ISS 2011 Blue Chip CEO Panel (Transcript Excerpts)

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ISS 2011 Blue Chip CEO Panel (Transcript Excerpts)

Michael Wright, Applied Global Solutions, Moderator

Our panelists are:

  • Bob Akins, chairman and CEO of Cymer
  • Aart de Geus, founder, chairman and CEO of Synopsys
  • Nobu Koshiba, president of JSR Corporation
  • Bill Noglows, chairman, president and CEO of Cabot Microelectronics
  • Michael Splinter, chairman, president and CEO of Applied Materials
  • Doug Neugold, chairman, president and CEO of ATMI

What are the principles you use to guide the development and deployment of capital?

Noglows: Over the last say three to six years, we’ve been focused on trying to get our development capability as close to our customers as possible— that’s both human and infrastructure so for our company that means cleanroom, CMP tools, and the metrology that goes with it. For a company of our size, those are some fairly significant capital decisions, strategic capital decisions to park that kind of facility in South Korea or Taiwan or Singapore or wherever it may be. But that interface between the customer and our development is critical to our success both today and into the future. Because the development cycles are so long, we find that we need a much richer flow of information when we have that development capability right there in a country, real time, in the language of our customers.

We think more in terms of intellectual and human capital and providing them with the tools they need to be as successful in the eyes of the customer. Most of our big investments are just that— trying to get credible people in front of the customers with capabilities that meet customers’ expectations very quickly. The key point here is speed and quickness. Many of our customers who expect us to iterate very quickly on new product development. To do that, you have to be right there with the customer… Now our focus is more to get people where they need to be, in front of the customers.

de Geus: …We are trying to ride the complexity horse like crazy, and there are different horses: the first one is the traditional Moore’s Law of complexity, the second one is customer complexity, and the third one is systemic complexity. Moore’s Law is the first true exponential in a massive scale that humankind has ever seen for a long period of time. Not finished by any means, but a very tough one to ride. To me, what’s interesting is that it’s really not one exponential; it is always multiple exponentials. The key in technology is to really understand when to exponentials cross…The exponential that’s underneath is vastly less important and the minute it crosses over, it becomes vastly more important.

Let me give you a simple example. At 130 nanometers, almost overnight power became more important than its speed for most products, and it forced an entire industry to rethink chip design and ended up at multi-core, where you are still pushing the speed but really decomposing the power into multiple blocks that you can minimize the power. That’s a good example of exponential costing, and the minute it happens, it’s very, very profound. Now in order to stay on top of an exponential, there’s one recipe: spend all the money you got. And it starts for us this 30% of our revenue goes into R&D. And another 15% to 20% is all into acquisitions of more technology. The good news is, if you win, you just get to play again, and you get to continue to spend money.

The second point is the customer complexity and in our field I’m starting to see it very much in the manufacturing as well, the proximity of humans to wherever the tool or product being used is increasingly important because it’s so difficult. Because the skill set has to be nearby in order to deal with issues immediately and move fast forward. That means for us that in just the last decade and a half, we’ve seen the number of locations grow dramatically. Most of you have seen a massive move towards the Far East or the broader Far East. You can just look at the ‘80s and ‘90s in Japan, followed by Taiwan and Singapore and Korea and then India and China, and now even the Middle East. So this is actually a very big sophistication as we have to support teams in many locations and have super experts available locally. The result is, you spend all the money you got to support those people, and they’re still not quite happy. But if you can spend a little bit more than the other guy, you win. And if you win, the benefit is you get that you get benchmarked against him for the next round.

The third one is systemic complexity. And I think systemic complexity is really what has driven this entire last decade, meaning that phenomena are increasingly interacting. We see it in our domain that it used to be that individual tools to a design, and you tried to assemble the best in class tools, and you end up with these Frankenstein flows that sort of worked until they maybe didn’t work. And suddenly one discovers that to be able to actually assemble tool sets where the upstream tools know what’s going to happen downstream…is absolutely essential to make it through. I see the same happening in manufacturing and you will see a gradual continued consolidation.

Koshiba: JSR originally started as a rubber company so our portion of the company is still petrochemicals, and the other portion is applied chemicals. As CEO, I really have to manage the portfolios. I have to manage the different types of businesses and the markets are very different. The nature of the markets is different; pricing is different. So given that fact, I use three principles including SVA…shareholder values to help manage portfolios, and other things like regular investment in office, IRR 8%... sales for semiconductors is 20%, and for petrochemicals 10%.

