Critical Subsystem Market Trends

You only have to look at the number of component and subsystem vendors exhibiting at trade shows or advertising in magazines to realize that a substantial industry exists in support of equipment manufacturers and their customers. These vendors provide all kinds of "parts" and services, ranging from simple passive components right up to the design and manufacture of complex integrated subsystems.

At the lower end of this range we find largely low value-added products that are generic to many industries and at the top end we have an important, fast growing and high value-added industry. A majority of these high value-added products are what we would describe as being critical subsystems (Table) — subsystems that actively affect the processing of substrates. The market for this group of products alone was valued at $3.4B in 2002. While this represents a significant market, it is still at only half the peak of $7.1B seen in 2000.

As one would expect, the demand for these products is closely linked to the demand for equipment used in the manufacture of semiconductors, flat-panel displays and thin-film heads. The shape of the curve in Figure 1, which represents the demand for critical subsystems, is similar to that experienced by equipment manufacturers. Even the compound annual growth rate (CAGR) of 9.9% for the 2002-2007 forecast period is comparable to that for equipment. However, the component and subsystem industry is driven by more than just the demand for tools, so it is interesting to take a look at the business and technological trends that are behind the numbers.

Business trends

If there's one positive thing to have emerged from this extended downturn, it's been the refocusing on key business issues: keeping costs down and product differentiation. Evidence of this activity has been seen throughout the supply chain as companies increase their use of outsourcing and continue to develop new products and service offerings.

1. Demand trends for critical subsystems have been similar to those experienced by equipment manufacturers.

There's been a lot of talk about outsourcing recently as a means of reducing risk by lowering fixed costs and, if possible, adding value to the product. Certainly, this trend is providing opportunities for additional work further down the supply chain, but it's important to remember that the main driver is cost reduction, and that the real value of the product is retained by the company holding the intellectual property (IP). This is an important distinction to make because outsourcing where the equipment manufacturer owns most of the IP is a relatively low value-add proposition for the subcontractor because manufacturing and assembly are offered to the lowest bidder. If, however, the IP resides with the subsystem vendor, then the equipment manufacturer has little choice but to pay for that added value.

It goes without saying that developing the right products and protecting the IP is the way forward, but this is easier said than done because the technology for many types of products is maturing and intense competition is resulting in constant price pressure. This doesn't mean to say that products are becoming commodities, but rather that OEMs are very good at holding onto IP and work very hard to ensure they don't have to rely on sole-source suppliers. Subsystem suppliers understand this and continue to impress by turning out new products and service offerings in a constant battle to stay one step ahead.

One of the areas where subsystem suppliers have been successful in adding real value is through the development of integrated subsystems. Integrated subsystems in this context are subsystems that are designed for a particular tool or process and typically require the combination of one or more critical subsystems with other components. This is done in such a way as to create a product that has superior performance over and above parts that are simply joined together. The key is for the subsystem vendor to add IP and not just provide the added value of assembly, which any subcontractor could do. To operate in this market, companies need to have the ability to integrate subsystems that are based on a mixture of technologies. Most notably, we have seen Advanced Energy, MKS Instruments, BOC Edwards and others acquiring these skills and positioning themselves to take advantage of this growing opportunity.

Figure 2 puts this development into perspective. To add value, it is necessary to get closer to the process. The equipment manufacturers themselves are moving up the curve by focusing on process development and process integration, which in turn means they are allowing more opportunities for their suppliers in the area of integrated subsystems.

2. To add value, it is necessary to get closer to the process.

These recent business trends are resulting in the polarization of the industry. We have seen the emergence of a few large companies with the resources to provide the equipment manufacturers with comprehensive design and engineering services, and which are also able to offer global support. In effect, these companies are able to enter the integrated subsystem markets that were previously outside their reach. At the same time, smaller vendors are able to be successful by pushing the boundaries of their traditional markets through the provision of specialized products or localized services.

The ongoing transition to new technologies, new materials and larger wafer sizes have made for a challenging environment for subsystem suppliers and their customers. Exactly what these changes mean for the subsystem industry will depend on how the solutions play out, but we can be sure that, as processing becomes more complex and the cost of misprocessing increases, the specifications for components and subsystems will also increase.

There are two areas that are currently creating a lot of interest: instrumentation, and advanced process control (APC). The relatively strong demand for instrumentation in contrast to the depressed state of the rest of the industry is a reflection of how difficult it is to keep productivity high. In fact, it's this same issue that is making APC the hot topic right now. Subsystem vendors are in a strong position to capitalize on providing APC solutions because most of the mechanisms for measurement and control are embedded within their products.

Understanding how subsystems work and the effect they have on the process is one of the subsystem suppliers' core competencies. But finding solutions requires the cooperation of competitors, equipment manufacturers and the end users. Managing these relationships is going to be difficult enough, but the most pressing need today is for an agreement on a common interface standard. Regardless of these obstacles, APC represents a major opportunity for subsystem vendors.

Subsystem suppliers have made remarkable progress in terms of product development and repositioning of their businesses. This progress is all part of their continued evolution from being just suppliers of parts to providers of integrated solutions.

The key message for subsystem suppliers is that, as equipment manufacturers focus more on providing their customers with technology and productivity for future generations of ICs, they will increasingly rely upon their subsystem suppliers to provide the core functionality of their systems.