INDUSTRY NEWS

Chip industry is still bemoaning its stroll down memory lane

It's a good bet no one will be humming "Thanks for the Memories" during the slow periods at Semicon West next month. Most experts believe, though, that the lingering glut of memory devices and the Asian financial crisis will have the semiconductor industry moanin' the blues through at least the end of this year.

Those twinned disasters were a constant refrain in the spate of downbeat quarterly reports and layoff announcements issued recently by chipmakers and equipment suppliers in the run-up to the year's largest trade show. Consider these tales of woe:

• Fujitsu and Hitachi announced plans to slash DRAM production at fabs in England and Germany, respectively.

• National Semiconductor plans to reduce its employee rolls by approximately 1400, or about 10% of its worldwide workforce, through a combination of layoffs and attrition.

• ADE, a Massachusetts-based manufacturer of metrology and wafer inspection systems, will reduce the size of its 350-member workforce by 12%. "We are taking this aggressive action to help move costs in line with lower near-term product demand," says Robert Abbe, president and CEO.

• Even though the chipmaker continued to install process tools at the site, Matsushita has considered indefinitely postponing the opening of its new fab in Puyallup, WA. The manufacturer blamed a 33% decline in DRAM prices during the fourth quarter of 1997.

• CMP equipment supplier Integrated Process Equipment Corp. (IPEC) reported a net loss of $2.5 million for the fiscal quarter ended March 31, compared with net income of $2.1 million for the same period in 1997. Industry watchers see CMP as one of the hottest equipment segments. The vendor says that a "significant number" of its tool shipments were postponed in the quarter. Furthermore, "results for the fourth [fiscal] quarter of 1998 are not expected to improve significantly over those of the third quarter. As long as the current conditions in Asia continue, we expect revenues to be negatively impacted, and must therefore closely monitor our operations," says John Hodgson, CFO.

• Tegal reported a 36.8% drop in revenues during the first three months of 1998 compared with the same period in 1997. The supplier of dry-etch systems and photoresist strippers saw income drop from $13.3 million in the first three months of 1997 to $8.4 million during the same calendar quarter this year. Michael Parodi, president and CEO, blamed "ongoing softness in demand...particularly from our Korean and Japanese customers."

• A Korean semiconductor manufacturer asked CFM Technologies to reschedule its shipment of two wet processing systems worth a total of $4.9 million. Says CEO Roger Carolin: "The near-term environment is likely to be difficult given the problems in Asia and the overcapacity issues facing the industry."

All of this news doesn't bode well for the atmosphere on the floor of San Francisco's Moscone Convention Center and the San Jose Convention Center, the twin sites of the annual Semicon West extravaganza. Wafer process tool and materials suppliers will showcase their wares July 13—15 in San Francisco, while test and assembly suppliers will set up shop July 15—17 in San Jose.

Despite the bad news, some 1500 companies will exhibit at more than 4200 booths in the two locations. Both figures are comparable with last year's show numbers, says Mike Droeger of SEMI's public relations department.

Droeger reports no cancellations as of the beginning of May. "Some companies perhaps have shaved their booth size a bit...but there are people right behind them to take up the slack. We had a call from someone today to get booth space at West. I told them, 'You're about a year behind schedule.' " He said that there are enough companies on the waiting list to replace any dropouts.

But James McKibben, Tegal's vice president of sales, says the high numbers reflect "the way the show's lead time is set up. Most of the companies had to commit to booth space and exhibit design long before the Asian meltdown, and, as a result, you're probably going to see a show that is as large or larger than last year's, when boom times were in effect. That's no indication of the relative health of the industry, however. It's simply a function of the way SEMI runs as an organization."

McKibben foresees a completely different situation for Semicon West 99 if the industry's fortunes don't improve soon. "If you don't see a turnaround... I think you'll see a slightly different show next year with scaled-back participation."

The portents certainly are bad enough that the Tegal executive's prediction could come true. Dick Greene, principal analyst with SEMI, notes that three-month average equipment shipments decreased in March 1998 to $1.3 billion, while bookings decreased during the month to $1.1 billion. The bookings were 12% below the February 1998 level, and 8% lower than the March 1997 level. A March buyers survey by the trade group showed that orders for new tools will decline by more than 12% in 1998 compared with the previous year. Meanwhile, the book-to-bill ratio for March 1998 was 0.80.

For the foreseeable future, no equipment segments appear to be immune. "Our numbers tend to say that just about everything is on roughly the same downslope," Greene says, adding that monthly bookings have been down between 10 and 15% over last year. "That's because purchasing agents—or general managers—are in a state of shock." The analyst theorizes that semiconductor manufacturers "are in a pause period" as they ponder their next move.

