2 January 2012

Opnext’s 10G module production at Thailand’s Fabrinet transferred from Chokchai

Following the severe flooding in Thailand that halted operations at the Chokchai campus in Pathum Thani of its primary contract manufacturer Fabrinet Co Ltd on 22 October, optical module and component maker Opnext Inc of Fremont, CA, USA says that production at Chokchai remains suspended, and that Fabrinet has stated that it is unlikely that production there will resume.

Opnext has hence relocated limited production capacity to its manufacturing facilities in Fremont and Totsuka, Japan. In addition, it is diverting a portion of the 10Gbps module production capacity to Fabrinet’s Pinehurst facility about 7 miles north of Chokchai. Fabrinet has allocated surface-mount technology (SMT) lines at Pinehurst to Opnext, and new test systems are being constructed to replace systems lost in the flooding. Opnext anticipates that Fabrinet will start production in February and ramp production as new test systems come online.

Opnext is also in the process of engaging an additional contract manufacturer with the goal of dual sourcing the manufacturing of certain high-volume products. The firm expected to have restored about 20% of the lost 10Gbps module production capacity by the end of 2011, and anticipates continuing to increase production capacity during the March quarter, with a return to full production capacity expected early in the June quarter.

Opnext expects that the loss of production capacity at Fabrinet will have a significant impact on its operations and its ability to meet demand for its products for the remainder of fiscal 2011 (to end-March 2012). Production at Fabrinet accounted for $37.3m (43%) of Opnext’s total revenue in fiscal second-quarter 2012 (to end-September 2011). The firm expects that the loss of revenue in each of the fiscal third quarter (to end-December 2011) and fourth quarter (to end-March 2012) will be material. Multiple factors will affect the extent of revenue loss, including (but not limited to) Opnext’s ability to move production to other locations, existing inventory from which to meet customers’ needs, the firm’s ability to source parts from suppliers that have been impacted by the flooding or from alternative suppliers in instances where the firm has had to locate alternatives, the level of demand from customers, and Opnext’s ability to incrementally increase production at its other facilities.

In addition, Opnext has experienced some loss of equipment and inventory in connection with the flooding, the full extent of which is still not known. At the time of the flooding, the firm had production equipment at the Chokchai facility, primarily consisting of 10Gbps module test sets (with an original cost of $31.3m). While it has been determined that some of the more sophisticated measurement equipment escaped damage from the flood waters, Opnext is still in the process of determining the extent of equipment lost as a result of the flooding.

The firm also had $15.7m of inventory with Fabrinet ($7.6m of raw materials and $8.1m of finished goods). Although about half of the finished goods have already been determined to be in good condition, Opnext is still in the process of determining the status of the remainder as well as the status of the raw materials.

While Fabrinet maintains insurance for the equipment and inventory at the facility (and Opnext maintains independent insurance for a portion of the inventory) and there are additional contractual protections in favor of Opnext that Fabrinet has stated it will honor, it is not clear that the insurance will be adequate to fully cover Opnext’s losses or that Opnext will otherwise be made whole.

Tags: Opnext Fabrinet

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