Watching for the Next Wave
By Ed Sperling -- Electronic News, 4/1/2005
Mike Splinter, president and CEO of Applied Materials, sat down with Electronic News to discuss the state of the capital equipment business, the future of chip development and the company’s growing emphasis on service. What follows are excerpts of that conversation.
Electronic News: How’s the market for capital equipment these days?
Splinter: If you look at our projection from Q4 and the end of Q1, we’re projecting flat. That’s a pretty good description of where the business is at right now. We had a substantial drop from our Q4. I’d say we’re flat in the bottom of this trough.
Electronic News: Is Applied Materials a leading indicator of the rest of the market or a trailing indictor?
Splinter: That depends on what indicator you’re looking at. We tend to trend along with factory utilization. As factory utilization picks up, our capital spending utilization picks up. In that sense, we’re a fairly early indicator of an upturn.
Electronic News: Let’s focus on some particulars in your business. China is building a lot of six- and eight-inch fabs. Does that translate into business for Applied Materials?
Splinter: China last year spent a lot of money putting on capacity. The leading companies like SMIC put on advanced capacity. Those fabs were not quite at the leading edge. There are many other fabs, primarily eight-inch fabs, that are a few generations behind and populated with used equipment. For Applied Materials, we have a strong refurbished equipment business. We buy old used equipment, we refurbish it, we ensure that it’s running properly and that it can do the processes as well as can be expected for that vintage of equipment. This has been a very good business for us in the past couple years. We expect it to be a good business for us going forward. This particular refurbished business is part of our global services organization.
Electronic News: Do you anticipate that will become a bigger portion of your revenues as time goes on?
Splinter: I think the way the trend will go is that as China expands it will grow. It will grow also become some new fabs, even advanced fabs, can use a few pieces of refurbished or remanufactured equipment. But I think when the transition is complete to 300 millimeter, the business then will drop off a bit until the 300 millimeter used equipment market starts to bill. That refurbished business will also have a cycle to it, and it will be based not only on the normal supply and demand cycle, but it will also have a lagging influence from the 200 to 300 millimeter transition.
Electronic News: Applied Materials has a lot of variables that are out of your direct control. How much of an issue is currency fluctuation?
Splinter: Every business has lots of variables, but currency is not a big issue for us. For some of our international competitors it’s more of a problem, particularly for the Japanese competitors, because when you look at the big buying companies today they’re pretty much tied to the dollar and most of our supply chain is in those countries. But the overall business cyclicality is something our business has to cope with. We’ve done a good job in the past few years of coping with an upturn without hiring a huge number of people. We kept our cost structure at the right level to be able to not take dramatic management action in a softening period like we’re having now. If we can manage our overall business a little bit more smoothly, despite the cycles, we can keep our employees focused on satisfying our customers, forming partnerships with them and developing the best technologies and products and services.
Electronic News: Across the semiconductor industry there are two movements afoot, one for standard parts and another for custom design. Where does the capital equipment market fit?
Splinter: When we send out a piece of equipment, it’s different for almost every customer. The base machine is the same, so we’ll ship an Endura [metal deposition system] to almost every player in the semiconductor industry. But most of the major players have specific modifications that they’ve made or that they request to be able to do specific process that they need done in a specific way. Our industry has been one of customization for a long time. The difficulty is that is it can drive up costs, so we’ve been working hard to offer customization where it really matters to the customers and drive standardization across all of our platforms where there may still be customization. But it will come off a standard base. A good example is gas panels. It used to be that every customer would want a different mass flow controller and gas panel configuration. We designed a new modular gas panel that allows us to get very high volume on our mass flow controllers, drive the cost down and still allow each company to have a little different gas configuration. It’s still based on standards, but it allows the customers to get a little more of what they need and we can still keep the cost down to a reasonable level and keep driving it down. You’ll see us do more of these standards-based things over time.
Electronic News: The Moore’s Law road map seems to be slowing down. Does that have an impact on your business?
Splinter: I hear the stories, but I don’t see the activity. Moore’s Law continues to be driven by the leaders of the industry. It’s been on a two-year per node run rate for a long time. Maybe that will change sometime in the future. There has been a lot of discussion about it, but Intel, Samsung, TSMC, as the leaders in their various segments -- DRAM, logic and foundry areas -- continue to drive the spacing between the nodes to two years and everyone else has to follow. You see everyone joining in at the R&D consortium level so they have access to the technology and can stay on that two-year run rate. Moore’s Law started at every 18 months. It did move to 18 to 24 months. And it may have slowed a little bit on the density, but not a lot. The increasing difficulty is in performance improvement. It’s why the transistor is coming into so much more focus than it has in the last 10 years.
