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Semiconductor equipment industry flounders (part 2)

Posted: 01 Dec 2010 ?? ?Print Version ?Bookmark and Share

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

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Several semiconductor industry factors that I detailed in part one of this analysis have far-reaching implications. With the semiconductor equipment industry in a difficult situation, little product innovation from the rest of the semiconductor industry, and relatively poor financial performance given 300mm product pricing, there is not enough discretionary funding to develop a 450mm generation of products to further the cause of Moore's Law.

The industry has not yet achieved returns from its $14 billion investment in 300mm, with the performance of those stocks underperforming the market and technology companies since 2006. Thus, financial markets are not going to be ready to provide the financing and capital required to develop the 450mm generation. The companies alone do not have the financial capability to develop the next wafer size generation.

Developing a new wafer size generation is an expensive process requiring considerable expertise. The core competencies of the front-end equipment company are the ability to develop integrated tools combined with process development capability, materials qualification, software and factory automation. These competencies are a significant barrier to entry particularly in a wafer size change since the entire process must be repeated as materials scaling from prior generations (in this case 300mm) is not a simple task.

The current front-end companies are unique in this capability and it's not likely that the semiconductor manufacturer--irrespective of size--is going to be able to develop these skills sets any time soon. There are few front-end equipment suppliers that are multi-product such as Applied Materials Inc. and Tokyo Electron Ltd, and it is unlikely that even these two giants of the industry can spend the money and resources required to develop the next wafer size generation.

The behavior of the largest chipmakers--Intel, Samsung and TSMC, and I would count Toshiba--has had a lot to do with this problem in addition to the behavior of the equipment companies themselves. It seems to me that if the equipment companies cannot earn adequate returns, the biggest chipmakers may have to go back to building and developing the equipment themselves--something that hasn't been done in the industry since the late 1960s and 1970s, when it was done by Texas Instruments Inc.

Samsung and TSMC have only been factors in the market since 1994. These companies do not have sufficient skills within their companies to develop equipment. Much of what they know about process development capability has resulted from their relationships with the equipment companies that have served them since their founding.

Samsung continues to sponsor efforts by insisting on Korean supply chain control and starting companies in Korea to build equipment. None of these endeavors have yielded a competitive product for consumption on the world stage.

The game is going to have to change and unfortunately it might change with the development of the Chinese equipment industry which today is in its infancy. I believe that the Chinese will support a homegrown equipment industry to support their internal semiconductor industry. One equipment startup, AMEC, has developed a state-of-the-art oxide etcher that has penetrated a number of companies in the global semiconductor customer base. This product development has taken place over a period of years and reflects significant investment and patience by China after initial funding by U.S.-based venture capitalists. The type of patience and persistence demonstrated by the Chinese in this startup is significant as most equipment startups in the last five years outside of China have resulted in failure.

The threat of a double-dip recession would potentially put the semiconductor industry in another situation of overcapacity. Customers have learned a lot over the past few years about how not to have to buy new tools unless they are absolutely necessary. The 300mm generation of tools has reduced the unit demand placed on the market.

Actions needed

1. The front-end equipment industry will need to consolidate and gain some degree of leverage over the customer base. If this had been done four or five years ago, the industry would be ready to weather the potential upcoming storms. Applied Materials and Tokyo Electron should emerge as the leaders of this effort along with KLA Tencor in the wafer diagnostics space.

2. The industry needs to increase its efforts to provide its customers with a wide range of services that will improve revenue and insulate them from the shocks of cyclical equipment demand. Services should be more value added in the form of yield enhancing services through technical capability and technical product offerings such as application modules.

3. The industry needs to improve its operational acumen to provide efficiencies and cost reductions for its customers to improve supply chain management. In certain instances, some vertical integration of its suppliers through acquisition might prove to be cost beneficial. Most of the product costs of the equipment suppliers are direct materials outsourced to third parties. Examples of such vertical integration could be in the area of process gas systems, chamber bodies, RF generators etc. provided that such acquisitions could also provide post equipment sale revenue as well.

4. If the semiconductor industry wants 450mm equipment products it is going to have to contribute to its development effort. Jawboning efforts by the semiconductor industry and other threats will not be persuasive to the semiconductor equipment industry.

Consolidation

The front-end semiconductor equipment industry is prospering in the recovery environment of 2010 and 2011, but will not be prepared to weather the next downturn unless consolidation of major players occurs. The 300mm generation has yet to pay back the industry for its R&D investment as 300mm enters its 10th year of production. Past generations have paid back within a seven year production period primarily resulting from semiconductor industry component sales growth and customer financial participation in product development.

The industry has ceased to be a growth business despite the significant technology required to meet customer requirements as devices shrink to 45nm for production and 32nm and 22nm for development. The equipment companies are not generating sufficient profits to take on the risks of research and development. Consolidation of the companies within the front-end equipment industry will be required to deal with the current business conditions in the industry.

Consolidation is necessary to produce the necessary profits and business results that will allow investment to continue. The semiconductor industry will have to participate in financing the development of a 450mm generation which will be required to continue to support Moore's Law and the resultant pace of the industries applications capability.

Joseph R. Bronson is principal at TheBronsonGroup LLC, a business advisory group focused on operational and financial consulting. ?





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