Zeev:
This article is from today's (5/20)St. Louis Post-Dispatch. Thought it would be of interest to you and others on this thread. Chip
<<MEMC tops U.S. market in silicon wafers
By Virginia Baldwin Hick
Of The Post-Dispatch
Despite the nickname of that valley in California, there's more computer silicon in O'Fallon, Mo., the headquarters of MEMC Electronic Materials Inc., than anywhere else in the United States.
MEMC is the world's second-largest maker of silicon wafers -- the base upon which semiconductor chips are made. It's the market leader outside Japan, and the only large wafer maker based in the United States.
When the semiconductor industry suffers losses -- which it did big-time last year -- so does MEMC.
"I wouldn't call any of MEMC's current problems company-specific," said Jeffrey A. Gentle, associate analyst with A.G. Edwards. "You can basically call silicon wafers a commodity industry. When wheat prices tank, you don't look at particular wheat farmers and say they didn't manage the business correctly."
Still, just as wheat farmers may employ strategies to survive price downturns, so has MEMC.
Company executives believe MEMC will lead the industry's recovery, regaining profitability, perhaps improving market share, and making the 2,000 or so employees in O'Fallon secure in their jobs once again.
MEMC's troubles are a classic supply-and-demand story. The present price curve had its seeds in the early 1990s, when the chip manufacturers who supply everything digital -- from microwave ovens to Pentium PCs to computer-controlled manufacturing equipment -- were clamoring for wafers on which to build their circuitry.
"For about three years, starting in April 1992, every customer in the world couldn't get as many wafers as they wanted," said Jim Stolze, MEMC's chief financial officer.
The semiconductor industry -- wafer makers, chip makers and device makers -- grew 30 percent a year through the early 1990s, Stolze said. Wafer manufacturers built new plants and added capacity as fast as they could.
"It came to a screeching halt in 1996," Stolze said. Wafer makers had "huge inventory increases," just as demand for chips began dropping.
Demand was down in part because chip manufacturers are continually finding ways to reduce the size of circuits and put more chips on each wafer -- say, 400 where once they put 80. The industry calls the process "line shrinkage."
Line shrinkage has been a major reason why electronic devices drop in price as volume goes up, Stolze explained. Until 1996 or so, increase in volume sales of devices had offset line shrinkage on wafers.
But the financial crises in Asia began to tamp down demand for electronic devices. Large Japanese wafer makers began lowering prices to shore up demand. With the yen falling against the dollar, MEMC was hard-pressed to keep up.
Last year, worldwide silicon demand dropped for the first time since 1985 and only the second time since MEMC began making wafers in 1960. None of the five major wafer makers -- three in Japan, one in Germany and MEMC -- made money in 1998.
MEMC's 1998 revenue dropped 23 percent, to $759 million. It lost $310 million.
MEMC's stock price has fallen from a high of $54.38 in May 1996 to $8.50 on Wednesday.
MEMC can't compete on price, because the Japanese can always price lower, Stolze said. "We realize we have to be the cost leader."
To do that, MEMC has taken these measures:
OoShifted a portion of its research and development from new products to cost reduction, asking workers to identify ways to make its processes more efficient. For example, employees determined that if the tiny saw blades that cut the wafers could be made thinner still -- by using wire instead of a flat blade -- MEMC could get more wafers and less waste. Other process changes cut down on breakage or imperfections.
OoChanged its worldwide structure and reward system from regional units to product units and encouraged employees to share their best practices. If a team perfects a process in Italy, for example, it takes it to the plant in Taiwan.
OoClosed plants and halted plans for new ones, including shutting an older plant in Spartenburg, S.C., which made smaller diameter wafers; halting construction of a plant in Malaysia; and withdrawing from a joint venture with China.
OoTrimmed the work force by about 1,700 workers to 6,300 worldwide.
OoShifted production around to reduce the range of products made at each plant.
MEMC is also trying to beat its competitors with better service -- putting its engineers in customers' factories to better understand their processes and needs.
Earlier this year, MEMC's major shareholder, Veba AG of Germany, shored up the company's finances with an infusion of nearly $2 million in cash, new debt and debt consolidation. Veba increased its share of the company to 71.8 percent from 53.1 percent.
MEMC's management believes their company made these tough choices more quickly than some competitors. They feel the company is more flexible now and ready for the next market change -- an increase in demand for 8-inch wafers, which is replacing 5- or 6-inch wafers as the industry standard.
Bigger wafers are more cost-efficient for both the wafer makers and the chip makers. But chip makers have to invest in new equipment every time the wafer size changes. While chip makers are gearing up to switch to 8-inch wafers, MEMC is already making small quantities of 12-inch wafers for equipment manufacturers to experiment with.
Gentle, the analyst, said MEMC could surge ahead if it can switch more quickly than competitors to the size customers want.
MEMC at a glance
Founded: 1959 as a division of Monsanto Co.
Stock symbol: WFR (public since 1995)
Headquarters: 501 Pearl Drive, O'Fallon, Mo.
Employees: 6,300, including 2,000 here.>>
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