Distributing from an island

John Murphy discovers how CVI is making inroads into Europe from the Isle of ManUnless they are very rich, the only thing most people will know about the Isle of Man is that it hosts the annual TT motorbike races. If they are rich, they will know it is also a tax haven. Few will suspect that this peaceful, lush outcrop, halfway between the north west coast of England and Northern Ireland, is also a leading centre for the production of high quality laser optics. It has become the European beachhead for the recent expansion of the CVI Laser Optics catalogue.

CVI manufactures and distributes a range of optics from its base on the Isle of Man to a European market.

CVI came to Europe with the acquisition of Technical Optics, which had previously been a specialist manufacturer of etalons, focusing on the semiconductor industry. When the semiconductor industry hit a periodic decline, Technical Optics got into trouble and was bought out by CVI. Since then it has enjoyed a renaissance, with its own product line being represented in the US by CVI, and the Technical Optics operations becoming the European hub for CVI manufacturing its traditional line, together with many of the 300,000 components in the CVI range. It has also invested heavily in rapid prototyping equipment that is closer to its European customers than CVI could previously have achieved.

It has formed a partnership with BFI Optilas and, between the two, they sell the full CVI range to Europe and together they have driven the company to double-digit growth every year since 2000. Sales have grown significantly and the Isle of Man operation has grown, even including the acquisition of another optical manufacturer on the same island.

Technical Optics was founded in 1971 by Mike and Dave Lunt, who chose the Isle of Man as its base because the financial backer lived there and the Island government was offering attractive deals to high technology companies to locate there. By the late 1980s, it had been acquired by the Melles Griot Group. It had developed an expertise in making etalons to narrow the wavelengths of laser light. They are widely used in applications such as lidar and spectroscopy and, as feature sizes became smaller on semiconductors, they found a major market in lithography.

As the semiconductor market grew, the company became increasingly dependent on it. In fact, it was so confident in the strength of the market that it actually became dependent on one particular customer (which it will not name). In the late 1990s, that customer went under, leaving Technical Optics somewhat embarrassed by the fact that two thirds of its turnover had disappeared overnight.

At the same time, in a boardroom far away in New Mexico, Dr Yu Hak ('Haggie') Hahn was looking for a way to expand into Europe. Hahn had emigrated from Korea to the US as a teenager and, in 1967, founded CVI Laser. He had been a senior scientist with Bausch and Lomb and wanted to establish a company making high quality optics for the new field of laser physics. He established his company in Albuquerque, New Mexico, in order to be close to the Sandia National Laboratory and Los Alamos, where many of his early customers were. His first international expansion had been the creation of manufacturing facilities back in Korea, but he believed that the time was right to have a more substantial presence in Europe, running sales as well as manufacturing. He had previously had an operation with two coating machines in Luton, England, but it was not profitable and had made no sales impact in Europe. When Melles Griot put Technical Optics up for sale, he saw the chance to do something better in what was clearly a huge market.

Hahn took over Technical Optics in 2000 and replaced all but one of the management team. He appointed Dr Helmut Kessler as firstly sales manager and then general manager for Europe.

Kessler says: 'Unfortunately, the management failed to see the danger of exposing the company to one product. We could have gone the same way into telecoms, but I could foresee what would happen in that market.'

Kessler decided that the company needed to make a fresh start and build a sustainable business. Chris Bridle was the only survivor from the old Technical Optics management and is now European sales manager. He says: 'The idea for us was to establish a foothold in Europe for the CVI catalogue, as well as to sell the etalon technology back into the US. Our customers' high quality optic experience, with CVI's catalogue experience and Haggie's money, gave us the opportunity to turn the company around.'

Bridle says that CVI's catalogue is much more varied than other catalogues on the market because it specialises in optics rather than mixing in benches and consumables or lab equipment. Kessler adds that the CVI catalogue also has a very logical way of numbering parts, making it easier for customers and sales staff to navigate their way through.

Kessler says: 'The numbering system means that you can basically build your own part. You can pick a substrate and specify its properties and build your own part with a part number that is logical and understandable. If you give me any CVI part number I can tell you exactly what product it is.'

Manufacturing started to expand on the Isle of Man; not only was it supplying etalons, but the company started making a lot of the high tolerance products from the CVI range, which are also sold back into the US market. There has been a heavy investment in new coating and polishing machines, and stocks were built up to serve the European market. It currently has 30,000 parts in stock in the Isle of Man, with access to 500,000 stock parts from Albuquerque. It can manufacture almost all parts in Europe, except for filters, which are made in Albuquerque for all countries, just as etalons are made in Europe for world markets.

