Hermann Gerlinger, President and CEO, Carl Zeiss Semiconductor Manufacturing Technologies AG

Hermann Gerlinger is president and CEO of Carl Zeiss Semiconductor Manufacturing Technologies (SMT) AG (Oberkochen, Germany). He joined Carl Zeiss as a member of the scientific staff in 1984, and later managed the Optical Process Metrology Laboratory and served in a variety of management posts. Gerlinger has a Ph.D. in physics from the Physics Institute of Würzburg University. Carl Zeiss SMT produces optical equipment for lithography and optical and e-beam equipment for wafer inspection, review and failure analysis, and mask inspection and repair.

SI: Carl Zeiss SMT is an enormously diversified company, and you have done well in 2000-2001 in light of the fab you opened at the end of last year and your plan to go public. What's the company status, and what's in the works right now?

Gerlinger: The new fab is currently in its start-up phase. We began its construction at the end of 2000 when there was still a high level of demand for supplies. We also realized we needed the new plant if we were to create the new products and capacities required to meet the demanding requirements of the new technology production environment. New products are becoming larger, more technologically challenging and more complex, so we needed a superior environment to make these new products.

SMT also experienced the 2001 downturn, although not as severely as the rest of the industry. We had a core business revenue decline of only 10%, unlike the 30% and 40% experienced by other companies. This was primarily due to a timely switch to new products with better ASPs. This meant we were ready to ship new products for 193 and 248 nm in the middle of last year — right on time. We made full use of the opportunity presented to us and put all our resources into producing these new systems. We were successful and are now ahead of the competition — our initiative paid off.

SI: What's the status of your move toward becoming public?

Hermann Gerlinger(Source: Carl Zeiss)

SI: At that point would you go public, or would it still depend on the market?

Gerlinger: Definitely we would look at the state of the market first.

SI: In view of the prospect of going public, what are your long-term strategies?

Gerlinger: Above all, we'd first like to strengthen our core business, which is still in the lithography and inspection areas. We're facing a number of technology challenges that require heavy investment in R&D and process technology to be able to meet 157 nm and EUV product requirements. We've had very successful milestone results in both areas. Clearly, we'd also like to strengthen our new entries such as e-beam technology. A year ago we acquired LEO Electron Microscopy Ltd. (Cambridge, UK), which was a part of Zeiss in a joint venture with Lancet Holding (Rijswijk, Netherlands). There are some important technologies that came with LEO that we will market. Therefore, we already have a number of technologies to grow our core business.

SI: So will you focus on organic or acquisition growth?

Gerlinger: You always look for the potential of acquisitions. However, presently we don't have any acquisition targets.

SI: You mentioned R&D — what percent of your revenue goes into it?

Gerlinger: It's a high percentage, as is normal with high-tech industries. It varies from year to year, of course, depending on revenues. On average, however, it's between 12-15%. We're investing very heavily — the same percentage with respect to revenues — in metrology technology and production processes. So, all told, our R&D expenditure plus capex is between 25-30% of the total revenues that are reinvested into the business. You'll find comparable numbers among all technology leaders in the semiconductor industry.

SI: Is there anything you're planning to change in the company?

Gerlinger: We expect to continue our basic strategy. Clearly, one always pursues additional excellence, speed and flexibility in all processes. Flexibility is a top priority, and we've already negotiated an agreement with the unions and our Works Council which allows us to react to cycles more efficiently than others, without having to lay off a large number of employees. In our case, this is of extreme importance because our workforce is highly educated: In production, we normally only have people at the technician or engineer level. It's difficult and costly to build up know-how, so we must maintain and improve it over time. This is why we seek the highest possible flexibility within our workforce.

SI: What kind of negotiations are you referring to?

Gerlinger: It is a simple model. We've agreed with our people on what we call a "flextime account." They get their regular basic salary, and the overtime they do over a certain period is put into a time account . They're not paid for it, but we accrue payments on the P&L side for up to several hundred hours. When markets are slow, we return this time, so to speak, to the workers. They aren't working, but still get their regular salaries and benefits. It is like insurance, and helps us to manage our industry's cyclicality. This is one of our greatest managerial tasks.

SI: What are your next growth areas and how are you planning for them?

Gerlinger: Technology is our main growth area. For example, in lithography, it's high-NA DUV systems and the new 193 nm systems, which will be followed by 157 nm technology. Overall, in all our business, this involves approaching the 100 nm node now and the 50 nm node over the next five or six years. These are our growth drivers and, clearly, they are product-fueled. We have no other fancy growth models.

SI: Does growth appear to be getting more difficult?

Gerlinger: If you look at projections from technology market forecasters, they state that chip and equipment sales are flattening and are lower than they were 25 years ago. In spite of everything, in our industry, average growth is still a two-digit percentage. If you go by the interpretations of these trends, then you must agree growth is more difficult. However, on the other hand, there are many niche areas where you still have strong growth and potential — the mask area, for example. Costs are exploding. Inspection and repair systems for masks are taking off. If you have the right niche and capabilities you will grow much faster, regardless of trends.

