Don't Fix the Guillotine
Aaron Hand, Managing Editor -- Semiconductor International, 6/1/2003
The semiconductor manufacturing industry is killing itself. For the past couple years, there's been unrelenting talk about the economic depression, the cyclical downturn of the industry and a canoe-shaped recovery that just never seems to get itself above water. The latest predictions call for a recovery beginning just about...now. And the same way we keep tuning in to tomorrow's weather forecast, we want to believe. We come back from the analyst summits with relief and a grin, declaring, "The recovery will begin tomorrow."
Meanwhile, when is the next downcycle expected? Will the industry manage a year of good sales before the bottom falls out again? Is this really about the normal ebb and flow of overcapacity and diminished supply in the semiconductor industry? Perhaps this is a sign that we cannot continue to sell semiconductor chips for the price of potato chips while socking billions of dollars into ever-mounting technical challenges.
A reader recently sent us an open letter, addressing the new CEOs of two top equipment suppliers, Applied Materials and Tokyo Electron. It's a plea for Michael Splinter and Kiyoshi (Ken) Sato to take the lead and "stop the madness"; to stop discounting prices to such outrageous levels that the companies can't afford to keep their businesses running.
In his letter, Kambiz Farnaam recounts the joke about a lawyer, a doctor and an engineer set for execution by guillotine. When the guillotine does not operate correctly, the blade stopping half way down its path, the lawyer and doctor are set free. Coming to his turn, however, the engineer first insists on fixing the problem with the guillotine, thereby getting himself killed.
Farnaam, at the time a process engineer just out of college, was offended when he heard this joke told to him by a salesperson. But today he thinks perhaps that salesperson was right — engineers are a pretty stupid lot. "After all, engineers have worked hard, created miracles, and now the majority of them in Silicon Valley are out of a job," he says.
Ah, but as long as the industry can keep up with Moore's Law, all will be right with the world. Throughout the supply chain, companies are devoting their remaining resources to addressing the challenges of next-generation lithography, low-k and high-k dielectrics, and 300 mm wafers, just to name a few. "There are no showstoppers," they continue to decry, engineers feverishly toiling for workable solutions while upper management prepares for the next round of layoffs. No showstoppers, as long as you don't consider going belly up a showstopper.
The chip manufacturers, selling their devices at a small fraction of the cost of yesteryear, continue to put pressure on their equipment and material suppliers to hold prices down. Meanwhile, those suppliers are expected to continue funding forward-looking projects, and they're becoming more vocal in their concerns about money supply. Interviewed for this month's cover story on 300 mm wafer development (see "300 mm Progress Report "), Wilbert van den Hoek, CTO and executive vice president of integration and advanced development at Novellus Systems, voiced an increasingly common gripe: "What we complain about is that the 300 mm technology was developed on the backs of the equipment industry. We had to bring tools to market early on and then there was another five years before there was any revenue. ...It cost us billions of dollars and we are still fairly far away from recouping that money."
The answer, according to Farnaam's urgings, is for suppliers to double their prices and to stop offering discounts. Easier said than done, of course, but he may be on to something. "I have no doubt that other equipment manufacturers and the semiconductor companies will follow your leadership if there is any sense left in their top management. They will increase their prices, and so will the electronics manufacturers," he says. "Let's all have a collective understanding that playing the lower-price game is not healthy to anyone, including to the ultimate customer."
