3:49 a.m. PST Friday, December 5, 1997
Asian Fallout
Chip-equipment makers twitching over economic crisis
BY MICHAEL ZIELENZIGER
Mercury News Tokyo Bureau
TOKYO -- Wondering how the Asian economic meltdown affects a slice of Silicon Valley? Ask the people who build the expensive, sophisticated equipment that every chip maker needs.
''We're all sitting here waiting for the next shoe to drop,'' said Richard S. Hill, chairman and chief executive officer of Novellus Systems Inc., a San Jose builder of equipment that etches semiconductor chips with chemicals. ''Our Asian business has been growing at 40 percent a year. But that large growth was based on deficit spending (by companies that have run out of cash).
''Will the crisis in South Korea affect the U.S. economy? No, not really,'' he added. ''Will it affect us? Absolutely.''
For the people who build the special chip-making tools for Silicon Valley and the world, life in the high-tech fast lane seemed sweet six months ago. Today, what they see in Asia makes them twitch.
''I can sense the softening in the last few weeks'' in demand for chip-making equipment, said Arthur Zafiropoulo, president and chief executive of Ultratech Stepper of San Jose. ''I'm getting concerned about the (business) plan we've put forward for 1998.''
No one is talking layoffs, but the growth that Asia delivered to the high-tech toolmakers may be flattening, meaning firms will have to temper their most optimistic profit projections. Wall Street has reacted already. Some equipment makers, including Novellus and Applied Materials Inc. of Santa Clara, which is America's biggest maker of semiconductor equipment, have seen their stock prices slip because of the Asian turmoil.
So, with the makers of semiconductor manufacturing equipment gathered here this week for the giant Semicon Japan trade show, where 1,400 companies display their wares for 150,000 visitors, the financial crisis in South Korea and the meltdown of the Malaysian currency were no distant matters.
Whether at the glittery booths in the convention center, or at the elaborate cocktail parties off the floor, the talk was not exuberant boasts about new products introduced or big contracts signed. Instead, the anxious whispers described orders being canceled, factory-construction delayed and harder times ahead -- at least in the high-tech markets of Asia.
All in all, ''people are rather pessimistic,'' said Shoichiro Yoshida, president of Nikon Corp., which makes far more profit from its photographic lenses used in chip-making equipment than it does from its famous cameras. ''We've had troubles in Thailand and Korea. And the Japanese market has not yet fully recovered.''
For even as high technology is booming worldwide, some of the key markets for chip-making equipment firms are in a tailspin.
The tigers cubs of Asian high technology, nations like Malaysia and the Philippines, have been brutalized by currency speculators and jittery foreign investors. Japan is stumbling, unable to restart a sputtering economy. And to stave off default, South Korea -- the world's third-largest semiconductor producer and until recently an engine of regional growth -- requires $55 billion, the largest bailout in the history of the International Monetary Fund.
Diminished economic growth in Asia could reduce consumer demand for computers, business spending on networking equipment or the pace of multimedia adoption. Most analysts believe it is too early to know the full picture. But for equipment makers, South Korea's predicament is already the most worrisome.
As the nation poured billions into the race to catch Japan, South Korea became a huge consumer of expensive chip-making equipment. Eventually it became a world-class exporter of semiconductor memory chips -- but at a terrible price.
South Korean firms such as Samsung Corp. and Hyundai produced so many chips that memory prices collapsed. While the sharp decline in memory prices last year enabled consumers to buy cheaper computers, it meant the South Korean firms were selling chips for less than it cost to produce them.
Now they must cut back their investments just as they are falling behind U.S. manufacturers, according to G. Dan Hutcheson, president of VLSI Research, a market research firm in semiconductor manufacturing equipment.
''A year ago the South Koreans were world-class producers, but they are not anymore,'' he said. ''The question now is how much money are they losing, and we figure it will be about $2.7 billion.''
Despite the growing losses, he and other analysts said, the South Koreans must keep pumping out chips, even at a loss, to earn desperately needed foreign currency.
But Hutcheson said equipment makers shouldn't be overly concerned about canceled orders in South Korea or Japan. Continuing worldwide demand for semiconductors will fuel demand in Taiwan, Europe and other parts of the globe. Besides, sales of semiconductor manufacturing equipment are growing in the United States.
''Equipment makers are shifting away from a Korea that has gone stone cold to other places like Taiwan who want to take market share away from the Koreans,'' Hutcheson said.
The South Koreans, Hutcheson said, really should be investing in more equipment to make them competitive again. But the stringent terms of the IMF bailout, which are sure to slow South Korea's domestic economy, may make it difficult for even South Korea's strongest high-tech companies to find the capital they need to invest.
''We have serious concern regarding the impact of the Korean economy and how it will affect capital investment,'' said Tetsuo Iwasaki, chairman of Applied Materials Japan, the largest division of the Santa Clara manufacturer.
T.K. Kwak, president of Tokyo Electron Korea, the Seoul-based unit of a leading Japanese equipment manufacturer, admitted that the collapse of the South Korean economy would wreck his company next year. He predicted business would decline 70 percent.
Last year, South Korea accounted for nearly 30 percent of worldwide spending in the $35 billion equipment industry, according to Hutcheson. This year, South Korea's spending will fall to 23.6 percent of the world's total, with more declines expected in 1998, he said.
Hutcheson noted that U.S. producers such as Texas Instruments and Micron Technology now produce memory chips more cheaply than their South Korean rivals.
Ironically, this could have a political impact on the bailout of South Korea. Under terms of the proposed IMF-led rescue package, the United States might contribute up to $5 billion to prop up the South Korean economy. But Micron is asking the U.S. Senate to block any aid to South Korea, arguing such assistance would only boost Seoul chip makers that dumped below-cost memory chips into the U.S. market, costing sales to U.S. manufacturers.
The Asian slowdown will have other effects, too. While the equipment industry has invested millions in the last year to develop new technology that allows chip makers to bake their chips on larger-sized, 300-millimeter silicon wafers, it isn't clear that semiconductor firms will have the money to upgrade.
Charles McKenna, vice president of Varian Labs, another Silicon Valley manufacturer of semiconductor equipment, acknowledged that one South Korean customer had already delayed an equipment purchase. ''For now, they are saying three months,'' but he acknowledged the delay could be longer.
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