Leasing fab gear picks up speed in recent downturn
Semiconductor Business News, © 1999, CMP Media Inc.
March 1, 1999
Leasing has shot up 30-to-40% at a time when sales of IC production equipment have fallen 25%
By Allan Richter
Leasing semiconductor production equipment may finally have gone legitimate. Not only has leasing grown at a time when the overall chip gear market was falling on its face, but most equipment companies now are beginning to offer chip makers a broader range of creative leasing options.
The upswing in leasing activity, in fact, accounts for a recent pickup in the overall equipment market. That has happened even though chip makers dramatically scaled back their capital spending this year. Leasing is "up 30-to-40% in a market where everybody else's business is down 25%," says analyst G. Dan Hutcheson, president of VLSI Research Inc. in San Jose.
What's causing this shift? For one, a bunch of first-time lessees are switching over from outright purchase. It used to be that the large chip makers with deep pockets always bought their equipment outright. But now, such major chip makers as Intel Corp. seem to be open to leasing their production gear, according to market experts.
Other chip companies new to the game come from overseas. IC makers based outside the United States historically have resisted leasing their capital equipment, but that is changing. Japanese IC companies are turning to vendors for their financing because local banks are tapped out from that nation's recession and the Asian economic crisis.
The Europeans also are new to the chip-gear leasing game. Chip makers from Japan and Europe helped push international lease revenues ahead of U.S. revenues for the first time last year at Comdisco Inc.'s Electronics Group, says Roger Innes, president of the San Diego-based lessor.
To tap this new business in Japan, Comdisco and Japan's Itochu Corp. set up a joint venture called Comito Equipment Management Services. The Japanese IC test and assembly equipment market is a $10 billion annual business, according to Comdisco estimates.
While equipment makers are eager to pursue such new markets, they sometimes hesitate to take on the additional role of banker. So some vendors are forging relationships with financial institutions or setting up separate divisions to handle leasing.
It's from such operations that the sophisticated new leasing programs are coming from -- deals in fact that may give equipment vendors a greater stake in their customers' fabs. Some chip makers have even approached Comdisco about leasing an entire wafer fab, Innes says.
Equipment suppliers increasingly are using their leasing programs to promote longer-term relationships with chip makers. Comdisco, for example, is offering a new "technology refresh" program in which the chip-maker customer agrees to lease one piece of production-line equipment as well as its replacement. In one of its latest lease programs, Comdisco will act as a consultant and perform site technology audits in which it looks at production efficiencies and identifies any bottlenecks.
An equipment maker that's moving more aggressively into leasing is Ultratech Stepper Inc. in San Jose. Its Ultratech Capital division, set up last year to enable it to focus more closely on the leasing business, has set up several new programs that give the equipment vendor a greater stake in its customers' business while reducing customer risk, according to Ellery Buchanan, president.
The leasing unit is now working with a finance company to offer a "variable lease" program that will allow its customers to purchase equipment with a payback based on the number of wafers they produce. "It will allow the customers' outflow of cash to be tied to their units of production, so you're truly converting this large fixed depreciation cost into a variable unit of production cost," Buchanan points out.
Ultratech Capital also has set up special lease programs for startup chip companies. "They have restricted equity capital, which is the most expensive capital there is," comments the Ultratech Capital CEO. In exchange for taking on the higher credit risk that typify startups, Ultratech receives an equity stake in its customer under what's called a "venture lease."
What all this new leasing activity boils down to is that chip equipment vendors are taking on more of their customers' debt. In fact, receivables outpaced sales in a composite of the financials from six major equipment suppliers in the past three quarters, according to Steven Pelayo, semiconductor capital equipment analyst at Morgan Stanley Dean Witter & Co. These companies were Applied Materials, KLA-Tencor, Lam Research, Novellus Systems, Silicon Valley Group, and Teradyne.
The combination of a faster decline in sales than receivables has pushed the group's days' sales outstanding (DSO) much higher. Analysts use DSO as a ratio indicating the number of days' worth of sales uncollected by a vendor
The higher DSO "could be a factor of the semiconductor industry being more global since payment terms outside the U.S. are longer," says Pelayo. "Equipment manufacturers [also] are more willing [now] to extend terms," he says. "During a downturn, you'll do anything to get sales."
But chip gear makers seem to be taking less risk now than before by allowing the higher DSO. One trend helping them here is the expanding market for used capital equipment. The more demand there is for equipment in the after-market, the easier it is for lessors to sell equipment at the end of a lease period and the better the terms are for chip makers.
VLSI Research is bullish on the growth of used production equipment, predicting that the worldwide market for such gear will climb to $1.4 billion next year, nearly double its size six years ago.
"Customers are trying to stretch their capabilities, so they're doing a lot of upgrades as opposed to buying new tools," says Steven Lanza, vice president of global business operations at Watkins-Johnson Co. As a result, "they're looking to the used tool market more than they used to." The Scotts Valley, Calif., company, which sells atmospheric-pressure chemical vapor deposition (APCVD) systems, recently inked a deal with a San Francisco lender, The CIT Group, to provide financing to chip makers.
The close relationships that equipment suppliers are forming with their customers enable vendors to keep a closer watch on the leased equipment. This way they can help to maintain its after-market value. "We can tie in our worldwide network of training and support to ensure that the equipment is kept in top condition for the life of the lease," points out Ultratech Capital's Buchanan.
Chip makers usually can gain the most in equipping their fabs by leasing the hardware with the shortest life cycles and buying the systems that will be around a while. Comdisco has worked out a formula whereby chip makers can save up to 30% of the purchase price by leasing equipment they would use for "substantially" less than seven years, says George Deltoro, assistant vice president of strategic marketing at Comdisco.
But it doesn't always lay out neatly. New technologies can fluctuate equipment life cycles and affect the acquisition plans of chip makers. The advent of copper in the IC production process, for instance, may change the demand for other systems. Copper could reduce the demand for aluminum-based metalization, tungsten chemical vapor deposition (CVD), aluminum deposition, and metal etch tools. That could make all of this gear more suitable for leasing, according to Deltoro.
But the growth of leasing also has its downside. Ultratech Stepper, for example, took part of a $16.6 million charge in the fourth quarter to cover "a possible impairment" to its assets because of two financially weak customers holding leases on its equipment, says Bill Leunis, chief financial officer at Ultratech. But lease payments are up to date from all Ultratech customers, he adds.
There also is something called a leverage lease, which tends to apply to equipment that will not quickly become obsolete. Such a lease protects all the funding parties of the lease but leaves the lessee exposed, according to Charles Novak, finance manager at Lucent Technology Inc.'s Microelectronics Group in Allentown, Pa.
"It's known as the lease from hell," Novak adds. "It limits the ability to terminate equipment before the end of the lease." Also, he warns, "they have an all-or-nothing clause at the end of the lease. The lessee is faced with having to buy it all or give it all back. You lose the ability to cherry-pick assets that are still valuable to your operations."
Despite such land mines, Lucent has been stepping up its leasing of chip-making gear. One of the benefits for the chip maker, Novak points out, is that leasing places the burden of disposing of equipment on the lessor.
"We'll [keep] doing it," the Lucent finance manager predicts, "as long as there are people out there to share risk and provide superior service . . . and as long as we can get low cost flexibility."
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