Ruling Applied Materials with a steady hand
By Sergio Non
news.com.com
Glancing at a list of high-powered technology CEOs, the average person would be excused for not recognizing the name James Morgan.
In an industry legendary for its outsized personalities, Morgan remains a relative wallflower. He may not even be the most famous member of his own household--his wife, Rebecca Morgan, a California state senator for nine years, holds that distinction.
Yet no CEO of a bellwether technology company has been at the helm longer than Morgan, who has run Applied Materials since 1977. Along the way, he's transformed a niche market supplier into a semiconductor-manufacturing empire with more than $7 billion in annual revenue. And unlike counterparts at most computer and software companies, Morgan doesn't worry so much about the competition.
"The biggest threat to Applied is Applied itself," said Risto Puhakka, an analyst with VLSI Research.
That's a common refrain heard from analysts who say Morgan's primary challenge will be managing through a patch of soft demand while his customers wait for the economy to rebound. Applied Materials is one of the few companies with products for almost every step of the semiconductor-manufacturing process, including the processing of silicon wafers, the etching of circuit patterns, and the detecting of flaws in finished chips.
But for all its dominance, it's still unclear whether the company can grow faster than the rest of a depressed industry. The company's fortunes depend on orders from chipmakers, which buy their machinery from Applied Materials. And because of the slowdown in the PC and communications equipment markets, it may take another couple of quarters before the Intels and Advanced Micro Devices of the world are confident enough to expand chip fabrication plants or build new ones.
In the meantime, Applied Materials has felt the effects of the 2001 recession: The company was recently forced to eliminate 3,700 positions, and its stock fell as low as $26.59 from a 52-week high of $59.10. Even so, shares recovered much of their lost ground by the end of 2001 amid optimism for a macroeconomic recovery in 2002.
Despite these setbacks, Morgan says the most recent tech collapse hasn't forced him to alter his strategy for the new year. It will look a lot like his plan for 2001, which called for heavy spending on research and development.
"As a leader in a rapidly changing business like ours, if you aren't a little steady, people get confused," he said.
This kind of stoicism comes naturally to the 63-year-old industry veteran, who has lived through several booms and busts since his first business experience as a teenager in the 1950s, when he was put in charge of 35 workers in his family's vegetable-canning business in Indiana. Morgan was further instilled with a sense of discipline in the Reserve Officers' Training Corps during his college years at Cornell University, and he went on to work in management consulting for the Army Materiel Command in the 1960s.
His first civilian executive job came with Textron, which had a 1,600-employee unit so inefficient that it was losing $15 million on a large government contract. Morgan spent four years turning the division around--an experience that served him well when he arrived at Applied Materials, a company with annual sales of $29 million but losses steep enough to persuade him to eliminate five of six business units. Revenue fell to $14 million as Morgan rid the company of everything not directly related to chipmaking equipment.
Since then, Morgan has spent far more time spending money to grow his company rather than cutting back.
The company's growth has generally outpaced the overall market for chip equipment, keeping revenue from declining despite a slump in the chip market and a financial crisis in Asia, the company's biggest market. Applied Materials grew 17.7 percent in 1999 and followed up with a fiscal 2000 that can only be described as wildly successful--87.7 percent sales growth--even if you account for the technology bubble of the time.
The question, however, is whether Morgan's steady-as-she-goes direction is what Applied Materials needs to navigate some of the most turbulent times in its history. Even in the current recession, the CEO has resisted curtailing long-term planning and allowed R&D spending to top 21 percent of revenue in the company's last quarter.
As a percentage of revenue, the company's budget for research and development actually has risen during industry downturns; during the chip market slowdown in 1997 and 1998, for instance, R&D consumed 14 percent and 16 percent of sales, respectively, compared with 12 percent in 1996 and 2000, two of the company's strongest growth years.
That spending has paid off in the past year, allowing the company to roll with three major changes in the chipmaking industry: Densities shrank from 250 nanometers to 130 nanometers; wires moved from aluminum to copper; and the silicon wafers from which chips are cut expanded to 300 millimeters from 200.
The first two developments make chips cheaper and more powerful. The third improves chip-manufacturing yields. In every case, long before most chipmakers were willing to produce the chips en masse, Applied Materials was ready with machines because of its R&D layouts during previous downturns.
"They have a breadth of product and an ability to deliver the latest technology that no other company can touch," said Larry Tolson, logic operations manager for Texas Instruments, the biggest maker of chips for wireless phones.
Although it remains unclear whether future R&D investments will be equally successful, Morgan has shown that he's not afraid to take chances with resources. In building Applied Materials' international business, for example, he has been willing to lose money in a region for years if he believes in the area's potential to pay off.
"That's what's driven my personal focus on being early into the markets and getting the position before anybody else," Morgan said.
Indeed, overseas markets may be as important as technology in determining the company's future. Applied Materials gets the majority of its business outside the United States and refuses to think of itself as anything but a multinational corporation. Morgan in 1981 went so far as to ban the words "international" and "domestic" from his company's literature.
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He also decided Japan deserved attention in the late 1970s, at a time when the Japanese market was considered impregnable to foreigners. He even wrote a book about it, called "Cracking the Japanese Market: Strategies for Success in the New Global Economy." Although Japan is a unique market, Morgan believes in the same persistent, careful approach of building contacts, getting to know government personnel, and being on hand as soon as customers develop works in other areas, such as mainland China.
Applied Materials entered mainland China in 1984, when the country's shift to capitalist business practices was just beginning. Applied Materials' Chinese operations have never produced noteworthy earnings, but even in the face of Asian chip gluts, as recently as the late 1990s, Morgan refused to leave.
"Though it was pretty backward at that time (1984), I felt that someday it would be a major player," he said. "That really hasn't paid off in great dollars, although it's beginning to accelerate now. But on the other hand, we built the relationships with all the people who emerged into the decision-making positions of the high-tech industry in China."
VLSI's Puhakka attributes much of Applied Materials' success to its attention to business relationships, saying that the company will continue testing and tinkering with equipment at a customer's plants until the system works properly instead of forcing shaky machines onto the market.
"If you're a big customer of Applied, you know they'll work out their problems," he said.
Morgan said the company has benefited in other ways from its international forays, occasionally picking up management tips from companies with vastly different cultures. In the end, however, he will rely on the basics.
A booklet of Morgan's own managerial musings, called "10 Ways to Be Successful," reads like a collection of corporate aphorisms urging readers to "lead from your strengths" and "routinely to plan ahead."
The pamphlet's final exhortation? "Press on."
One of the nice things about Windows XP appears to be that it reformats text for copy and pasting so I have only a minimum of realignment to do. This is a good article so I brought it over here for future reference if desired.
Thanks, RtS |