Kessler explains that the manufacturing operation is not a high volume production line knocking out millions of standard parts. The workforce in the Isle of Man is highly experienced and skilled and they tend to operate in batch mode, relying on that skill to produce the highest quality parts. If a customer orders a part that is not in stock, they set up and make a batch of them. Each line can be producing many different products over the course of a week. Coating time is the most precious resource and has to be managed carefully.

Bridle says that while a company producing lower quality parts on a production line could certainly produce parts more cheaply, he believes that it is uneconomic for the high volume manufacturers to compete with its high quality optics needed for high energy lasers. He says: 'Quality for quality, we will not be beaten on price.'

The company has recently added a rapid prototyping facility on the Isle of Man to serve European markets, as it decided that it could hardly use the term 'rapid' if it had to ship from the US. The Isle of Man is about an hour by air from London and even less from Manchester. As parts are high in value and low in weight, this extra bit of air freight does not add any significant cost.

The sales operation has also been significantly enhanced. The IT systems were upgraded so that staff in Europe can always see where stock is held around the world, helping it to reduce inventory costs and give customers accurate information about delivery times. Kessler says that after the CVI takeover, a lot of effort had to be put into winning back old customers who had been mistreated by the previous management.

He says: 'It was not just a question of ignoring customers - they were actively thrown away. Some were told that we didn't want their business any more and they should go away, because the previous management believed they were going to make so much money from the semiconductor business. None of the management here today could understand that philosophy, and we have set out to do the exact opposite.'

Sales to the UK and a few other countries are handled directly from the Isle of Man. But, little more than a year ago, it struck a mutually exclusive deal with BFI Optilas to distribute its products in the other major European markets. BFI has invested in training and holds some stock. Bridle says the key difference between this and the previous distribution structure is its openness. BFI reports all sales back to CVI. This is particularly important for OEM sales, where both companies will visit the customer together to work on the deal, giving the customer confidence that BFI has the technical backup and CVI has the local presence.

Bridle says: 'BFI sell at the same list price as we do; there is no mark-up. We have total transparency and we know who the customer is for every order. Previously we had no idea, although we could guess sometimes. Now we travel to support the BFI offices and visit customers with them. It means we can develop OEM accounts and develop strategy R&D accounts. At the moment we send them a weekly inventory list. They do not have live access to the inventory yet and, in reality, that is probably 18 months away.'

In 2003 Hahn sold CVI to Norwest Equity Partners, which installed a new top management. The new CEO, Stuart Schoenmann, decided that regional differences were important and the European operation was given greater independence. He also ensured all measurements in the catalogue were in metric as well as imperial units, making it a truly worldwide catalogue.

The next stage of the company's development will be sub assemblies with optics and mounts. The first few sub assembly products have started appearing on the website and Kessler says that more are in the pipeline. He also sees the product range expanding through R&D efforts to actually push the boundaries of what is possible, such as high-damage threshold polarising cubes, or optics for femtosecond lasers, which are not available anywhere yet. Past experience has shown that it is worth working with customers at the leading edge to make things that are hard to make, because those customers keep coming back.

He says: 'In my working time, I want to see CVI becoming the number one optical company in the world.

Bridle adds: 'Europe is a very competitive market, but we like competition. We like beating people. There is huge market there. People talk about it being worth $2bn a year and we are nowhere near that. More people know about us now and are recommending us - and word of mouth is extremely important in the R&D sector.'

CVI is also using acquisition to grow in Europe and it did not have to look very far to find a company to acquire. This spring, it bought Quality Laser Optics, based in - yes - the Isle of Man. Needless to say they were not strangers before; QLO managing director Gary Thomas trained at Technical Optics in the 1980s. Bridle says that CVI constantly needed to grow its capacity to keep up with growing sales, and so it bought the company largely for the skills of its workforce. The two companies will be integrated but, as they are just a few miles apart, it is not a problem.

Bridle and Kessler stress that one of the key features of the company is its open culture, where everyone is made to feel valued. They are not just machine operators, but highly-skilled technicians. Its biggest problem going forward is going to be attracting the numbers of people to live on a small island in the Irish Sea (population: 76,000). Bridle says it used to be a problem because, as a tax haven, property prices were very high, but that has settled down now. The very low income tax is a great attraction, as is the very low crime rate. The island's government, known as the Tynwald, is also very generous in its incentives to companies that set up there. Believe it or not, there are some other high quality optic manufacturers on this small island, which is only 42km long by 24km at its widest point. These companies may one day be the target of acquisitions - who knows?

But CVI admits that if its ambitious growth plans become a reality, then they will eventually run out of space, and people, on the island. But with plenty of financial backing from the CVI group, they anticipate being able to find another company to join the group that can add not just capacity, but also a new capability to the company in the future.