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Cyclical downturn: Passing phase for the semicon industry?

Posted: 23 Nov 2010     Print Version  Bookmark and Share

Keywords:front-end  semiconductor equipment industry  market analysis  manufacturing 

The major factors for this value migration are the impact of the lack of product innovation and the impact of the 300mm production implementation by the customers. There has been a resultant "brain drain" from the semiconductor equipment industry to other industries where process engineering skills are critical to growth. Venture-backed investment in equipment company start-ups has been virtually non-existent, with no single new company emerging as a major player in the industry.

300mm production generation
The 300mm product life cycle has been devastating to the equipment industry. The fundamental business model was changed as pricing of 300mm equipment was significantly less than 200mm without the attendant cost reductions, thereby compressing margins of the semiconductor equipment company.

The equipment industry believed that unit volume would stay flat or grow a bit due to increasing product complexity evidenced by the number of process steps in future product generations. The customers slowed their migration to increasing complexity and the impact on the equipment industry was reduced unit volume.

The customers achieved significant cost benefits through the significant increase in die per wafer (more than 225 per cent over 200mm equivalents) without having to pay much more for those cost benefits.

Gross margins for the equipment industry of more than 50 per cent have been reduced by as much as 10-15 points, making it difficult if not impossible to invest in R&D at traditional model levels of 15-20 per cent of sales. Operating margins are contracted, forcing the value migration to the semiconductor manufacturer.

The major companies in the pursuit of Moore's Law--Intel, Samsung and TSMC--have successfully reduced equipment company margins. Equipment companies tried in turn to leverage their supply chain without much success, as their leverage over their supply chain is minimal.

Many suppliers to the semiconductor equipment industry abandoned the business entirely rather than succumb to continued pricing pressure. This business phenomenon forced equipment companies to reduce their research and development spending and, while the chipmakers benefit from the enhanced production of 300mm tools, the lack of profitability and returns for the equipment industry actually constrains the growth of the entire industry since innovation and new applications cannot be pursued economically.

Also, venture capital for the entire industry has been affected by this situation. As growth rates and applications decline there is no reason for entrepreneurs to develop new ideas for the space. The equipment companies did little strategically to combat the behaviour of their customers such as:

Used equipment--the equipment industry did not develop an adequate used tool strategy to maximise revenue, instead the customers learned the techniques of "equipment reuse" which should have been the bastion of the equipment company's expertise.

Services--the equipment companies were unable to offer value added services such as process development, equipment maintenance cost savings, parts offerings etc. to buttress the loss of capital equipment spending. Other companies filled this vacuum.

Sematech--the consortia abandoned their approach to improved productivity as focus by member companies turned to photolithography requirements for advanced technology nodes and reduced the size of Sematech's budget. The State of New York lured Sematech and its member companies through strong subsidies, causing it to abandon manufacturing capability initiatives based in Austin, Texas.

The result is that the supply chain to the semiconductor equipment industry has become dishevelled and weak and incapable of response. Many companies went bankrupt during the downturn and other stronger entities moved on to other industries and refused to grant the cost reduction demands of the equipment industry executives.


About the author: Joseph R. Bronson is principal at TheBronsonGroup LLC, a business advisory group focused on operational and financial consulting. Part two of his analysis of the semiconductor capital equipment industry will focus on the dilemma facing equipment suppliers regarding the proposed transition to 450mm wafer sizes and provides recommendations for front-end equipment suppliers.

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