Gear business 'pause' to buy time for 300mm

Electronic News, Feb 23, 1998 by Chad Fasca

New York--Tracing with a laser pointer a dip in Applied Materials stock, which he called "a market hesitation," Applied Materials president James C. Morgan explained, in the Baroque Room of New York's Plaza Hotel, that an investment of $10 million in Applied stock in December 1987 would equal a $500 million stake in December 1997. The message: It pays to watch the semiconductor equipment and materials business.

Mr. Morgan's state of the equipment market address served as an apropos linchpin to the 2nd annual SEMI Invest '98 conference, Semiconductor Equipment and Materials International (SEMI)'s annual chance for equipment and materials companies to descend upon New York and woo Wall Street. The luncheon address delivered by Mr. Morgan kicked off three days of closed meetings and workshops last week as companies like Applied, LAM, KLA-Tencor, MEMC, ATMI, Veeco, Semitool and Nanometrics vied for investment attention.

Calling the equipment and materials business "critical partners in technology deployment," Mr. Morgan compared the results of merchant semiconductor sales from 1978 to 1997 with a CAGR of 16 percent to that of the semiconductor equipment and materials business, which has grown at a CAGR of 14 percent from 1985 to 1997. He expects the semiconductor business to reach $50 billion by 2000 and the equipment business to reach $30 billion.

In talking about market prospects in Asia, Mr. Morgan labeled the events there as an overdue financial correction. He saw no long-term impact, rather "a short period of uncertainty," involving "localized cutbacks" and possibly opening up a shift in the landscape of the industry.

A panel of investment advisors led by moderator Willem Maris, ASM lithography (ASML) CEO, also dissected the semiconductor equipment and materials market. Panelists Jonathan Joseph, principal, NationsBanc Montgomery Securities; Jay Deahna, Morgan Stanley Dean Witter semiconductor analyst; Gunnar Miller, Paine Webber senior VP; Ed White, Jr., managing director, Lehman Brothers, and Elliot Rogers Jr., managing director, Deutsche Morgan Grenfell, agreed that the market is experiencing its "classic cyclical behavior," according to Mr. Deahna who said he saw it bottom in December with the latest book-to-bill ratios. He expected January figures to be slightly up, reversing a downward trend that began in June.

A real delay in 300 MM "The delay in 300mm is real," said Mr. Deanha of Morgan Stanley Dean Witter. Other panelists also agreed that 300mm is a long way from reaching maturity. Recalling a conversation with an Intel executive, Mr. Deahna said that 200mm will remain the dominant production technology down to 0.15 micron, roughly until 2002--a far cry from earlier expectations of 1999.

He explained that advances in shrinking linewidths were actually beating Moore's Law as new equipment surfaces every two years instead of every three. It was also noted that fabs would need separate production lines for its 200mm and 300mm operations. With hurdles like new automation for the fabs and other hurdles still looming, Mr. Maris added, "It will take time."

Mr. Rogers of Deutsche Morgan Grenfell added that this prolonged migration to 300mm will benefit equipment companies in the development, planning and cost of making the move to larger wafers a reality. He was seconded by Mr. White of Lehman Brothers.

"Could equipment companies pay for this, was the question," said Mr. White. "Now they have time."

Shifting to the Asian financial crisis, the panelists expected Korean capital expenditures to drop considerably. Mr. Miller of PaineWebber pegged this drop to be 73 percent. He said that the Korean chaebols are wrestling between saving face, i.e. leading in DRAMs at all costs, and facing up to the shortcomings of its win-at-whatever-costs management style. He expected this reckoning would take between nine months to a year for companies "to get their house in order."

Though relatively untouched by Asian flu, the Taiwanese are also expected to tighten their belts over the coming year.

Barely two months old, 1998 is a write-off. Concluding the panel discussion, the investment gurus basically dismissed 1998, concurring that austere measures and deep cuts this year would improve the immediate visibility of 1999 and 2000 and benefit companies as supply and demand come into better balance. The panelists forecast capital expenditures for 1998 to be down between 5 percent and 10 percent.