SEMICONDUCTOR BUILD-OUT WILL BENEFIT EQUIPMENT, MATERIALS SUPPLIERS
Risks Include Sarbanes-Oxley and Return on R&D Investment
San Jose, Calif., May 11, 2006 – The semiconductor industry can look forward to several years of prosperous growth, but there are risky waters to navigate such as Sarbanes Oxley accounting requirements and ensuring adequate return on R&D investments, according to speakers at the SEMI Silicon Valley Lunch Forum here today.
Bruce Rhine, CEO of Accent Optical Technologies, was optimistic over growth prospects for the industry, noting that the “Perfect Storm” has been replaced by a “Perfect Calm.” “It’s a great time to be in the [semiconductor] equipment industry. There will be tremendous demand over the next five years,” he said.
Rhine believes the “siliconization” of the electronics industry will accelerate, driven by a variety of new digital consumer products with shorter life cycles and the build-out of economies in Asia and the former Soviet bloc. “My conclusion is there is unprecedented demand for our customers. They need big chips and lots of them,” he said.
On the issue of 450mm wafers, Rhine said he had three words for equipment and materials suppliers: “Just say no”. He noted that the adoption of 300 mm wafers was relatively fast and painless and provided a “capital intensity windfall” to the device makers. “It’s two fabs for the price of one,” he said. The industry will be “stuck on” 300mm for a long time to come, which was good news for equipment and materials suppliers trying to earn back their investment in 300mm technology.
On the downside, Rhine believes the high cost of implementing accounting procedures under the Sarbanes-Oxley legislation has killed off the IPO market in the U.S. He noted that IPOs on the London Stock exchange are increasing while the number of IPOs on Nasdaq are declining. “Capital knows no borders,” he said, adding that U.S. startups will continue to look overseas for capital. Rhine cited a recent study by the AeA that found firms with revenues under $100 million spent 2.5 percent of their sales to deal with Sarbanes Oxley accounting requirements.
Ron Leckie, president of Infrastructure Advisors, presented highlights from his recent White Paper on R&D spending in the equipment and materials industry. The White Paper, commissioned by SEMI, estimates that by 2010 the potential R&D funding gap for the equipment and materials industry could reach almost $20 billion.
Leckie noted that device makers have fueled most of the R&D spending in the semiconductor industry, while equipment and materials suppliers were “barely treading water”. That’s largely because device makers have enjoyed higher gross margins of between 30 and 50 percent thanks to Moore’s Law productivity gains, and have reinvested some of that money back into R&D.
He encouraged equipment and materials companies to adopt a similar business model, one that was based on value selling. “We have to learn from customers and strengthen business models. We have to re-learn as an industry value selling. A lot of companies have lost it,” explained Leckie.
Another solution to help close the R&D gap would be more consolidation in the industry. In the equipment and materials sector there are “too many cats chasing too few mice,” according to Leckie. However, he stressed that acquisitions must make technical sense and not simply be done to increase market share, otherwise there is a higher risk of failure.
Equipment suppliers were at a disadvantage because they need to allocate R&D spending for continued enhancements of machines that have already been shipped to customers, whereas device maker ship their product and “wave goodbye to it,” said Leckie.
He warned against going down “blind alleys”, where R&D was invested in a technology that is ultimately not adopted. A prime example of this was 157nm lithography, which was at first encouraged by chipmakers, then dropped in favor of 193 nm immersion lithography. “We need to do the research and investment analysis up front, and do it collectively, not individually,” said Leckie. “R&D funding comes from only one place; revenue. You have to make it before you can spend it.”
In conclusion, Leckie noted that slower overall industry growth doesn’t mean the end of the world. “It just means we have to do things differently,” he said.
SEMI is a global industry association serving companies that provide equipment, materials and services used to manufacture semiconductors, displays, nano-scaled structures, micro-electromechanical systems (MEMS) and related technologies. SEMI maintains offices in Austin, Beijing, Brussels, Hsinchu, Moscow, San Jose (Calif.), Seoul, Shanghai, Singapore, Tokyo and Washington, D.C. For more information, visit www.semi.org.