Volatility beta guides MEMS investments

What kind of MEMS business should engineering entrepreneurs create or invest in? Although there truly is no easy answer, one could quantify the answer by means of a "beta" volatility index.

Similar to a volatility index for a stock, which determines the price-movement sensitivity of a specific stock to either its industry sector or the overall market, the volatility beta looks at the level of risk associated with specific MEMS market sectors based on a number of critical criteria.

These include the diversity of the sector from the viewpoint of total number of customers, total number of applications, total size of the market and compound annual growth rate. 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.

From a numerical value, a beta of 5 is average — the higher the beta, the higher the volatility. Let's look at some examples:

Industrial: With a beta of 2, this sector has the most diverse MEMS applications, including process control pressure transmitters, pneumatic/hydraulic control systems, heating ventilation and air-conditioning systems, to name a few. Also, many kinds of MEMS can be used in these applications — for example, pressure sensors, force sensors and temperature sensors.

Environmental monitoring and medical/biochemical: With a beta of 3, these categories enjoy a wide variety of current (and many potential future) applications, with relatively few companies competing. The interesting thing is that the current players have intelligently "niched out" their product offerings. Drug discovery, food and water screening, gene sequencing, DNA analysis and patient monitoring are some of the current applications of MEMS, with a boundless number of new applications coming to the fore in the next few years.

Automotive: This market currently enjoys a beta of 3 due to the exploding number of new MEMS applications in production, tied in with existing applications. Of only six true killer MEMS applications, two — manifold absolute air pressure (more than 30 million) and airbag accelerometers (over 90 million) — were fitted into the approximately 55 million vehicles produced worldwide in 2002. At last count, there were more than 70 opportunities for MEMS in automotive applications [1]. The other good news is that these 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.

IT peripherals: This category boasts two killer applications: read/write magnetic heads (over 1 billion in 2002) and inkjet printer nozzles (more than 650 million in 2002). These two applications constitute a significant portion of the total sector sales and each of these sectors is dominated by a limited number of "800-pound gorilla" companies. Hewlett-Packard inkjets and Seagate read/write heads are excellent examples of gorillas that can dominate an application sector.

Telecommunications: This market had received the greatest attention from the investor, trade and popular press over the past few years, but it has fallen on bad times, as have its telecom industry customers, such as JDS Uniphase and Corning. Optical-MEMS funding has slowed dramatically, with first-round funding virtually nonexistent. It is my opinion that new investing into these companies will be made more judiciously and only after significant due diligence. The current beta of 8 was changed from its previous value of 6 largely due to the contraction of the telecom industry, the failure of many MEMS optical-telecom startups, as well as the industry forecast for this sector.

The current jewel in the crown of telecom MEMS is radio frequency (RF). Although the applications are currently somewhat limited (cellular handsets, Bluetooth, RF in the home), these offer immense volume opportunities (more than 420 million handsets were sold worldwide in 2002). RF MEMS 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 MEMS a truly enabling technology.

So, just where is the action in MEMS? In a word, it's in infrastructure — that is, manufacturing, packaging, testing and assembly. Although we have not included this category 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 MEMS devices, which significantly mitigates risk.

[1] "Automotive Applications of MEMS/MST," Proceedings of the Commercialization of Micro and Nanosystems Conference, Ypsilanti, Mich., 2002. The report is available at www.rgrace.com.

Roger H. Grace is president of Roger Grace Associates and president of the Micro and Nanotechnology Commercialization Foundation, Albuquerque, N.M..