Then we deal with cash flow management. So those are the kinds of basic principles I use to manage my company… I tried to bring in some different ideas for long-term thinking. One of the things I changed in my company is to determine whether it would be a big investment or not is incorporating the value of the carbon dioxide. This may not be the appropriate moment to bring up this issue, global warning issue. But as I look at world trends, global warming and also biodiversities, those are becoming more and more boundary conditions for us. Therefore, we handle chemicals …we always try to calculate the value or the price of the CO2 and we try to incorporate it into our investment strategy.

I often tell my people that last year when Obama took office; he proposed duty. I feel some analogy to when Bill Clinton took office years ago with the information superhighway. That changed the whole world, like 20 years later. I also see how this new deal with CO2 could change the whole world… It’s a slow change, but it’s a big change. In ten years from now, in the ‘20s, the way that we invest, how we run companies, how we make a value proposition, that’s going to be totally different in about 20 years… So that’s why in doing investment calculations and opportunities, we started making those kind of ideas, like how we can incorporate value of the CO2 and biodiversities as well into decision making.

Akins: We even surprise ourselves— that we make the impossible possible on a yearly basis in this industry. We don’t achieve that by taking conservative, safe routes in how we make decisions in running our businesses and what we commit to… you have to accept the fact that basically all of our companies have to bet the company’s existence on the decisions that we make on a daily basis. You can’t afford to be wrong more than about once when it comes to how you’re going to deal with a major technology transition. A lot of companies in this room have a track record of near 100% of being right in those areas. But we can all think of a few companies or ourselves when we’ve made decisions that have been wrong. The pain has been huge, and if you exist through it, there is a tremendous price to pay. If you don’t act that way, then you are bound to fail. So you have to be comfortable with making aggressive decisions, trusting your gut about everything else.

I guess the second principle, particularly capital intensive relative to chip-maker customers’ level of intensity as far as capital intensity. That it’s just really tough to get together a lot of great people and I know we’re all thankful for the great people that we do have working for our companies. I used to think many years ago that large successful corporations were monolithic blocks of great people. I learned over the past many years that corporations are not that way…there’s an extremely small percentage of their work population that makes them a great company— not just a good company... When they leave, if they are not replaced with equally great individuals, those companies will change.

We all have to be looking at minimizing fixed costs, maximizing variable costs for our businesses. We need to be constantly looking for ways to maximum leverage our great individuals that we currently have in our companies. For an equipment manufacturer, that means a continuous progression from …doing most everything yourself to the point where you’ve leveraged those great people to where you are employing universities, research institutions, other preparations, your customers to be able to provide more and more of the pieces of the pie. So your advantage in external resources and being responsible for the architecture and perhaps the overall systematic control of what you do and everything else is outsourced. But you’ve got to place your best people in a position of being architects, “doers,” to be effective.

The third principle is that knowledge is the most sustainable competitive advantage. A principle we oftentimes discuss, but like you, I know that we are easily overwhelmed with information— from our customers, from our products, from our suppliers, etc. If we’re not careful, we get overwhelmed with all of that noise, and it becomes paralyzing. The process with which that data is transferred into knowledge, true learning that you can then quickly gain insight from and make timely significant and tactical decisions upon is a real trick. It’s not always easy to do. Those companies that can excel at turning the data into knowledge, quickly, experience a competitive edge and going forward will have an even greater success.

Neugold: Our company is highly focused on materials and then innovative technologies that allow those materials to be used in a very efficient way. We organized the company around a strategic intent statement. I think it’s valuable within the context of focusing people, and process efficiency is at the core of that. So when we’re thinking about deploying capital, the first question we’re asking ourselves is, “Does it get through that filter? Will the deployment of that capital result in a meaningful, sustainable benefit for our customers in terms of how they use what we provide them?”

In this industry… “faster, better, cheaper” can play out in many different ways. Our approach is if you try to focus it from the customer’s perspective and see how we can extract the most value through that mantra, from their perspective, it’s tricky business. In 2000, we significantly retrenched our company to try to win at one thing— materials. We changed our company completely, and that was fun until 2007 or 2008. We made a decision that we wanted to deploy capital against “mega trends.” Certainly, it’s become a lot clearer in the last couple of years that sustainability, however you choose to define it. It could mean solar, but it could also mean better ways to refine gasoline….

When you talk about your rule of three, we see that the great people could get even better. So like the other members of the panel, we’ve been deploying our capital to get us extremely intimate with the customers. We’ve been making investments that to us seem… game changing for us. We’ve made a lot of risk decisions… we spent in a very targeted area.

