Trial By Fire During the telecom craze, Wall Street urged Corning to dump its other businesses. Now the company's future depends on them.
By William J. Holstein

(Business 2.0) – Throughout the boom, Peter Volanakis just couldn't get any respect on Wall Street. It didn't matter that he ran Corning Technologies, a branch of Corning Inc. that was bringing in more than a quarter of the company's $7 billion in sales. And it didn't matter that his division, which concentrated on things like using ceramics to clean up automotive and industrial emissions, was growing 9 percent a year.

When the company's top brass made presentations before Wall Street analysts, the meetings always ended the same way--with the analysts huddling around the executives in charge of Corning's fiber-optics business. "I'd just get my suitcases and walk away," Volanakis recalls. "There were so many analysts who were incapable of understanding anything but a very thin sector" of Corning's businesses.

In fact, some financial mavens were so focused on the fiber-optics business that they pushed management to sell off Volanakis's division and turn Corning into a "pure-play" fiber-optics bet. The logic was simple: Fiber sales almost doubled from 1999 to 2000; retaining any other business in the company would only slow things down. "Pure-play peers were getting a lot higher valuations," says Merrill Lynch analyst Steven Fox.

It's a good thing that Volanakis isn't the sensitive type--and that Corning didn't listen to Wall Street. We all know what happened next. The telecom industry suffered one of the most spectacular collapses in U.S. technological history, and demand for fiber optics all but vanished. Corning's telecom sales dropped by two-thirds during the next 12 months, and the company's $4.9 billion debt, an easily manageable burden in a company growing 50 percent a year, became life-threatening.

CEO Jamie Houghton is now painstakingly rebuilding the company around--you guessed it--Volanakis's once-disdained Corning Technologies group. The company really has only one way to survive: to expand the non-telecom businesses already on the books and race new non-telecom technologies into development. In a sense, Corning has become the pure play that Wall Street kept urging it to be. It is now a simple bet on the ability of a 152-year-old firm, the company that blew the glass for Edison's first lightbulb, to innovate its way out of disaster.

Walking around Corning's headquarters and the small upstate New York town that shares its name is like trekking the Bikini atoll after the first atomic bomb test. Corning has closed or mothballed four of its five fiber-optics plants worldwide, and a photonics plant that made amplifiers and similar gear on the outskirts of the city is all but empty. Houses that once sold quickly in the $200,000 range (steep for rural New York) stand empty. Some carefully restored restaurants and bars in downtown Corning are dark.

A lot is riding on Houghton. A member of the founding family who previously served as CEO from 1983 to 1996, he returned from retirement at age 66 last April, while Corning was in the midst of writing off $4.8 billion in fiber-optics assets and laying off 20,000 employees, almost half the workforce.

Although the company operated at a loss for 2002, Houghton vows that it will be profitable this year. He's banking on three non-telecom technologies to make that happen.

GLASS FOR LIQUID-CRYSTAL DISPLAYS. In 1964, seeking better car windshields, the company perfected a technique for creating the ultrapure material called fusion glass. It involved pouring molten glass into a trough (imagine a house gutter suspended in midair) and allowing the liquid to overflow at both ends. As the flow came together, it formed a pane of glass with no imperfections.

The glass proved too expensive for the automotive industry, and Corning lost money on it for years, finally shelving the technology in 1971. Twenty years later, however, makers of electronic displays found that it was perfect for the liquid-crystal-display screens used in everything from cell phones to laptops. Glass manufactured this way doesn't have to be polished or ground, which makes it cheaper than alternatives. And Corning's version is thinner than anything the competition produces--so thin, in fact, that it's possible for a viewer to see what's displayed on the screen from any angle, not just straight on. Corning says sales, projected at $400 million for 2002, are increasing by 30 percent a year.

CERAMICS FOR DIESEL EMISSION CLEANUP. This technology hasn't changed much since 1974, when Corning made the first catalytic converters for automobiles. The ones it makes for diesels are slightly bigger, but the concept is the same: Car engines force emissions through a maze of ceramic corridors that trap particulates and convert nitrous oxides and carbon monoxide into oxygen, nitrogen, and less-harmful carbon dioxide. Corning thinks it has an edge over the competition in the composition of the ceramic itself and in its manufacturing technique, both of which allow Corning to produce converters with thinner walls and more surface area, thereby converting more emissions.

The company estimates that it sold $400 million of "environmental" ceramics in 2002, and figures it can double that amount by 2007. The key development here is that the U.S. Environmental Protection Agency, the state of California, and the European Union have mandated that diesel emissions meet new requirements over the next seven years. Also, since fuel cells and other ultraclean technologies are still far in the future, diesel is becoming an important, cleaner alternative to gasoline.

CRYSTALS FOR SEMICONDUCTOR PRODUCTION. To etch designs onto the silicon wafers that become memory chips or microprocessors, chipmakers use a machine called a stepper. Inside are lenses and mirrors that help guide the laser beams burning the design onto the silicon. Corning has long made fused silica, the same purified glass used in the Hubble telescope, for those mirrors and lenses.

But now that chipmakers are squeezing ever-smaller circuits onto their chips, the next generation of steppers will require an even purer kind of glass. Corning expects to supply it by adapting a technique that its researchers have been working on for five years, which involves growing a perfectly clear crystal of the mineral calcium fluoride. Corning anticipates that as the semiconductor industry emerges from its latest cyclical rut, sales will climb 20 percent annually between now and 2008.

If these businesses grow as hoped, it won't be the first time Corning has been saved by technologies that emerged from its R&D labs with no immediately apparent commercial use. "When I took over in 1983," Houghton recalls, "we had great hopes for optical waveguides"--the key component of fiber optics--"but we didn't have a clue where they would ultimately be used." As things turned out, the technology made it possible to transmit data through pulses of light, though the company lost money on it for 17 years before it was finally adopted by the new long-distance phone companies that sprang up in the wake of the AT&T breakup in the early '80s. Similarly, the glass ceramic that was used in Corning Ware housewares was originally devised for the noses of missiles and rockets. When a marketing executive proposed deploying it in pots and pans, researchers laughed him out of the room. Corning's housewares business went on to become a huge success, of course; the company sold that division in 1998.

Nowadays, Corning tends to be fanatical about R&D. Despite the downturn, the company has actually increased its research spending as a percentage of sales--to 14 percent, compared with 5 percent in 1997. And even though the ranks of researchers have been cut by almost 45 percent in the last year alone, the company's ability to "re-aim" the remainder, as Houghton calls it, has been key to identifying new opportunities. Right now, for example, 70 percent of Corning's R&D spending goes for non-telecom projects, which means some scientists who spent decades in fiber optics are doing other things.

Not surprisingly, pressure is once again coming from Wall Street--this time to cut back on R&D and hasten Corning's return to profitability. Houghton refuses. "We're not going to chop off the future," he says. The company's chief financial officer, James Flaws, adds: "Sometimes analysts are here today, gone tomorrow. We're stewards of the company for more than just the shareholder of the minute." It's an admirable, if old-fashioned, sentiment. Perhaps it's the best reason to believe that there will be life after telecom for Corning. --WILLIAM J. HOLSTEIN