Chip Gear Makers Celebrate Upturn, But Cautiously
By Daniel Sorid
SAN FRANCISCO (Reuters) - The $22 billion microchip production equipment industry holds its largest event of the year this week, and for a change, profits are flush.
Sales of their tools -- which turn slabs of silicon into the semiconductors that run computers, flat-screen displays and other electronics -- will rise more than 60 percent this year, and another 20 percent or more the year after, according to an industry forecast to be released on Monday.
Yet as industry brass strut into a San Francisco convention center on Monday with pockets overflowing with orders, they nonetheless know that business can turn on them, and fast.
Memories of the unprecedented downturn of 2001 and 2002, when overspending on chip factories forced massive losses and layoffs in the industry, are still fresh.
"We're really managing through this period in a different way," said Michael Splinter, chief executive of Applied Materials Inc. (Nasdaq:AMAT - news), in an interview ahead of Semicon West, a trade show expected to attract 60,000 attendees.
The Santa Clara, California-based company, the world's largest maker of chip-making gear, saw its payroll balloon from 12,000 employees in 1998 to 17,000 in 2001, and drop back down again to 12,000 last year. This time, the newly appointed CEO insists on higher productivity, "not chasing increased orders with increased headcount and spending."
One of Applied's top rivals, San Jose, California-based Novellus Systems Inc. (Nasdaq:NVLS - news), is taking a different approach. Chief Executive Richard Hill said Novellus will slowly add staff until levels are perhaps 30 percent higher than their low-point -- even if he must make layoffs down the road.
"When you grow, it would be foolish not to hire and not take advantage of growth just because there may be pain in the future," Hill said.
That pain may not come soon, if the industry's trade group is correct. Semiconductor Equipment and Materials International on Monday will raise its growth forecast for spending on chip-making gear this year to above 60 percent, from an earlier forecast of 39 percent.
Spending will again rise in 2005 by 20 percent, the group forecasted, before a "soft landing" slump in 2006.
"What we're really seeing is a stabilization at relatively high current market levels, and we think that's going to continue through the next couple of years," said Stanley Myers, the president of SEMI. "Certainly at this time we don't see it overheating."
However, there are skeptics. Mark FitzGerald, an analyst with Banc of America Securities, points out that chip equipment makers sit near the end of a long supply chain: consumers demand electronics, electronics makers then demand chips, and then chip makers demand new equipment.
"There's a saying that's going around in the Valley -- the equipment guys are always the last to know," he said, referring to Silicon Valley.
Down in the trenches, one big market-share battle is likely to take center stage at Semicon -- between Applied Materials and Novellus -- over who has the best tool for the critical step of making silicon wafers flat, called planarization.
Applied's Splinter said his company will introduce a new planarization technology, which adds an electro-chemical element to the process. Novellus plans to show off its own planarization tool it developed from an acquisition.
In the meantime, the industry seems to agree on one thing.
"The recovery will last longer," Hill said. "And, of course, I don't think we should have the collapse we had in 2000."
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