How can we drive the efficiency of our most valuable thing we do for our customers— which is help them solve these new material problems and these integration problems? So we’ve re-thought our approach to doing that science…re-invented our approaches, but we’ve also pushed them out of our facilities in Connecticut and into our most advanced technologies into the Asia region. Spend in support of your customer’s principal objectives, but for us speed is the underlying issue in that investment decision. The rest of the decision, customer proximity. We think that the innovation effect is as important for us as our customers, the pace of learning comes out of those investments is important.

Over the last few years, solar has created an enormous amount of marketing capitalization and destroyed an awful lot… As a materials company, everybody would say to us, “Are you going there?” In the sustainability area especially, we’re looking at it from a “does it feel pure?” Solar is hard for us, because there’s so many fingers in that pie… But as a counter, an LED light seems to be able to defend itself on performance, right? Thirty percent less energy usage is pretty compelling when the majority of your energy you usage is lights. It seems like a great place to go…. but the real issue is can we get to a real pure commercial discussion. Whenever we deploy capital in a new place, you’re looking at that potential market. You’re saying when all is said and done; desirability to deliver efficiency drives that customer’s success.

That’s what took us to Life Sciences. We’ve completely re-thought manufacturing processes with our customers, and they are deploying our packaging technology for photoresist to manufacture genetic drugs in a way that’s totally mind bending. We look at the mega trends, purity in the market, speed and innovation capability as our principal drivers. As tempting as it is, we’re not a “spend everything we have” company. We try to have a good balance sheet so we can invest opportunistically, which for a lot of us means in a downturn.

Splinter: I focus it in on the core competencies of the company. What we’ve been trying to do is assess what those core competencies are. What are we really, really good at, and ask ourselves then how to utilize those to deliver value to our customers in the markets that we’re in and markets that we desire to be in. We believe that by doing that, by focusing in on those core competencies, we have the best opportunity— it lowers our risk and give us the best opportunity to deliver value to the customers.

Value to the customers comes in, in different ways in different markets in different industries. But in semiconductors first and foremost, can we help enable moving to the next generation? Can we improve yield? We need to help customers improve yields and the cost of their product and help improve the productivities of their factories. If we have a clear vision of that, that our technology will match up with the critical values our customers have. We believe then that we have a good chance to develop a new product or advance an existing product for a new application. That is so critical when we’re trying to decide where to spend our money, because at least in our company, there are a lot more ideas and places to spend the money than we have money to spend. And increasingly, as the difficulty of the technical problems increase, the amount of money that you have to spend to solve any one problem becomes higher. You also have to work on efficiency of R&D.

How do you come to financial and long-term value conclusions? How do you deal with Boards and financial markets when you have to make tremendous investments over a long period of time?

Noglows: To answer the question I want to draw a box around it. I think there are some real market realities and scale realities into how much risk you can take to push your company into a totally new space… Market realities, a company like Cabot, we’re a “one-trick pony,” we do CMP consumables, and our investors like it that way. That creates what I would describe as a market challenge for publicly traded companies of our scale. If we were bigger, we could probably diversify much more easily because we can kind of do it under the veil of more revenue, but we’re not big enough. So you’re walking a tightrope really with your investors and your Boards on how much risk can you really take and how far do you want to stretch your company to where people start to lose confidence in your ability to manage the core business that made you successful in the first place. So I think there’s a real market and scale reality that you have to take into account and consider how far outside of your core competency are you going to push your company.

Splinter: We picked a particular theme of where we would make new investments. That was one of the other principles; our other focused area in investment was in energy and environmental products. But the products that we would make in that field would really be based on the core competencies that we have. I don’t think it’s ever easy to decide to diversify. Whether your company is large or small, investors would like to make those decisions themselves. But people in our position have to think about long-term success of the company and think… what’s going to last for the next horizon, the next generation? To do that, you have to be thinking about those markets that are going to last through the next generation and grow in the next generation. Today there is no question that semiconductor equipment, the growth has slow. This is not 1996 to 2000. The last ten years there has been zero growth in wafer fab equipment spending. There’s been shifts in share, but no growth. So for a large company, the challenge to diversify is much, much greater…

Akins: Cymer is at the other end of the spectrum… We are highly focused. We make light sources for lithography. We are a one product, one market company, and while that fits Bill’s definition of what investors are looking for, it can be very limiting…. We’re accustomed to making decisions that have at least a decade impact or starting R&D in ten years before production reality begins to happen. So I think that there are internal decisions we’re making for the semiconductor industry, having to do with diversification that can play that question of sustainability and how we go to our shareholders with a proven track record of putting that capital to work and those people to work for a longer-term return as well as diversification.

