Novellus CEO paints somber semi picture
By Mike Clendenin, EE Times
October 20, 2003 (8:33 a.m. EST)
URL: eetimes.com
TAIPEI — The chairman of equipment maker Novellus System Inc. almost made the semiconductor industry sound like the US farm industry on Monday, noting it will be tougher to squeeze out a respectable return on investment for the capital intensive industry and stressing that government subsidies will be key for countries wishing to stay in the business.
“The prognosis for the future is anywhere from continuing upward, optimistically, to continuing downward, pessimistically. But the best bet is that it will be flat at best,” said Richard Hill, chairman and CEO of Novellus, while addressing a business forum in Taiwan.
Like many of his peers recently, Hill focused on the economics of the semiconductor business more than the technology. These days, semiconductor manufacturers need twice the amount of time and much more capital to get one-half to one-third the return on investment capital that they used to get in the mid-70s, Hill said.
At that time, Hill figured for every dollar of depreciation, a company could earn $16 or $17 in revenue. Today, that number has plummeted to about $6 in revenue, he said.
Plugging that scenario into a risk-adjusted rate of return, Hill said a bare minimum of return in the industry needs to be 12.5 percent. Through the 90's, most firms were above that level. But since the collapse in 2000, semiconductor manufacturers have precipitously dropped below that level and as a whole do not return capital to the shareholder, he said, leading to a drying up of investment in some areas.
However, since the industry is growing there are some havens. Asia is one of them, particularly China, where Hill believes domestic fabs will have an advantage for profitability.
Because of a variety of subsidies and tariffs, Hill reckons China-based fabs will equal the profitability of non-domestic fabs supplying chips to the country.
For instance, from 2003 to 2007, Hill said China will consume $144 billion in chips. Domestic companies will make only $39 billion of that total. Hill said China chip fabs will earn nearly $10 billion in profit, about the same amount as foreign suppliers, despite the assumption that they will only supply less than a third of the chips.
“It is exactly this type of return that is attracting the investment dollars, which is causing the greater amount of equipment to be purchased over the next five years in China,” he said. His estimates for return on investment are heavily dependent on a few key assumptions, such as fab efficiency and access to leading edge technology.
Still, as long as there are barriers for non-domestic suppliers, value-added tax incentives as well as income tax incentives to manufacturers who locate in China, Hill said “we will see a preponderance of the investment continue to move there.” |
