Executives Offer Little Hope for Imminent Turnaround

"You could have heard a pin drop," said one attendee at Semiconductor International/Electronic News' state-of-the-industry breakfast in July, after Jonathan Cassell, chief editor of Electronic News , asked seven CEO-level executives, "When will this downturn be over, and what is the economic outlook for the rest of 2001?"

The panelists, representing segments of the semiconductor manufacturing, capital equipment supply, design and analyst communities, conceded that they do not see strong drivers for electronics on the immediate horizon that would lead to a rapid turnaround in the semiconductor business. Crippled by extensive layoffs, restructuring and stockholder pressure, companies are scrambling for (but not finding) the next "killer app" that will drive device consumption and industry recovery.

Despite the uncertainty, the panelists did identify strategies for helping companies better manage the downturn and prepare for the eventual upturn. For instance, a slow market affords companies time to improve internal operating procedures, especially manufacturing efficiency, partnerships and e-business development.

"The key is to get prepared during the upturn, because it's too late when the downturn comes," explained Ken Schroeder, CEO of KLA-Tencor (San Jose). "I've been through eight industry cycles, and what you learn is to be prepared - by making your costs variable, tailoring your R&D and doing more outsourcing." Claudio Luddo, CEO of 1st Silicon (Sarawak, Malaysia), added, "We must cut capital expenditures and improve manufacturing effectiveness. What we must not do is cut our engineering and manufacturing resources, because they are very difficult to get back when we need them."

"I see the desire to design and invest our way out of this situation, but I don't see a lot of uptake at the top of organizations," said Ray Bingham, CEO of Cadence Design Systems (San Jose). Joining Schroeder, Luddo and Bingham on the panel were Henry Becker, fab manager of Infineon Technologies' Richmond, Va., facility; Don Mitchell, CEO of FSI International (Chaska, Minn.); Dan Niles, analyst with Lehman Brothers (New York); and Susan Mulcahy, vice president of research at Cahners Electronics and Manufacturing Groups (Newton, Mass.).

"I think the Internet boom exacerbated the downturn," Niles said. "In addition, companies like Lucent, Nortel, Nokia and Ericsson were building huge inventories. It was as if companies had suspended belief and thought that, if they could make more cellphones, for instance, people would buy them." He added that now, since those inventories have been reduced dramatically, the issue has become one of electronics demand.

Though some experts liken the severity of the current downturn to that in 1985, Mulcahy commented, "We are a much larger industry today and we have enormous influence on Wall Street, so the impact is greater than ever before."

In addition to participating in the panel discussion, Mulcahy shared results from a recent Cahners Research survey of 600 top buyers of semiconductors and electronics. She concluded that, despite the very difficult environment today, companies have significant opportunities..

For instance, 72% of buyers select a capital equipment manufacturer in a team environment, primarily comprised of corporate/senior management as well as manufacturing, design and production engineering management. These buyers are using fewer equipment vendors (six, down from 18 five years ago) and expect to purchase less equipment than they have in past years. However, satisfaction levels with current vendors are low, creating opportunities for competitors to win the business. "Customers need help more than ever before. They are outsourcing more and they are frustrated with the level of support they are getting from their vendors," Mulcahy said. The greatest areas of frustration are:

• Delivery/lead times
• Communication
• Customer support
• Payment policies
• Quality
• Getting information
• Delays due to downtime
• Adequate tech support
• Documentation
• Cannot get in touch with vendor

The importance of lead times and delivery schedules is evidenced in one statistic, showing that more than 33% of all equipment and components are arriving late, even during this downturn. However, even higher priorities than meeting delivery schedules are: 1) quality and reliability; 2) technical expertise; 3) price; and 4) customer service and support (Table). Today's process development windows are between seven and 15 months worldwide, but the time needed to solidify a purchase (between identifying the need and ordering) is about four months, when ideally it should take two months, according to vendors.

Insufficient communication is also a primary complaint that customers have about equipment vendors, as well as a big frustration equipment companies have with their customers. "Clearly we could all communicate better," Mulcahy said. "Also, is the right person at your company talking to the right customer, and is that exchange happening at the right level?"

The panelists discussed whether the eventual building of 300 mm fabs could lead to chip oversupply. Luddo emphasized that few companies can enter this arena. "First of all, you need to be able to afford a 300 mm fab, and strategic partnerships are clearly critical here, but you also need the technology, the capital and the high volumes of devices to warrant 300 mm manufacturing." He also noted that the product base has changed, and small design houses require a flexible manufacturing environment. "You are right — the 300 mm fabs are very costly, but at the same time the 300 mm conversion is driven by overall cost savings," Infineon's Becker added.

"The fact is, this business is about being courageous, and we need to work these crises out together," Luddo said. "Too often, we have a crisis, we tend to reduce the sales, marketing and manufacturing forces, and then when there's a recovery, we have long lead times. So we are unable to ride the wave of recovery, and we're always following."