When we started a new business development opportunity and how we’re going to invest our precious few dollars of profitability into the diversification process, we naturally fell into the mode of how we started the company, looking at core competencies. Can we go out and find a problem to solve with those technology competencies, which is a typical venture capital investment game. The success rate for venture-funded high-tech start-ups is something like one in a thousand. I knew that we were playing that kind of game, those odds, when we started the company, but we were young and foolish, willing to take a chance, and we had nothing to lose. But as a public company that’s larger now, we can’t play those same odds.

So instead, we turned to defining what our core market competencies were. And I’ll say that it happens occasionally, but it’s not common that a group of people go to venture capitalists and say, “We’re a bunch of marketing people. We really know a market…we want to raise $10 million to start a company.” It’s tough to get money that way. As a public company, if you look at your market competencies then you start thinking differently. You start looking at technology as something that you’re not going to be able to plan to buy or to license or to develop organically. When we made that change, all of a sudden we started to find some new opportunities, and it led to our first diversification into the flat panel display equipment business.

How do you go through the process of saying, “Hey, Board, this is where I want to go.” Where does that come from? Is it just CEO courage that everyone has to have?

Neugold: I can assure you, we don’t ever bet the farm… When I say Life Sciences, we made a decision to go into that business six years ago. Spent money below the radar... Somebody came to us and they said, “I’d like to do this.” I said to the guy, “You can. Here’s some money. Don’t talk to me for another two years. It’s not a lot of money. It’s money for you to go out and figure out if you really have something there.” When he came back and he had something, we progressively made more investments. Over the last couple of years, through equity and cash, we spent real money, but it’s been great. It’s maybe harder for Mike because he’s so big, but it’s easier for me because I’m not. But I’m not betting the farm, I’m making investments that I think take advantage of my core competencies.

Does your segment require something unique because you’re in materials or EDA or equipment?

Noglows: For CMP materials and consumables, we’ve had a significant effort to exploit the technology and the knowledge into other applications, we call it engineered surface finishes. The technology does not tend to be that applicable outside of the semiconductor industry. We always end up back at defense applications, aerospace applications, medical applications. And applications close in the semiconductors, and that might be polishing sapphire or silicon carbide…so I think it’s hard to, at least for our company and our kind of technical knowledge, it’s hard to push it into other applications and find meaningful businesses; we can find niches of high-value niches that are niches nevertheless, which makes it difficult to diversify on that basis. I think we start talking about M&A now. I think that’s kind of the way we look at things now. It’s to not take organic risk, if you will, the organic development risk and look for opportunities to use our cash balance to acquire businesses that are successful with a new technology or new application in a different market or a faster growing market than the one we compete in today.

Looking at risk tolerance and core capabilities. Can you talk about the value of it? How does that reconcile with some of the issues (like sustainability) that were brought up here in terms of balancing out my short-term? Is there a place for everyone to play in those larger trends?

Koshiba: We are a materials company; we have multiple core competencies. We can go to…semiconductor industry to LEDs and LCDs. So basically that’s our business model, using our materials expertise. We try to place ourselves in markets that are really growing…talking about how we can see the long-term trends. When I took my position in 2009, right after the downturn, I formulated my internal projects, trying to understand what’s going to happen in 20 years. As I said before, the green movement is going to change the value proposition of the world. It’s amazing to see how much of the information is available up to 2030…2030 is just only around the corner... Therefore, how populations can go, where the petrochemical industry is going to go… How many cars are being manufactured in 2030 and also how many will be electric vehicles. That data is all available. There are some environmental regulations up to beyond 2020…a lot of things you can read. Therefore, based upon those assessments, being a material company, I manage my portfolio….

Akins: There’s a very interesting copy or edition of Scientific American, came out about four months ago. You may have seen it. It was all about the end of things: climate change, availability of materials. It had some really interesting analysis of projected usage rates going forward, how long would projected reserves, identified reserves and projected reserves last for various materials, including oil. It was quite shocking, even if you don’t believe that we’re going to run out of these materials. If you believe that costs are going to start to skyrocket significantly because of the difficulty in refining or recycling materials. For things like indium and silver and even copper…all of a sudden these become extremely difficult-to-get materials, with indium starting about 2020 and silver about 2030. As an industry, we need to be thinking about the impacts of that, alternative materials, and/or alternative ways of solving problems fundamentally. These are on timeframes that some of us will still be running companies.

