From IBD:
Rivals Novellus, Applied Going For The ... Copper
Date: 7/13/98
Author: Reinhardt Krause
Chip-equipment maker Novellus Systems Inc. Monday will get a jump on archrival Applied Materials Inc. by licensing a new manufacturing process from IBM Corp.
Novellus is licensing IBM's process for using tiny copper wiring, instead of aluminum, to create electrical pathways in chips.
IBM is the first chipmaker to plan a switch to copper, but others are expected to follow. Chip-making systems for copper will cost manufacturers millions of dollars.
San Jose, Calif.-based Novellus believes the agreement will give it the edge over Applied in selling next-generation production systems that use copper. Applied is the largest maker of chip-manufacturing gear.
Even with IBM's help, Novellus faces a tough fight against Applied, analysts say. The chip industry is mired in a drawn-out slump - that favors the larger Applied.
But Applied has grown to dominate a market that uses aluminum. Copper holds more promise for the future, say IBM and other chipmakers.
''It's pretty evident the industry will make the shift to copper,'' said Richard Hill, Novellus' chief executive. ''It's not in Applied's interests to see a move to copper accelerate because that cannibalizes their aluminum- based market.''
Novellus and IBM were set to reveal the licensing deal at the chip equipment industry's biggest trade show, which starts Monday in San Francisco. Terms weren't expected to be disclosed.
Chipmakers have used aluminum wiring and closely related technologies for about 30 years. But IBM says copper will lower manufacturing costs and result in more-powerful chips that consume less energy.
Rivals such as Motorola Inc. and VLSI Technology Inc. also are expected to move to copper-based manufacturing in the next two years. Just how many other chipmakers will be able to afford to make the switch is a big question.
In any case, analysts say the rivalry between Applied and Novellus will be fierce.
''There is an opportunity for a focused competitor like Novellus to improve their market share in this type of transition if they bring the right products to market early,'' said Jay Deahna, a Menlo Park, Calif.-based analyst at Morgan Stanley & Co.
Novellus claims to have a lead on Applied.
''I believe we have a technology edge - a more cost-effective way of depositing copper on wafers,'' Hill said.
Chip-making equipment cleans, smoothes, bakes, chemically coats and etches electrical pathways in wafers. Thin silicon wafers are cut into hundreds of thumbnail-size chips.
Applied also plans to demonstrate copper-based production systems this week in San Francisco. Its biggest strengths have been size and a broad product line. And it's picking up copper customers.
On Friday, Advanced Micro Devices Inc. said it would buy Applied's copper-based production tools. ''We're working closely with AMD to accelerate their copper development,'' Fusen Chen, an Applied Materials vice president, said in a statement.
Applied also sells a package of machines that perform different manufacturing steps. And it provides engineering services to customers globally.
Those are capabilities Novellus needs to match, analysts say.
In late May, Novellus formed an alliance with Lam Research Corp. and Integrated Process Equipment Corp. The companies plan to jointly sell and service copper-based manufacturing tools.
The jury is out on the alliance, analysts say.
''It's the first thing in a long time that gives Applied a serious competitor,'' said G. Dan Hutcheson, president of VLSI Research Inc. in San Jose, Calif. ''But they still have to demonstrate the alliance can work.''
There's plenty of industry speculation that some of Applied's rivals may soon merge, using the shift to copper as a steppingstone. Customers would applaud, analysts say.
''(Chipmakers) would like to see a major rival to Applied,'' says Ronald Dornseif, analyst at San Jose, Calif.-based researcher Dataquest Inc.
Applied sold about one-fifth of all wafer-processing gear last year. Chipmakers don't want to rely too much on one supplier, agrees Carl Johnson, president of market researcher Infrastructure in Irving, Texas.
''If Applied has a weak spot, it's a question of if (customers) want to be held hostage to one company for their wafer processing needs,'' he said. ''It's kind of like Microsoft Corp. or Intel Corp. Do you want to be held hostage to one operating system or one class of x86 processor?''
Market conditions could pressure some Applied rivals to merge, say analysts. Chipmakers built too many factories during the boom of '94 and '95. Equipment orders slowed in late '96 when a glut of computer memory chips surfaced.
Then came Asia's economic woes. Chipmakers in South Korea and Japan were forced to reduce spending.
VLSI Research says chip-equipment sales, which hit $35.6 billion last year, could fall 4.5% to 16% this year.
Damage from the industry slump is setting in. In June, Lam Research announced layoffs for the second time this year.
Morgan Stanley's Deahna points to an ''anti-Applied coalition'' that includes Novellus, Lam, IPEC and KLA Instruments Corp., which merged last year with Tencor Corp.
Deahna says some of these suppliers may be forced to ''bite the bullet'' and merge.
But rumors of a Novellus-Lam merger have circulated for years. ''The likelihood of it happening are pretty slim,'' said Gunnar Miller, an analyst at Goldman Sachs & Co. in New York. ''I'm not sure what Novellus would be getting. They have the highest revenue per employee in the industry.''
Novellus' sales rose to $163.2 million in the quarter ended March 28, up 61% from the year-ago period. Net income climbed 35% to $21 million.
CEO Hill says Novellus is in no rush to merge. ''When you make a corporation larger, you're only as strong as your weakest link,'' he said.
He says the copper alliance with Lam and IPEC will give customers the support they need.
Applied's biggest weapon is heavy spending on research and development. R&D expenses rose to 13.9% of sales, or $568 million, last fiscal year. That's more than Novellus' $534 million in total sales last year.
And Santa Clara, Calif.-based Applied is good at playing catch-up. It's quickly boosted sales in one of the hottest markets - chemical mechanical planarization machines. CMP tools polish and flatten a wafer's surface.
Two years ago, Applied trailed a handful of gear suppliers in CMP. But it may emerge as the market leader this year, Hutcheson says.
Still, Applied isn't immune to the slump. Sales for its second quarter ended April 26 fell 10% from the previous quarter, to $1.18 billion. It delayed the opening of a new technology center in Japan. It also announced plans to reduce its work force by 15%.
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