Electronic News: We’re also seeing a lot more system-level design than in the past. Does that affect your market?
Splinter: The chips still have to be made, and increasingly there is pressure to optimize performance and power. Our front-end products group has a slogan: ‘Run fast, stay cool.’ They’ve been working on many different technologies to allow the transistors to switch faster, to run faster, and yet give the customers knobs to turn to help lower the leakage in the power. One example is strain engineering, which we’ve been working on very hard with a number of customers. That really improves the mobility of electrons in the transistors and improves the performance. We’ve also been working on high-k dielectrics. This should dramatically improve the power loss in a transistor. This is going to continue to be very critical. Because the world is going mobile, increasingly the optimization at the system level runs all the way down to the fundamental element of a system. Everything has to be optimized, whether it’s an iPod or a cell phone or a mobile DVD player.
Electronic News: Is Applied Materials now getting involved at a deeper level in the technology development?
Splinter: It’s so difficult today to understand how your tools are going to be used. It requires us to have a very deep understanding of the application and how the transistors are going to be made, how the interconnects are going to be laid out, what kind of package the device is going to go in. There are so many different interactions that the depth of technology knowledge has to increase. We’re going to continue to increase our level of knowledge. Technology differentiation is key to selling our products. One of those differentiations is how our products will be used by our customers so we are better able to help our customers get the performance out of the tools they have.
Electronic News: Are your R&D costs going up as a result?
Splinter: Because our industry is cyclical, we try to keep our R&D costs in the 12 [percent] to 20 percent range. They rarely get close to 12 [percent], and sometimes they get over 20 [percent]. But we want to keep them in that range. Maybe it averages between 15 percent and 18 percent overall, but there’s hardly ever an average year. It’s difficult for us and our competitors to fit in all that’s required. I believe there is an R&D crisis in the equipment industry. The industry is too broad, there’s too much replication of R&D today. And unlike our customers, who have allegiances and alliances to cut the costs of R&D, it’s very difficult for us to do the same.
Electronic News: But can’t you form some of the alliances with your customers? Applied has formed an alliance with Cadence, ARM and TSMC.
Splinter: That’s more of an example of the depth and breadth of which we have to have knowledge about the application. That particular alliance is about application of interconnect. We do a lot of joint development with our customers and have many programs along those lines, but most of those are one-on-one types of development.
Electronic News: Looking out on the entire electronics ecosystem from your vantage point, where are the bottlenecks likely to crop up in the future?
Splinter: Just building a product is one thing. Getting it designed and into manufacturing is quite another. In the supply chain, there are some critical components that we work on closely with the supply base. In the last few years, since 2000, there has been a sea change in how equipment is built and how the supply chain has responsibility for building things. The modular design of the equipment has been much improved, so a supplier company may have responsibility to build a module. The biggest issue in getting things built effectively and cost effectively is the cyclicality in the industry. Can companies move quickly when an upturn happens? If you look back from November of 2003 to March of 2004, our equipment volume doubled. It’s that kind of cyclicality that’s hard for companies to keep up with. When we look to our supply chain, we look for companies that are financially stable, that have a flexibility model so they can stay with us during the ups and downs of this industry and still be cost-effective.
Electronic News: Let’s swap topics here. How is your services group faring these days?
Splinter: We see real revenue from our services business. Last year at our analyst meeting, our CFO, Nancy Handel, said our services revenue has gone from 12 percent of revenue to 20 percent of revenue. You can see the shift that has happened, and we expect that shift to continue. We think it’s going to be a very positive, anti-cyclical business for us going forward.
Electronic News: Does it even out some of the cycles in this business?
Splinter: It does have a cyclicality of its own, but it’s muted because companies run their factories in good times and bad. There’s a lot of service that has to be done, no matter what the loading on the factories.
Electronic News: Does that change the type of people you hire and where they’re located?
Splinter: Yes. The equipment business R&D is primarily centered in Santa Clara. We also have units in Israel and England. Those will stay relatively constant. The service business has to be close to the customer, so most of the employees that are part of the service business will be in the field at the customer’s location. We’ll of course offer some remote services that can take advantage of our economies of scale, but for the most part they’ll be at the customer site.
[Harry: Sure does not sound like he is looking for an uptick in demand anytime soon.] |
