Results for the first half of 2003 for those involved with bringing MEMS devices to market has been a mixed bag of both good and bad news, coupled with movement forward in some areas, and a few steps back in others. Tough economic conditions have finally caught up to the MEMS industry, with many companies going dark, filing for bankruptcy, or undergoing significant reorganization. In fact, the latter part of 2002 saw a rapid increase in worker displacement, reaching far beyond the confines of those involved in optical networking and continuing into 2003.

Today, this is a tough business to be in, with substantial shifts over the past year in terms of who's involved and how. While the second half still looks a bit dicey for some companies, others will continue to see an upswing in business. Key issues right now include greater regional competitiveness, more semiconductor companies upping their profile, and a tough venture capital environment for startups. Even so, some markets and applications are indeed gaining momentum.

Fab capacity remains a real concern, with new companies continuing to enter the sector, even though an increased number of established MEMS fabs in North America and Europe are struggling to stay afloat or are simply going out of business. Nearly half a dozen foundries in Taiwan now offer MEMS fabrication, with an uptick of activity in China, India and Singapore. The positioning taking place in the Asia-Pacific region is creating subtle ripples whose full impact cannot yet be determined; but it does raise the question whether there will be a fundamental shift in the MEMS fabrication business some time in the near future.

From the point of view of the semiconductor players, there are a lot more big fish in a relatively little pond. As such, the stakes have been raised significantly for suppliers of MEMS devices as an increased number of companies pursue a relatively limited number of lucrative and/or high volume applications. On the one hand, this may appear to be a daunting competitive challenge for the startups and, on the other, it may present an opportunity for some unique partnerships.

The bottom line: being a large company with deep pockets doesn't necessarily guarantee success in the MEMS industry. In fact, in some ways, the divisions within companies that are pursuing MEMS commercialization are saddled with a greater burden to succeed in a short time. That's a tough proposition in an economic downturn.

The biggest challenge startups now confront is an ever-shrinking number of venture capitalists still willing to fund their dreams of success. Many VCs have chosen to exit rather than wait out a market upturn. Nevertheless, startups both new and not so new are continuing to find varying degrees of financial backing ranging from seed funding to later rounds. The real difficulty here is a serious disconnect in timing. VCs typically like to get involved with startups about 18 months before product launch; but it takes several years for MEMS device development — and that's when companies need money the most.

As the history of the semiconductor industry so clearly illustrates, ebb and flow in growth rates is a natural business cycle; certain market segments may experience a downturn that is moderate and short, or steep and prolonged, while at the same time, another sector may be experiencing an upswing. As such, the success or failure of MEMS should not be determined by the performance (or lack thereof) of any particular market at any given time. The whole is definitely greater than the parts.

For example, despite the short-term loss of opportunity for MEMS in optical networking, MEMS devices are being integrated into cell phones at a blistering pace; as a result, the communications market overall remains solid. And despite the economic malaise and resulting pressure the automotive and consumer electronics markets are currently experiencing, from a MEMS standpoint, there has been a real increase in development deals and partnerships. In fact, In-Stat/MDR expects to see tangible results in these two areas, in terms of unit shipments, within the next 18 months.

Perhaps most importantly, the war in Iraq and the ongoing war on terrorism have actually benefitted several sectors of the MEMS industry, most notably the medical and military markets. While the gains realized now are more from the standpoint of visibility (in terms of technology potential) rather than actual dollars generated, the long-term outlook for growth in these two areas is especially favorable.

Since these issues are generally the same ones faced by MEMS suppliers this time last year, one might argue that the MEMS industry is really just caught in a traffic circle, unable to get out and go anywhere. Others would argue that this is an industry at an important crossroads — with any number of directions to go and with a final destination that's not immediately clear. Either way, this is clearly a technology on the road to success, and despite some bumps, MEMS remains a vital, growing business.

Marlene Bourne (mbourne@reedbusiness.com) is a senior analyst with In-Stat/MDR (Scottsdale, Ariz.).