Technology gaps are decreasing around the globe. As you expand into other markets and go to other countries, where do you spend your human and financial capital?

Neugold: I think when you look at the trends that you described, we’ve been through cycles like this. We talked about sovereign capital in the context of China and Korea and other countries at various points in time, right? So people come into these markets, and they do what they want to do. It certainly seems to be intensifying right now. When you look at some of the Asian countries as an example of recognizing that of course that GlobalFoundries is a part of this discussion…

As a supplier in this industry, I look at the Asian markets. It’s almost breathtaking the contrast between their absolutely focused strategy for dominance in these markets and as an American company our absolute lack of a national strategy for technology, not that we should be defining markets, but we should protecting, we should be developing some things. So we look at those markets, and frankly since 2000, we’ve had a principle objective to increase our presence in Asia, so methodically over the last 9 years, we’ve increased our investments more and more… leading up to year before last, putting our most advanced development capabilities in Taiwan and Japan, in addition to having them in San Jose and Danbury. And the customers are eagerly and happily taking advantage of that. We look at the strategies of Korea, the intention is quite public… “equipment companies will exist here, material companies will exist here, and we will have the strongest infrastructure.”

Is there a role for company culture and the protection of R&D? Certainly, companies that have been very successful at building worldwide cultures…culture is what happens when you leave the room.

de Geus: Witness WikiLeaks…this is going to happen to many companies. It takes only one individual to break whatever professional schemes you have to be able to do major league damage to your company. The same is true with terrorists, very small actions creating damage. No matter what you do, you cannot completely protect your intellectual property, your technology. Even with structure, it’s often difficult, because the more you trust people, the more they’re empowered.

So I think a company culture is absolutely essential, because instead of there being a company police state, you make every employee set expectations on everybody else... The second thing that I would observe is that many movements to the Far East…big investments are actually in R&D and the markets are there. So the business will be there, no matter what. The sooner you build the high-quality culture, the better… They become part of a global company, which is, we’re talking about business and climate. We are global— this notion of nations is so past century.

Do corporations start to take on more social and political responsibility? The GDP, the entire output of Chile is about one-tenth of the sales of WalMart. That’s a significant economic impact and economic responsibility, but a social responsibility as well. What’s your thinking on this issue?

Akins: Certainly in my working lifetime I’ve seen so many companies go from not existing to worldwide respected giants— Intel, Samsung are a couple of examples… They employ lots of very talented and respected people. They’re solving difficult problems every day…. Yet there isn’t a semiconductor industry well-established, well-messaged position on the whole issue of sustainability. Individual companies have individual efforts, some large, some small. They may be disconnected, each stressing a different point. As an industry, we have pulled together and work more closely together if they have a unified message or position that I think that could capture the imagination and following of consumers all over the world, basically leverage the success that’s been demonstrated and their technical leadership which has been demonstrated into a well thought out, technically accurate, compelling value statement about what we can do as a world to work on issues of sustainability.

Splinter: I have fundamental beliefs about this. First and foremost, our companies have prime objectives and depending on what company you’re looking at, we have a prime objective to advance the desires and pay back our owners, our shareholders. We cannot have a second prime objective. A company cannot be the educator of children. There’s a place for companies; there’s a place for governments. I do think that those kinds of responsibilities are the responsibilities of governments. Now, can companies help? Can they counsel, can they plan a big role? They can, absolutely. We try to do a lot of things along initiatives in education and environment in our local communities in which we work and live. Our employees drive that; it’s part of our culture to do it. But there’s a boundary. We can participate, we can cajole, we can create initiatives, but we cannot in my mind be the owner of those prime objectives about the welfare of the constituents…

de Geus: I’m with Michael. We cannot be governments….I see so many issues baffling the government. And you just have to take education in this country to see one...debates on climate are another one. So what does our industry have to offer?… High tech…and semiconductors offer a meritocracy… Meritocracy is an incredibly powerful principle…These principles are really attractive for many people that have not experienced that in their lives, in many other places. Secondly, our industry has another characteristic. We have learned to manage ultra-systemic complexity, meaning not only the exponential complexity but the interactions of many dimensions simultaneously… This is the single most difficult problem that most legislatures face today... At a minimum, I think our industry needs to take some co-ownership for transforming the political and community environment for problems…because we have the power within our companies.

Thank you very much for your contributions this afternoon. These gentlemen have set frameworks in their companies to develop value-driven companies that perform extremely well because of the frameworks they laid out.

February 1, 2011