CEOs say: Industry cycles here to stay; Managing the cycles, not forecasting, key to surviving downturns - News

Electronic News, April 1, 2002 by Jeff Chappell

While tool OEMs sat in the corner licking their wounds in 2001, hindsight has provided them with a very important lesson: The trick isn't to forecast downturns, but to better manage them.

"I think what we've learned from the last cycle is that we've learned nothing," said Mary Puma, CEO of Axcelis Technologies Inc. Throughout past cycles right up through the downturn of 2001, capital equipment companies continued to deal with customers and push-outs and cancellations the same way, she said. And the industry has continued to put stock in forecasts that have proved somewhat fallible at best.

"From an industry perspective, I don't think we've necessarily gotten any better," Puma said of forecasting the vagaries of the market. Cyclicality isn't going to go away, she added. The answer is not better forecasting but managing the inherent cyclicality better.

Puma's comments came during the recent Semiconductor Equipment and Materials International's (SEMI) SEMInvest event in New York. Puma participated in an executive roundtable discussion that also included Roger Blethen, CEO of LTX Corp.; Paul McLaughlin, CEO of Rudolph Technologies Inc.; Alex Oscilowski, senior VP with Kulicke and Soffa Industries Inc. (K&S); and George Chamillard, CEO of Teradyne Inc.

The other company leaders agreed with Puma's assessment of forecasting and cyclicality. "I think cycles are alive and well," Chamillard said. The trick in managing them is determining how deep they will be, adding that it is difficult to manage a down cycle such as 2001, when the equipment industry was down some 80 percent. "We have to do a better job in predicting these downturns. Everyone is hurting," he added.

Blethen and Oscilowski suggested that companies must learn to manage throughout whole cycles, from peak to trough and back again. This means being prepared to ramp quickly and cut back dramatically along with customers.

"One of the things we've learned in this downturn is care and feeding of a supply chain," McLaughlin said.

This is something the industry as a whole failed to do in 2000 and 2001.

"If I had one thing to do over, I'd better manage the chain on the downside," he said, adding that companies such as Rudolph Technologies (assemblers of equipment modules) lend themselves to outsourcing.

While many have heralded the foundry model, claiming it would soften cycles, the panelists said it will, in fact, have the opposite effect, if any. With the addition of foundries, additional steps are created in the supply chain, which in turn exacerbates the bullwhip effect for tool suppliers, Blethen said. Chamillard concurred, adding that foundries add complexity to the silicon cycle.

While their companies still may be hurting from the beating of 2001, the panelists agreed indications are that things are improving. Most agreed the industry is experiencing the beginning of a technology-driven upturn, but it is going to be a slow recovery, at least for the time being.

Even as tool OEMs look forward to 10 percent to 25 percent increases in orders and revenues, in annual terms, it's not enough to put the industry on par with 2000 revenues, Puma cautioned. "But the signs are there that things are starting to happen," she added.

In the back-end, K&S started seeing an improvement in orders for advanced wire bonding equipment and probe cards last quarter.

"It's here; it's technology driven," Oscilowski said of the upturn. Increases in tapeouts are consistent with the company's increasing probe business.

"We see an upturn across our businesses. We believe it's real," Oscilowski said, but he was quick to add that the upturn slope will not be a steep one.

So what end-markets are going to come to the rescue of the industry? Some panelists suggested it would be wireless applications for Internet access. As boring as it sounds, the Internet is driving the chip industry, Chamillard said. While slow rollout of broadband service has hampered high-speed access to the Internet, wireless access may step in to fill the gap, driving chip sales, he added.