobel prizewinner for physics, now at Stanford. I was the engineer on the team that built and ran the lab for Steve.
At Bell Labs, at that time, I was being paid about $25 000-30 000 per year and did not have any start-up capital, so I took a more traditional approach. I bought an old Bridgeport milling machine and spent nights and weekends designing and making optomechanical parts and then selling them. That provided some cash, which I then re-invested. Slowly I built on that to provide more and more complex products. Finally, I left AT&T Bell Labs in November 1989.
What's the key to making Thorlabs successful and different from the competition?
Part of our success is understanding the manufacturing end of the equation. Having grown up in the industry and having been a customer of all of my major competitors in the past, I knew the market that I was approaching. One thing that I do claim credit for is [highlighting] the need to have the product available instantly. Our responsiveness has been a major competitive tool.
The order comes in and ships out on the same day. We've also been able to aggregate enough of the market within our catalogue business to allow us economies of scale that give a strong advantage over our competitors. While we may not be the least expensive, we strive to have the best quality at a price that is highly competitive. The fact that we manufacture more than 90% of the 9000 products available in our catalogue gives us an advantage.
Why do you manufacture products yourself?
I see much greater value in a business that designs, manufactures and distributes, rather than a pure distribution model. It's about building value. We came in to an industry that had not seen alot of investment at the nuts-and-bolts level. Take optomechanical components, for example. There were a handful of competitors out there and many of them, in my opinion, were simply just harvesting the market. Year after year, their prices were going up by between 5 and 10%. I came along and recognized that I could make a very good profit and sell my product, typically at about 40% less than anyone else. I do that by controlling the design and manufacturing. This allows us to be an agile competitor, on price and also on innovating the product. We can push those innovations out to the customer very quickly.
These acquisitions fit very well. The first one, Profile - which is just coming up to its first anniversary - is a design and manufacturing facility in Germany. It serves a number of important purposes: expanding the product line; expanding the range of expertise in high-end instrumentation for laser diodes; and [delivering] polarization measurement and control equipment. I've been very lucky. The core business of Thorlabs is generating a healthy amount of cash that allows us to go out and make these acquisitions.
Why are all your acquisitions in Europe?
There are strategic reasons for wanting to be firmly entrenched in all of the key markets around the world. I am a big believer in local intelligence. We have built a strong foundation from which we can service and understand the needs of local markets. Each of these acquisitions adds to the strength of our business worldwide.
With the dollar-euro exchange rate being what it is for the past 12 months or so, it may look a little silly to go into Germany and do a fair amount of manufacturing with the eye to bringing those products back to the US. But the key is having an understanding of the manufacturing process. We're producing relatively low volumes of products. One key fact that I always keep in mind is that if we are selling hundreds of any particular item in our catalogue, then it's a relatively popular product. The major investment in all of our products, regardless of where it is manufactured, is the cost of the design and the cost of supporting that design. Until recently, the photonics market has only been able to support very low volumes.
Why not go public?
I've looked at that and I have considered opportunities in the past where we could have become a publicly traded company through various mergers. I think that as a private firm we can grow to become a $200 m business within five years. Beyond that I will seriously have to consider doing a public offering. But, as long as I can maintain control and keep our fast-mover advantage it just makes sense to play out this portion of our history. Two or three years down the road an IPO could be the natural next step for us, and I'm very excited about that. I enjoy change. An IPO would provide a new set of challenges and opportunities and I would enjoy waking up and taking on those challenges.
One advantage of being private is that I can take a three- to five-year approach over acquisitions. I don't need to ensure quarter-by-quarter revenue growth to keep shareholders happy.
What was the effect of the telecoms market crash?
At its peak the optical-telecoms market represented 45% of our revenue, so a sizeable portion of our customer base disappeared overnight. In fact, we had negative growth for at least one quarter, with more product being returned by telecoms firms than we were selling to them. We've always had a liberal returns policy and even though it gave me pause for thought, we stood by it. Our response was to quickly put out another catalogue and look at the other markets where we saw growth potential.
To be successful requires a high degree of agility. It is necessary that you have a view of what's happening in the market and know where the opportunities are. I take a lot of pride in my team, which was able to replace a large chunk of that 45% telecoms-related revenue. In our off year our revenue was only down 18% as opposed to 80-90% - which was more typical of many firms. And this year's revenue, coming in at around $50 m, will be a new record for us. The upside is that the unusual circumstances created by over investment in telecoms have put me in a great position to make acquisitions. Today I can make cash purchases at prices that are highly affordable.
Why not set up factories in China or another low-cost region?
I periodically look at the cost of moving our manufacturing to low-cost centres. I run through the numbers at least once a year and I always find that we compare very nicely, even though Munich and New Jersey are clearly not the places you go to for low-cost manufacturing.
The reason is that the labour component of one of our products is, on average, less than 20% of its overall cost, and in the US it is less than 15%. If you move the manufacturing, you've then got to factor in the cost of transportation and longer lead times, and you lose the flexibility of synchronizing the supply of the product to the demand. Some 94% of our orders ship on the same day that they are received, which is a phenomenal percentage. We don't want to lose that performance and we want to do the manufacturing where the product knowledge resides.
How do you plan what products to release next?
It's a complicated and challenging problem. We go to trade shows. I attend the major ones and that's motivated by my need to stay well informed. The catalogue business provides us with a view into the market-place. We have a lot of raw data that we mine and this provides us with early indicators of what's going on and where the potential is. Having a company that is recognized by the academic and scientific portion of the market - which is an area where we have always retained our focus - is also very useful.
Tell me about your strategic partner programme
I look for opportunities to team up with young companies and start-ups and help them to accelerate their drive to profitability.
Menlo [a US femtosecond laser specialist] and Novaphase [a manufacturer of precision optics also based in the US] are just two examples where we help their businesses to become profitable by providing information from Thorlabs' databases. It's a win-win situation for everyone. It's a win for me because I am typically a board member of the start-up and have equity in the company. And it's a win for them because it provides them with a much easier path to profitability.
So far we have six businesses taking part in the programme. Participating in these start-ups provides me with a first-hand insight into any new technology, and as much as 25% of our revenue depends on us serving start-ups in our industry. By being an active participant we can better understand what these start-ups need.