Ernie Godshalk, Varian Semiconductor President and COO

Ernie Godshalk has been president and COO of Varian Semiconductor Equipment Associates Inc. (VSEA, Gloucester, Mass.) since February 2001. He previously served as CFO for Varian Semiconductor (1999-2001) and vice president of finance for the semiconductor equipment business of Varian Associates (1998-1999).

Before joining Varian Associates (now Varian Medical Systems), he was managing director of the Elgin Management Group, an investment company; and CFO and secretary of Prodigy Inc.

Godshalk has a bachelor's degree from Yale University and an M.B.A. from Harvard Business School. VSEA designs, manufactures and services semiconductor processing equipment used in IC fabrication. It offers a line of ion implantation platforms.

SI: Varian Semiconductor is a reflection of the rest of the industry today. You've had layoffs, and your fourth-quarter revenues were $70M in 2002 compared with $96M in 2001. How do things stand right now, and what are your expectations for 2003?

Ernie Godshalk (Source: VSEA)

We've put considerable effort into improving our flexibility, shortening our lead times, reducing our inventories, becoming more disciplined in terms of meeting customers' expectations right out of the box, and delivering product on very short notice. We continue having very high customer satisfaction.

SI: You pride yourself on being adaptable?

Godshalk: Indeed! You must adapt to our industry's unpredictable cyclical nature. It isn't a good or a bad thing — just a fact of life. No one is really able to predict in which direction the industry will go. If we think things are going lower, they suddenly turn up, and vice versa. We continue to shorten our cycle and lead times because customers require it. The lead time between when we get an order and when the customer wants it delivered continues to shorten.

SI: Besides declining revenues, how else have you been affected by the current downturn?

Godshalk: Revenue has been the major thing. We continue to generate cash and to attract and retain top people. We have continued investing in new product development. Our dollar spending on R&D continues to climb from year to year, unaffected by the cycles.

SI: Are you implementing some extra cost-cutting measures?

Godshalk: Yes, although to be honest, it hasn't been that much different from when times are good. We're very cautious about not gaining weight. Many like to say they have a lean and mean organization — this is the case with us.

For example, in our facilities where we haven't added any floor space — even during 2000 when things were moving — we have given the best floor space to the people who really count: engineering, manufacturing and marketing. From my office in our world headquarters, I can see a body repair center, and we're at the end of the dead-end street that includes a fish-packing plant, a karate studio, a nail salon and various public warehouses. We gave the big building on the hill to manufacturing and engineering, and we moved marketing to our facility in Newburyport (Mass.), which is well-suited for the operation. The corporate staff, including our chairman and me, moved here. We watch our nickels very carefully, and that shows in our financial results as well as new product development.

SI: In addition to shorter cycle times, what else are your customers asking for?

Godshalk: Our customer base is very capital-intensive. They have a huge investment in bricks and mortar, and equipment. This makes them sensitive to their revenue changes, and cautious about putting more capital in place than is necessary. So when business turns up, if they lack capacity, they need it immediately. They get an order and, if they don't have the capacity, they want us to put it in right now. So their demands for shorter lead times have become quite extraordinary.

SI: How would you describe Varian Semiconductor today?

Godshalk: It's a fine company to work for. We have a dedicated group of people, and top talent in all areas. It's a team of people that really enjoys working together. Of all the companies I've worked for, this is the most apolitical. We don't walk around wringing our hands over how awful things are. We're very focused on, from an operational point of view, the things we've already discussed — increased flexibility and speed. In the new product area, we have a group of very motivated people developing leading-edge technology. We're the single-wafer ion implant company, and we have new technology along those lines that we believe will be revolutionary. We're always looking for ways to improve things.

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

Godshalk: Nothing really dramatic — mostly adjustments and improvements. In the supply chain area, for example, we saw a need to reduce lead times and costs. We felt we needed a significant step-function improvement there. The management team got together, and we decided to resolve it by putting in the company's best possible people, whether already involved in this area or not. We selected five of the top people in the company — high-potential people from manufacturing, quality, engineering, marketing and materials management. We're using this multidisciplinary approach to change things rapidly.