SI: You mentioned metrology. The trend now is toward integrated metrology and, in some cases, the metrology's cost is reaching that of the platforms themselves. What do you think of this?

Gerlinger: True, metrology is getting expensive. Metrology systems require large investments, particularly in R&D, and metrology providers must somehow be able to get a return over time. With integrated metrology you have very high-end systems with extremely complex software and considerable application efforts involved in the integration of these systems into the fab environment.

SI: Is there anything you're planning to do differently from your competitors?

Gerlinger: We have a different business model. We're mostly in the subsystem business. The lion's share of our business is subsystems for our partners. We're focused on this core technology, which means we must cope with less complexity and have a better opportunity to drive innovation.

SI: So what should your customers expect from Zeiss in the next few years?

Gerlinger: Innovation. Leading-edge tools ready for them early in their R&D processes, with high performance. Higher capacity, a better production environment that will give us even greater flexibility, speed and process excellence with which to meet their needs.

SI: Certainly your concentration is not solely upon the products you provide, but also the services that go with them?

Gerlinger: Indeed! Increasing involvement with the customer is a very important point in introducing new technologies. There has to be an ongoing partnership in the design, R&D stage and, later on, in setting up the processes. That means customer support and relations must go well beyond just a mere supplier/customer relationship. This is a clear growth focus for next year.

SI: That can be difficult to accomplish at times if, because of intellectual property concerns, your customers won't tell you why they need certain capabilities.

Gerlinger: It's true that there are certain barriers due to those IP concerns. However, more and more, everybody in the industry is realizing that, if we don't know why certain specs are needed, we may not be able to provide the exact capability needed. We can further improve our services and product offerings if we understand why the customer needs what he needs — we've proven this in several cases. We can also provide better advice if the customer adapts to those instances where we are limited due to physical reasons, to improve his process and product. We must do the same thing with our own suppliers and strategic partners — there is no way around this. You cannot keep up with the industry's rate of development and reduction of time-to-market if you don't do it.

SI: How do you view the tremendous rate of consolidations in the industry?

Gerlinger: It's pointless to make a value judgment as to whether it is good or bad because it is taking place regardless. These days, technology development requires an increasing amount of resources — human and economic. This means that many of the smaller players cannot cope with or survive in this business/technology environment. This requires stronger partners. Regarding the organization size, volume deliveries, etc., since we play on a global stage we have to be present everywhere. So there is a consolidation on the market and supply sides. There will be, clearly, niche innovations, but in general terms size is a requirement to participate. Only the larger companies can service a global industry.

SI: Which industry trends do you believe we should pay more attention to?

Gerlinger: (Laughing) We ask ourselves that every day! Seriously, though, regardless of rumors, Moore's Law is still the prime driver, and we expect this to continue for at least this decade. The speed and power of innovation is increasing. This means that, as OEMs, we'll have the challenge and burden of providing the necessary new technologies in time to meet our customers' needs. Technological challenges are becoming more demanding, and our reaction time has to become shorter.

SI: There are indications that we're finally emerging from what probably is the industry's worst downturn, and there already are prophets of doom predicting the next downturn sometime during 2005. Is there anything we can do to reduce the amplitude of these cycles' sine wave?

Gerlinger: This is one thing we discuss regularly, and ask ourselves how to influence the market to make it more reasonable. I don't think that this question is solvable. It is one of those things, like gravity, that we must live with and cannot change. Industry forecasts are notorious for their lack of reliability. Although we could do with better forecasting systems, I don't believe the industry's volatility permits it.

SI: Aside from these cycles, what do you view as some of the industry's endemic problems, and what would you change?

Gerlinger: As an industry, we perform very well; much better than other sectors. We do very well in the roadmap's continuous drive and development. This has resulted in many useful tools while cooperating with organizations such as International SEMATECH. As new technology requires long-term R&D work far ahead of the products' introduction to the market, it would make sense for customers to contribute financially, more than they do now, to help fund the development efforts that are needed. In return we provide the industry with technology being ready and available when it is required, and facilitate significant advantages in terms of cost-effective production of chips with each new product generation.

SI: What will Carl Zeiss SMT look like in five years?

Gerlinger: The company will experience strong growth between now and then. We've already demonstrated this over the last seven years by establishing a track record of 45% yearly growth. In five years I believe we certainly will have hit the E1-B mark. We certainly will face the next technology challenges, which will be at the edge of physics. For example, we will be able to supply the required tools for the 70 nm node to the industry in the near future. Right now, we've obtained outstanding results with next-generation lithography technology, demonstrating the potential of EUVL.

Our first prototype is able to exhibit resolutions of <50 nm. And this is just the beginning! Regarding our portfolio, it is not only the lithography but also the e-beam technology necessary for failure analysis and all the inspection tools needed that we will come up with for each node.

I expect we'll have a boom within the next two years, since we're already seeing shortages in some technology requirements. The new designs, such as system-on-a-chip, are driving this. The new technology is already in the pipeline, being prepared for launching.