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Semiconductor equipment industry flounders

Posted: 18 Nov 2010 ?? ?Print Version ?Bookmark and Share

Keywords:front-end? semiconductor equipment industry? market analysis? manufacturing?

Editor's note: This article is part one of a two-part analysis on the state of the front-end capital equipment industry and its future prospects.

The semiconductor equipment industry has been battling a significant industry cyclical downturn

Since the end of 2007, a major cyclical downturn has been challenging the semiconductor equipment industry. Customers have cut capital spending significantly from a decade ago. While the industry is seeing signs of a cyclical rebound this 2010�albeit perhaps short-lived as the world copes with a sluggish recovery from the deep recession�I believe the industry has been unable to deal with the last two cyclical downturns and is not well positioned to cope with the uncertain economic conditions.

Dearth of product innovation
Customers have cut investment in R&D type of equipment and capital because there has been no significant product innovation from the major equipment companies. Product development in the past three to five years has offered only incremental improvement for which customers would not pay premiums, thus, the profitability of the equipment companies has gone down. Unit volumes for new products have not grown due to the lack of innovation, demand interruption caused by the cyclical downturn and the customers' ability to reuse equipment.

Changing business model
This lack of product innovation has brought about a a fundamental change in the business model of the semiconductor capital equipment company. Product innovation refers to products that are disruptive to the current installed product set and that demonstrate significant value through productivity improvement and process capability, enabling customers to shorten their product development cycles.

For example, Applied Materials developed the physical vapor deposition system (Endura) in the 1990s which dramatically improved the capability of the customer. Although its average selling price was nearly thrice the price of its nearest competitor, the value proposition was so compelling that customers bought the equipment.

The impact of this lack of innovation is the commoditization of the tool set, resulting in price erosion, and consequently, lower gross margins, therefore pressure on operating expenses which starts the cycle all over again. Equipment companies have had to reduce capacity and cost and spend less money on R&D and process development. Applied Materials' workforce is less than it was in 2003. They have also shed employees and other valuable employees have left the industry completely moving to alternative energy or the biotech industries.

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