A sense of growth by acquisition

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John Murphy meets the team at OSI Systems, a US-based manufacturer of specialist electronics, including photodiodes

Photodiodes are becoming one of the most ubiquitous detector technologies in the world. We all know about the high-tech world of smart bombs and CAT scanners, but these detectors are also produced by the million for supermarket checkout scanners, flame detectors and a thousand other uses. How the world interacts with light is one of the most useful bits of physics for the instrumentation world – and photodiodes are very good at detecting small amounts of light.

OSI Systems Optoelectronics Division (OSI Optoelectronics) has been in the photodiode business for many years, but its strategy has been to move up the food chain from the basic components. Not everyone can reach the volume to take advantage of cheaper manufacturing in the Far East, so OSI has invested in a large Far East manufacturing facility to offer reduced manufacturing costs for relatively small volumes. Further up the food chain, OSI Systems has bought companies that are major users of its core detector technology, such as patient monitoring devices and security X-ray scanners, which all serve to keep the operations at the lower end of the food chain busy.

This level of vertical integration on the one hand, and the ability for customers to buy into the food chain at detector or sub-assembly level on the other, has seen it achieve astounding growth in the past 20 years to $385m for the whole group in 2005, and up to $452.6m this year. It started as a small, technically-oriented company but has adopted an aggressive strategy of buying up and integrating companies that fit into a total picture – a strategy that has delivered a very healthy return for its investors.

Dennis Mattock, international sales manager for OSI Optoelectronics, says: ‘We have been able to evolve OSI from a $10m company to a $450m company because we have evolved solutions and rolled them out, so we can offer customers a cost reduction for getting their product made.’

OSI can trace part of its origins in a company founded by Dr Paul Wendland in the late 1960s, called UDT (United Detector Technologies). Wendland was working at Hughes Aircraft doing research on diode detectors, and he decided to leave and form his own company to pursue the technology. In 1976 UDT hired a young engineer called Deepak Chopra, who had emigrated from India in 1971 with a masters degree and had been working in a variety of electronics jobs ever since. After three years Chopra left UDT to join Intel in Northern California.

Three years later UDT was in financial difficulties and was bought out by ILC, a flash lamp tube manufacturer in Northern California. Chopra was then hired by ILC to be President of UDT. In 1987 Chopra left UDT to found his own company – the original OSI (Optical Sensors Inc) – originally as a manufacturer of optoelectronic sensors and sub-assemblies. In 1990 he was able to buy certain UDT assets, and brought the two companies together.

The Pan Am 103 air disaster in 1988 brought a sharp increase in demand for x-ray scanning equipment, which in turn raised the demand for photodiode detectors, and the company started to grow. He raised funds to start buying up other companies. In 1993 he bought a UK company called Rapiscan, which he brought back to the US. Rapidscan was making small detectors big enough to screen a briefcase, but it has since expanded to airport detectors and machines so large they can scan a whole truck at once. He also bought a company called Spacelabs Medical from GE, which made various items of patient monitoring technology. The combination of OSI /UDT, Spacelabs and Rapiscan started to grow very quickly, going from $13m to $100m by the time the company went public in 1997. This funded a series of acquisitions of technology and capacity focused on security and medical devices at the higher end, and optoelectronic components, sub-systems and systems at the lower end. These now operate as three divisions: security (Rapiscan Systems), healthcare (Spacelabs Healthcare), and optoelectronics and manufacturing (OSI Optoelectronics).

Like most others in the sector, OSI had its share of troubles due to the telecoms bubble. But its customers are so diverse, ranging from the military to gaming machines, that it was not as badly exposed as many other companies.

The fundamental skill of OSI Optoelectronics is in making diode arrays that are at the core of its security and medical devices. They are very sensitive and have low noise, and the company is driving this technology in its components, both to sell on the open market and to sell as OEM sub systems – or indeed to use in its own medical and security products. Mattock says if its detectors were not superior, its medical and security products would not be a competitive as they are. ‘Our high-quality and superior sensors gives us a competitive advantage in our medical and security markets.’ The next step was to expand manufacturing facilities – which it has, both in the US and Malaysia.

