Analysis: Fab-tool biz is a house of cards
Mark LaPedus
(01/17/2006 3:16 PM EST)
HALF MOON BAY, Calif. — At last week’s Industry Strategy Symposium (ISS) event here, the mood among chip-equipment executives and forecasters was much like the weather at this scenic and sleepy town located near San Francisco.
During the first part of the week, Half Moon Bay was cool, clear and sunny. But by mid-week, it was cold, damp and rainy — with little or no visibility seen near the ocean’s panoramic front.
Initially, industry and Wall Street forecasters were sunny and upbeat, although the experts disagreed over the plethora of predictions given for semiconductors, IC equipment and capital spending in 2006.
Later in the week, however, a gloomy storm front moved into Half Moon Bay. This took place when the forecasters moved beyond the sometimes questionable numbers and took a pulse of the semiconductor-equipment and materials industry.
The prognosis? Mixed signals on several fronts. Semiconductor manufacturers and IC-equipment makers do not seem to be on the same page and the tensions are running high between the two factions. Most fab-tool and materials vendors are also still struggling to make a buck and unable to keep up with R&D spending.
In many respects, the semiconductor-production equipment industry has become a house of cards. The business won’t see a full-fledged collapse, but the ongoing consolidation among vendors is projected to accelerate this year and next.
The fab-tool industry is by no means in critical condition after the last, horrific downturn, which caused massive losses, layoffs and otherwise pain for vendors. Several industry leaders — Advantest, Applied Materials, ASML, KLA-Tencor, Lam Research, Nikon, TEL and others — continue to post admirable results and develop breakthrough products.
Generally, though, the industry is still recuperating and regaining its footing after the last downturn. The semiconductor-equipment sector “is a relatively healthy industry,” said Brett Hodess, an analyst with Merrill Lynch Global Securities, but “we also have sub-sectors that are not healthy.”
Among the problematic industries include automatic materials handling systems (AMHS) and automatic test equipment (ATE), he said at ISS. With a few exceptions, loss-ridden AMHS and ATE vendors have never fully recovered from the past downturn.
Mark Fitzgerald, an analyst at Banc of America Securities, warned that there is a deeper problem for IC-equipment vendors. “Companies are still restructuring,” Fitzgerald said during a panel session at ISS. “Three-fourth [of the chip-equipment companies] have business models that don’t make sense.”
Semiconductor-production equipment vendors have generated what could be considered lackluster performance and “sketchy profitability” in a tough environment over the years, he said. Given the lack of profitability in the industry, coupled by shrinking R&D budgets, the business continues to head down an inevitable path. “When we go to 65- and 45-nm and below, the industry will consolidate rapidly,” he warned.
And as the industry moves down the technology curve, it appears that there is more and more tension building up between IC and equipment makers. The two camps don’t seem to be on the same page on several fronts.
Behind the scenes, there has always been tension between the two camps. On one hand, IC makers want better and faster tools at cheaper prices. On the other hand, fab-tool vendors claim that they bend over backwards for their customers, but they don’t seem to get any respect.
No pun intended, but chip-equipment vendors have a chip on their shoulders and for good reason. For example, at ISS, Rick Tsai, president and chief executive of silicon foundry giant Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), took some surprising and subtle pot shots at the IC-equipment industry, urging vendors to improve their overall costs, lead times and productivity levels. Tsai was especially critical about the soaring costs for lithography tools, lack of advancements in fab-automation, among other issues.
His keynote left one fab-tool executive with a bad taste in his mouth, saying that TSMC is more interested in “cheaper equipment prices” rather than higher productivity gains.
Mike Splinter, president and chief executive of Applied Materials Inc., had a more sobering message for semiconductor makers. Speaking on behalf of the chip-equipment industry, he warned that fab-tool R&D spending is falling, making it more and more difficult for vendors to keep pace with the growing demands from leading-edge IC makers.
And surprisingly, he sent a clear message to a select bunch of bleeding-edge chip makers, including his former employer — Intel Corp.: the IC-equipment industry is not ready for the 450-mm era.
Chip makers will eventually move into the 450-mm domain, but the industry cannot afford to develop the tools for the next-generation wafer size, he said. Intel, for one, has discussed the possibility of keeping pace with the ITRS roadmap and building 450-mm fabs in the 2012 to 2014 time frame.
A more near-term worry is the current business cycle. It was a down year for equipment in 2005, but many expect a decent year in 2006. For now, the back-end is leading the front-end in the current cycle, but on the other hand, many ATE and wire-bonder vendors are in trouble. With the exception of Advantest Corp., ATE vendors are losing money.
The front-end appears to be gaining momentum. “I think the industry will enjoy a healthy 2006 with modest increases in capital spending,” said Jerry Cutini, president and CEO of Aviza Technology Inc., a supplier of semiconductor equipment. Last year, Aviza (Scotts Valley, Calif.) acquired Trikon, a specialist in plasma etching and deposition systems.
“Whether it’s front-end or back-end loaded is less important. What is important is that there are no significant problems on the horizon for our industry,” Cutini said.
“Our view of the industry is based on a lot less scientific analysis that the forecasters. We view it two ways. First, our quote activity continues to show continued customer activity in ordering systems for both new sites and capacity increases in existing facilities — both for 200-mm and 300-mm,” he said. “We see active purchasing of advanced technology generation systems, which means the industry is continuing on a relatively healthy path. If customers are adding capacity and investing in R&D, then the industry is in a state of relative balance.”
“In general, we’re seeing a stronger market,” agreed Robert MacKnight, president and chief operating officer of chip-equipment maker Mattson Technology Inc. (Fremont, Calif.).
“I think the foundries will be back in terms of spending. They were on the sidelines in ’05. And Samsung has been remarkably aggressive,” MacKnight said. In 2006, the Mattson executive sees a strong market for its bread-and-better rapid thermal processing (RTP) and dry-strip tools.
In 2006, lithography unit shipments could be flat-to-down, but average selling prices (ASPs) are expected to soar due to the advent of new and advanced 193-nm “dry” and “wet” scanners. ASML Holding NV and Nikon Corp. are running dead even in the immersion lithography front, that is, shipping a full-blown “production-worthy” tool.
“Immersion is still hot,” said Geoff Wild, CEO of Nikon Precision Inc. (Belmont, Calif.), the U.S. subsidiary of Japan’s Nikon Corp. “We’re sold out of everything.”
Another promising market for equipment makers is flat-panel displays, added Sven Lofquist, president and chief executive of Micronic Laser Systems AB (Taby, Sweden), a supplier of pattern generation tools.
Citing the boom in displays, sales of Japanese-made chip equipment are expected to rise 8.0 percent to 1.59 trillion yen ($13.9 billion) in the fiscal year starting in April, up from a previous forecast of 0.1 percent growth, the Semiconductor Equipment Association of Japan (SEAJ) said.
The association expects sales of Japanese LCD-making equipment to rise 10 percent in the next fiscal year, compared to an estimated 6.0 percent decline in the current year, according to SEAJ.
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