Stone Age ways threaten chipmakers
Slowness to embrace new technology and Internet costs millions
By Edward Iwata, USA TODAY
SUNNYVALE, Calif. -- The frantic call came Christmas Day from a large semiconductor plant in Taiwan. A high-precision measurement tool worth $500,000 was broken, shutting down a chipmaking line and costing the plant millions of dollars in revenue.
Two technicians from Zygo, a chip-equipment maker in Sunnyvale, dashed to the airport for the 12-hour flight to Asia. At the plant the next day, it took them 10 minutes to find the problem: a pair of burned fuses.
"If that plant was online, we could have easily done a remote diagnosis (over the Internet)," says Terence Lundy, 36, marketing director at Zygo. "We wasted $20,000 in time, labor and plane tickets."
Adds Lundy: "It's an e-commerce world, and our industry still uses paper and pens. Some guys don't even use their e-mail. They just don't get it."
Lundy's story isn't unusual. A growing chorus of industry critics say much of the semiconductor-equipment field -- an engine of high-tech progress in an earlier era -- is in danger of becoming an Edsel clunking toward the junk heap.
In its slowness to embrace the Internet and state-of-the-art information technology, much of the industry trails other sectors and even smokestack industries by 10 to 20 years. The irony is not lost on industry insiders. Their companies make the heavy-duty machinery and finely tuned devices that make chips -- the brains of Web-based computers, cell phones and other electronic goods.
"We don't use these great new technologies in our own plants," says Curtis Wozniak, CEO of Electroglas, a maker of wafer inspection tools in San Jose. "We're like a cobbler who has no shoes."
Consider:
While other manufacturers race into the online age with Web-based computing, most chip-equipment makers and their factories still lean on creaky mainframe computers and closed networks from the 1970s and '80s.
In a fast-moving, highly competitive industry, the sharing of massive data and information is done the old-fashioned way: by fax and snail mail.
Only a handful of manufacturers, such as industry leaders Applied Materials, Varian Semiconductor and Novellus Systems, use "remote diagnostics" for trouble-shooting computer and equipment problems through the Internet.
Assembly lines may be down one-third of the time at a typical $2 billion semiconductor plant because of poor computer controls, inadequate data management and equipment breakdowns. In contrast, steel and auto plants are down less than 10% of the time.
An old foundry lacking new technology loses $100 million a year in potential profit, Wozniak estimates.
The Internet's role in the fate of the industry has set off a touchy debate -- mainly behind closed doors. Most executives declined to be interviewed for this story or denied there was a problem.
At a recent trade conference in Monterey, several speakers urged the manufacturers to adopt an electronic-business model -- or risk extinction in a decade or two.
"This industry needs to realize that everything is moving at Internet time," warns Michael Splinter, head of Intel's Technology and Manufacturing Group. "It needs to do a ton of work to catch up."
Intel embraced online diagnostics long ago because it's much cheaper than flying engineers to plants around the world, Splinter says.
Back seat for back end
So why the sluggishness of others to change?
Security is a big issue. Manufacturers say privately that they fear losing trade secrets if they open their computer networks to the online world.
Another reason: Manufacturers traditionally have devoted the lion's share of their money and resources toward the costly devices that make faster and better chips. In their quest, many have ignored back-end operations in their plants. They spend only 2% of revenue on information technology, while other industries invest two to four times as much.
One high-profile executive, CEO Richard Hill of Novellus in San Jose, bristled and defended his industry's practices in an interview.
"No one can call us outdated by any stretch of the imagination," Hill says. "We're the most competitive and productive industry in the world."
Novellus (Latin for "unique") is a sector leader, selling high-capacity equipment to the world's largest chipmakers. The company does 20% of its supply-chain business online with customers, and it exchanges data over the Internet with Intel, IBM and others.
While the Net helps, Hill argues that greater productivity gains come from good supply-chain management, open communication among workers and a sharp focus on top business priorities. To that end, Novellus enjoys $450,000 in revenue per employee. The industry average is $350,000.
"The Internet will improve our efficiency, but let's not exaggerate its impact. Most of it is hype now," Hill says. "We still do business the old-fashioned way. We shake hands, people to people. Computers to people doesn't make it."
Despite its slowness to change, the $65 billion chip-equipment industry -- a pillar of the world's digital economy -- is booming. After a strong 1999, the demand for chip equipment will grow 27% this year and next, according to VLSI Research in San Jose.
"We create the technology that makes the Internet possible," says Stanley Myers, president of Semiconductor Equipment and Materials International (SEMI), a trade group in Mountain View with 2,300 members. "This is a thriving industry."
Wall Street investors agree, driving up chip-equipment stock prices 204% last year, according to SEMI's stock index of 65 companies. The sunny outlook should last for years if the demand continues to soar for Internet computers and cell phones, high-definition TV and other electronic goods, says Robert Maire, an analyst at Bear Stearns.
"New applications for silicon are exploding at a faster pace than ever before, and that bodes well for equipment manufacturers," Maire says. "We aren't going back to vacuum tubes any time soon."
Giants push for change
Still, critics caution that many in their industry will go belly up if they don't evolve quickly into the online age.
Much of the pressure to modernize comes from high-tech giants seeking to slash costs. Some have adopted Internet practices. Others, from Intel to Samsung, are farming out chip production to foundries in Taiwan, Singapore and Malaysia.
Chip factories are complex creatures, a blend of clanky steel machines and bleeding-edge rocket science. Equipment ranges from $20 ball bearings to a $4 million beast of a machine called an implanter, a 3-ton particle accelerator used to prepare silicon for the chipmaking process.
If the machinery crashes, watch out. A foundry can easily lose $1 million to $2 million an hour in revenue when an assembly line goes down.
To avoid that, cyber-engineers at Varian and Applied Materials use state-of-the-art remote diagnostic devices. They don virtual headset devices with video cameras and earphones to fix equipment in factories in Asia and Europe. Using video-conferencing via PCs, they also talk in real time to technicians overseas.
Varian also is a model of e-commerce. Customers can log on to its Web site (www.vsea.com) and see equipment schematics, order thousands of parts and track the status of their deliveries.
The Net saves Varian $3 million a year in operations costs, Varian's Walt Sullivan says.
"We have to keep pushing the envelope," CEO Richard Aurelio adds. "It can only make us more efficient and improve our competitiveness."
The pro-Internet forces see signs that their industry is awakening. As the old guard retires, a new breed of young, Net-savvy managers is rising to power. And more old-line executives are plunging into the e-business world.
"Even reluctant folks realize they have to move forward," says Bill Tobey, president of ACT International, a technology consulting firm in Waltham, Mass. "If they don't, they know their companies will die."
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