Mattock says: ‘We are able to take optical sensors that we make in the US and have them manufactured in Malaysia, where we can reduce cost and increase our market share. It is very rare for a company to be able to mass-produce a product at the speed that we can and the cost that we can, and we attribute that to the training of the staff in Malaysia. We also have a facility in Singapore, which does our global purchasing.

‘We do not manufacture in the volumes that are normally manufactured in the Far East. You need to be making one million units a month to get the attention of some manufacturers. We own our own facility, so we can move smaller lots in and out and control what we manufacture. We can kit up lots in California and ship them over to Malaysia, where they produce them in one week and ship them back. They are an extension of our manufacturing facilities in California, and that gives us the ability to reduce the cost and still maintain short lead times.

‘We work in the area where people cannot independently move their manufacturing over to the Far East. So we can give them US volume manufacturing at Far East prices. We have distributors in the Far East who sell components to the larger companies that are already manufacturing there.’

Mattock says that the link with a high quality manufacturing operation gives OSI Optoelectronics a key advantage when dealing with OEM customers. While it is absolutely fine if a customer simply wants to order photodiodes to use in their own manufacturing operations, it is more usual for OEM customers to need the device integrated into a sub-system by someone, usually a contract manufacturer, before it comes to the OEM’s facility for assembly into the final product.

He says: ‘When we meet with a client, then inevitably the photodiode will go on a circuit board, which will inevitably have a pre-amplifier. What we tell the customer is that we can supply the board and the first one or two stages of amplification, or the A/D converter. So we can offer the customer more of the solution and do it at a lower cost than them.’

In common with other photodiode companies OSI Optoelectronics has a proprietary design for its products and a proprietary process for production. This means that, no matter how good the manufacturing capability, the quality and features of the diode are at the core of all its activities. It does produce a catalogue of standard detectors, but these are usually purchased by customers for evaluation and development purposes. The larger market is for a solution developed for particular OEM applications.

Mattock says: ‘Customers say the standard part is working fine, but they need more light, they need the active area to be different, or they need to add a filter or pre-amplifier. People usually want a customised solution, because they need to optimise the signal. We are dealing with signal levels that are so small they are willing to have the product customised to get the extra 10 to 20 per cent of signal that they cannot get from a standard product. Our standard products are fewer than 15 per cent of our business and that is probably the same for our competitors.’

Mattock believes that OSI Optoelectronics starts from having very high quality, sensitive, reliable detectors that have evolved over the 30 years the company has been making them. In particular, he thinks the process that is used to make them give superior UV and visible sensitivity.

He says: ‘If you can offer the customer an improved performance at the sensor level, then that can lead to 10 times the performance at the amplified level. So, the instrument will be much more sensitive and it pays 100-fold in his final product.’

Typically, customers are experts in the application technology rather then the detector end. They are typically physicists, electronics engineers or optical engineers.

He says: ‘If we go to a large company, they will have all three guys on staff. Smaller companies have one guy who is a jack-of-all-trades and is by no means an expert in detectors. They know they need a detector and they know what they want it to do, but they are looking to us to actually deliver a detector that will do that. They don’t know what we are capable of doing. We offer a complete solution, the whole front end for their instrument including the complete printed circuit board assembly.’

The strategy for the future is to move up the food chain. It starts with the best possible detector for the least amount of money and moves on to manufacturing the sub-system at the lowest prices, even for volumes as low as 1,000. In the future, the company wants to try and find ways of making more complicated systems.

Mattock says that the company has to walk a delicate path sometimes, because it is sometimes competing with its own OEM customers. But he says that the company is very strict about enforcing non-disclosure agreements and there are strict walls between the detector operation, the sub-systems manufacturing operation and its own divisions that make the end products.

He says: ‘People sometimes say they are worried, because we also make products in the same market. We tell them that they can take that view if they want, but alternatively they can take the view that we have fine-tuned our manufacturing techniques, we honour our non-disclosure agreements and we can provide you with a full assembly or sub-assembly for a lower cost and with better performance than you could do. So what would you like to do?’

In the future there may be other markets that offer the chance for further growth, but it is careful not to upset its current customers. But Mattock believes that there is plenty of room to grow, because more people are starting to use more optical sensors. Markets like automotive are small at the moment, but are set to explode. Even if OSI Systems does not move into any new markets, there is so much growth potential in the fields in which it is already operating; it will have no problems meeting the expectations of its investors for some time to come.