Greene is uncertain about what tool market segments might be among the first to break out of the slump. "I don't think we'll know for a couple of months whether selected areas are going to emerge. I would expect lithography to be one of the first to recoup, because people will start shrinks if they can afford to do so." That might also be true of the metal etch, metal deposition, CMP, "and certain segments of inspection and measurement," he adds. "But right now I'd have to say we can't pick one out from the other. We're just sitting there waiting for a few things to shake out."

"It's hard to see how demand is going to catch supply in the current environment," asserts Frederick Wolf, a semiconductor capital equipment analyst with Boston-based Adams, Harkness & Hill. "Our feeling here is that people have too optimistic projections about how soon the industry is going to bounce back." In case anyone doubts the severity of Wolf's viewpoint, they merely need to glance at the title of a March 18 review of the capital equipment industry that he cowrote. It's called Take Off Your Rose-Colored Glasses.

Needless to say, Wolf is bearish. Noting "downward earnings guidance by Intel and Motorola," he foresees no recovery for at least the next 18 months, and he cites three reasons: "Technology buys by semiconductor manufacturers are not likely to accelerate. Capacity buys, particularly for new DRAM fabs, which are needed to stimulate an upturn in equipment orders, are not likely until late 1999, and the outlook for the foundry business, particularly Taiwan, which has been strong in recent years, is becoming increasingly uncertain."

At the time he made those comments in early May, Wolf was anticipating Applied Materials' quarterly report. "A big event will be...when Applied reports its earnings," he says, warning of the dire psychological effect for the industry "if they throw in the towel on the end of this year."

Richard Aurelio, the executive vice president of Varian Associates in Palo Alto, CA, agrees with Wolf's assessment regarding capacity-related tool purchases. However, he believes the analyst is too pessimistic about the timing of the equipment industry's recovery.

Varian's semiconductor equipment business has taken the same hits as most other tool providers. "The downturn has had a huge effect," Aurelio admits. "We have a lot of customers on the memory side...and there has not been as much business there in 1998. As you know, [the downturn] started in Korea, and while there has been some business in Korea, it's been down dramatically from last year. We had all hoped that Japan would kick in after the start of the fiscal year. That has not happened with any intensity. We expect our Japanese business to be down from last year by maybe 10%."

All of that bad news "eventually adds up to good news," the executive asserts. "That's what the upside is made of." He sees capacity coming on-line. "What customers are doing—correctly, of course—is shrinking their products and getting in more die per wafer.

"There are two ways to double your die per wafer," Aurelio continues. "You either make the wafer size bigger or the die smaller, and the easier of the two is to make the die smaller." The Varian executive points out that the industry is "much closer" to the die shrink than it is to making the vaunted transition to 300-mm wafer sizes. "Going to 0.18 µm is a less risky investment for companies, and we've got a good bead on 0.13 µm. I think that's the route it's going to take."

Aurelio thinks his company is well positioned to take advantage of the coming upturn. Varian sold its thin-films business to Novellus last year and used the money during the downturn to buy part of Genus and expand its plant in Gloucester, MA. The acquisition filled out its line of ion implantation equipment, giving it a high-energy tool and enabling the company to tend to its knitting. Thus, the expected shrink can benefit Varian, Aurelio says. "With a couple of strategic buys—and our equipment is certainly one of those—you can get a lot of output off a lot of the tools that are in existence."

Deposition tool supplier Novellus, it should be noted, is one of the few suggested front-end equipment stocks Wolf recommends as a performer to watch. Others are Applied Materials, ASML, and KLA-Tencor. The remaining stocks are those of back-end suppliers such as Teradyne.

Aurelio says that Varian has approximately doubled its R&D spending on its 300-mm tool development. "Despite the down market, we're trying to focus for the upside, which we're hoping for in the first quarter of next year. And based on discussions we had with customers, that appears to be the case."

For Dale Ann Springer, the upside is now. She is vp of sales and marketing for YieldUP International of Mountain View, CA, which makes Omega 1000 and 2000 wafer rinser/dryers. The supplier's revenues grew 180% to $2.6 million in the first quarter of 1998. During the same period in 1997 the company took in $913,000.

"It's to our advantage that the marketplace is slow," says Springer in an understandably upbeat tone. "When you have new technology and the marketplace is hot, it's hard to find people who have the time to listen to you. The other thing that's going on is that when companies don't have big capital budgets they want to get as much yield on their existing lines as possible. That's exactly why we're doing so well."

Told of YieldUP's success and Aurelio's remarks on the industry's move to die shrinks, Greene quietly replied with a comment that seems to sum up the current pre—Semicon West mood: "This is the period of introducing all kinds of efficiencies."

Illustration by James Schlesinger

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