As most of you guys/gals know,I use Amat as the bellweather.
I'm posting this from the SI Amat thread because I think it is relevant to Cymer. If you were Morgan, wouldn't you see Cymer as a wonderful acquisition?? Why is Cymer so in bed with Canon?? Does Cymer do business with Amat and if not, why?
APPLIED KNOWLEDGE
CEO and Chairman James Morgan has built Applied Materials into a semiconductor equipment company of near-monopolistic proportions.
By Brian E. Taptich
While the consumerization of the microprocessor has been tirelessly advanced by Intel's multicolored clean-room workers prancing to the beat of '70s tunes, few people actually understand how silicon is transformed into semiconductors. And until recently few could name a single company that develops the tools semiconductor manufacturers use to transform chip architectures into actual products.
Applied Materials is changing all that. The company's dominance of the semiconductor capital equipment market has elicited comparison to the choke holds that Intel, Microsoft, and Cisco Systems maintain in their industries. Accordingly, Applied Materials' stock (Nasdaq: AMAT) has done phenomenally well, outperforming both Intel and Microsoft since 1991.
But Applied Materials wasn't always a success. When James Morgan took over as CEO in 1977, the company was on the verge of bankruptcy. Soon after his arrival, Mr. Morgan tapped into the burgeoning Japanese semiconductor market - a move that protected the company from the cyclical slowdown of domestic semiconductor production in the mid-'80s. Then, in a strategic roll of the dice, Mr. Morgan bet correctly that Applied's efficient but unproven single-wafer, multichamber method for producing chips (in which a wafer undergoes several processes in different chambers of one self-contained machine; see Semiconductor maunfacturing 101: diagram) would dethrone the incumbent batch-process systems (in which each step is done independently on many wafers at once).
Two decades after Mr. Morgan's arrival, Applied Materials owns over 16 percent of the semiconductor equipment market, boasting more than $4 billion in annual sales. And in July the company was slapped with its first antitrust suit, that rite of passage for market dominators.
But the fate of semiconductor capital equipment companies has always been tied to the semiconductor manufacturers. And Mr. Morgan recognizes that advances in chip technology - including the shift from aluminum to copper, the trimming of feature sizes to below 0.25 micron, and the move to 300-millimeter wafers - mean that, in order to remain the envy of the equipment universe, Applied Materials must continue to extend its technical advantages while maintaining its close relationships with the chip manufacturers.
The Herring: After four years in venture capital, why did you decide to join a floundering semiconductor capital equipment company?
Morgan: I grew up on the operations side, primarily in engineering and program management in the aerospace business. And after my stint as a VC, I wanted to get back to running something. I'm not a good spectator.
The Herring: Things were pretty bad when you took over.
Morgan: We had something like $900,000 in equity and $6.8 million in debt. The company was started in 1967 by a couple of technical guys and went public in 1972. But, under pressure from Wall Street, it got into trouble by diversifying too much. Applied Materials was small at the time and was stretched too thin. Fortunately, after I arrived we were able to manage it by selling off or getting out of five of the businesses. And by 1978 we were able to begin developing a longer-term strategy.
The Herring: Which was?
Morgan: The company had a good product and a competent team who had pride in what they were doing. But they needed somebody to provide some leadership. We set about building good operations ability, developing a new set of relationships with our customers, working on complementary technologies, and globalizing the operation - which we did throughout the '80s.
The Herring: Applied has been universally lauded for its successful move into Asia.
Morgan: We started our move into Japan early, in 1979. Rather than partnering with a Japanese company, however, we set up our own operations there - something not many people had done at that time. And because of our sensitivity to their culture, we were afforded the same courtesies as native companies. Soon, we were moving into Korea, Taiwan, and Southeast Asia.
The Herring: Was the move into Asia designed to protect you against the cyclicality of the semiconductor business?