SI: In general terms, how are you strategizing for Varian Semiconductor's future?

Godshalk: The industry is maturing, and we'll see a slower growth rate over the next decade than what we have in the past. The company must concentrate on things that are appropriate to a more mature industry. As time goes on, I believe our customers will become more focused on reliability, productivity and cost of ownership than ever before. Our strategy is unchanged. We are, and expect to remain, the market share leader.

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

Godshalk: Our spotlight on ion implantation has paid off. We're very good at what we do, and all this has made the business easier to manage. We have one manufacturing facility and one engineering facility; we have no divisions in the company. All this helps in terms of focus. We certainly will be looking at new technology. As devices get smaller the implants get shallower, and that means that the implant's energy goes down to form ultrashallow junctions. This is an area where we think there will be tremendous growth, and for which we believe we're well positioned with our pulsed-plasma doping technology. We have no particular plans to expand out of ion implantation. However, if there were an opportunity related to what we do, we'd consider it.

SI: China is viewed as an area of expansion.

Godshalk: Yes. We are in China with a facility and installed base there. However, at the moment China appears to be more of a used than new equipment market. I'm impressed by their government's commitment to expand things. I believe that, when they start growing, we will grow as well.

SI: How do you view the intellectual property question in China?

Godshalk: I don't believe that it would be a showstopper for us. The main IP problem would be for companies where a knock-off is easier. I believe that for the Chinese to develop an ion-implantation business would be difficult — well beyond just IP.

SI: Because your plan primarily appears to be maintaining company stability, the fact that growth is getting more difficult will not greatly affect you.

Godshalk: We're very focused on improving our market share, and I believe we have several opportunities to do so, particularly in the high-current area, and by improving product reliability.

SI: What are you planning to differently than your competitors?

Godshalk: The main differentiator is that we use single-wafer technology. We have a common platform for high-current, medium-current, high-energy plasma doping — all single-wafer tools. This is advantageous, particularly as we go into 300 mm. This is the foundation of our differentiation.

SI: Is growth through acquisition something that you would consider?

Godshalk: We're not spending too much time on that. We don't have a corporate development department looking for things for us to buy. Were we to do an acquisition, it would be strategically driven, based on complementary technology that we think we can better buy than make — a target of opportunity. We are in a strong position to acquire, though. We have $300M in cash, essentially no debt, and Wall Street likes our stock.

SI: What are your thoughts on the many acquisitions and mergers taking place?

Godshalk: My first reaction is to look at the results. There's a rule of thumb that states that 75% of all acquisitions don't work out. Reviewing in my mind the acquisitions that have gone on over the last few years, this appears to be correct. For too many acquisitions the sales price has had to be written off. The devil is in the integration details. There are rewards, but also risks.

SI: You've mentioned the industry's cyclicality. As yet we haven't weathered the latest downturn, and already people are talking about the next one. Is there anything we could do to soften these cycles?

Godshalk: When I first joined the industry, that was one of the first things I asked myself. Over the years, I'm afraid I've become part of the disillusioned majority that believes this seems to be beyond our ability to control. There are too many global factors and effects that become multiplied in their results for anyone to be able to control or predict. We're stuck with cyclicality.

SI: Looking ahead to the next two years, is there something that we, as an industry, ought to be preparing for?

Godshalk: Our own internal forecast for planning for production shows that we will see a recyclical recovery. This is based, to a point, on what the various forecasting services state. I doubt, however, that they know more than we do, and we don't use them for firm planning. Whatever you do, try to retain maximum flexibility.

SI: Based on your planning, what will Varian Semiconductor look like in five years?

Godshalk: We should have 50% of the ion implant market. Our cycle times will be even shorter and our customer satisfaction will continue to lead the industry.

SI: Any advice for the industry?

Godshalk: Use common sense. Ours is a very simple industry to run. We develop a technology product, manufacture it, ship it and support it. It is amazing how, so often, people go off in tangents and forget these basics. Reliability is key. We're a mature industry, yet most processing platforms aren't as reliable or work as well as an automobile.