Morgan: Not initially. We just recognized that the market over there was growing. Remember, in the '70s Japan was pooh-poohed by U.S. high tech because Japanese business wasn't very strong. It was our good fortune that the market over there grew in the early '80s, when business in the U.S. was slowing down. And then, when Asian business slowed in the mid-'80s, things were stronger in the U.S. and in Europe.
The Herring: A frequently cited statistic is that 70 percent of Applied Materials' business is in Asia. You must be concerned about economic conditions there.
Morgan: I'm concerned that the situation will adversely affect global economics. A worldwide slowdown would decrease demand for chips and high-tech equipment. [For more on the effect of the Asian crisis on semiconductor companies, see "Pacific Grim".] But even if that occurs, we have brand-new products that will help us withstand a downturn, and we have $1.5 billion in cash.
MATERIAL POSSESSIONS The top five semiconductor capital equipment companies in 1996 Company Market share (%)
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APPLIED MATERIALS 16.6
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TOKYO ELECTRON 12.8
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NIKON 8.4
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LAM RESEARCH 5.4
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CANON 4.6
The Herring: Recently, though, Applied Materials' stock has suffered because analysts fear that semiconductor companies will invest less in equipment this year.
Morgan: One thing I learned in my four years in the venture business is that you can't run your business through Wall Street. These days, everybody is a short-term investor. But you can't build a truly global company as a short-term investor.
Early on, we would overinvest in innovation, spending over 20 percent of our revenues on R&D. In 1987 we lost money for two quarters so that we could introduce our single-wafer, multichamber architecture six months ahead of schedule. But we broke even for the year, and we now own the architecture of choice.
The Herring: What are some of the technical challenges you anticipate?
Morgan: Chips are going to get more complex as we see more functions added to microprocessors. And our ability to enable the move to "systems on a chip" is critical. We need to provide equipment that can increase the number of layers on a chip as well as get the layers tighter.
The Herring: What impact will the semiconductor industry's shift from aluminum to copper have on Applied Materials?
Morgan: I think that it will force the chip companies to make major investments in their equipment. To keep pace we have made major investments in our metallization group to make a full set of extensions for copper applications.
The Herring: And what role will Applied Materials play in the move to smaller feature sizes and bigger wafers?
Morgan: We currently have machines in our six major product areas that work at 0.25 micron or better, and we are pretty far along toward being able to manufacture 300-millimeter wafers. But the transition to larger wafers is coming a little bit slower. All the chip companies want to be second, because it's a big investment and an even bigger risk to be first.
The Herring: Because your business is dependent on developments in the semiconductor business, it must be challenging to find a balance between being predictive and being reactive.
Morgan: Absolutely, but that's not unique to our business. All 21st-century corporations have to deal with the paradox of being large but trying to act small. By separating our company into its component subsectors, we've managed to keep a pretty entrepreneurial environment - to react quickly while maintaining enough foresight to stay ahead of the customer's needs.
The Herring: And that's especially important in the semiconductor capital equipment business?
Morgan: Our business is right at the heart of our customers' business. They have to share everything about their future so that we can develop equipment that meets their needs.
The Herring: According to the rumor mill, Applied Materials is thinking about entering the photolithography segment of the capital equipment industry.
Morgan: That rumor has surfaced every two or three years since 1980. Look, there are established companies in that marketplace, and we're working with them to solve problems. But entering the lithography market is a low priority for Applied Materials. Besides, we don't need to be in that market to build a $15 billion to $20 billion business.
The Herring: You must be counting on some pretty substantial growth, given that your total sales in 1997 were $4.07 billion, down from $4.14 billion in 1996.
Morgan: People get really confused. They think of semiconductor capital equipment as a cyclical and not a high-growth industry. But in terms of revenues, we have had a single down year in my 20 years, and we've grown close to 30 percent a year. That's a damn good business. Besides, our core markets are projected to grow 300 percent by 2005. So even if we only do a good job, we'll still do just fine. |
