Applied Materials sparks shift to larger silicon wafers

Applied Materials, the 800-pound gorilla of equipment makers, today is announcing 21 new pieces of equipment designed to process wafers the size of dinner plates, as opposed to the current salad-plate-size discs.

The move from 8-inch to 12-inch wafers allows up to 2.5 times as many chips to be produced per wafer, dramatically cutting the cost of making new electronics.

Applied is making its announcement at the start of Semicon West, the chip-gear industry's big trade show that kicks off today in San Francisco and moves to San Jose, Calif., later in the week. Other chip-gear makers, such as Novellus Systems and KLA-Tencor, also are expected to announce new gear.

It's not the first time Applied and others have tried to move the industry to the larger wafers. Applied has been working on the technology since the early 1990s and thought the industry was going to bite in the mid-1990s, only to find out no one would pay up.

"The main thing is customers are willing to spend money," Applied chairman Jim Morgan said in an interview. "In the past they were not willing to commit to buy."

Robertson Stephens analyst Sue Billat said this time the move is for real, predicting that about a dozen wafer fabrication plants (fabs) will be in production next year on the larger chips.

"It's here, and it is happening on an accelerated schedule," Billat said.

Money is the driving factor behind the move. Billat said the new tools will cost chipmakers between 30 percent and 40 percent more than the gear needed for 200-millimeter wafers, but they will deliver roughly 2.5 times as many chips.

Simple geometry dictates that there is 2.25 times as much area on a 12-inch disc as on an 8-inch one. But there is an edge effect because chips are square and wafers are round, meaning the larger wafers are even more efficient.

Billat, who has been in the chip industry since the transition from 2-inch to 3-inch wafers, said such moves are always difficult, but the time is right.

"Nobody wants to build the last 200-millimeter (8-inch) fab," Billat said. But at an average price tag of $2.5 billion, not every chip company will be able to afford to build a new plant to produce larger wafers.

That should increase the trend toward using foundries, contract firms such as Taiwan Semiconductor Manufacturing (TSMC) and Taiwan-based UMC Group, which handle the actual chip manufacturing.

"That's very good for Applied Materials," Billat said. "They have a pretty good market share in foundries."

Applied said its tools will cover about three-quarters of the steps needed to make chips using the larger wafers.

Billat said the big hole in the company's lineup is lithography. She expects ASM Lithography to talk at the conference about 12-inch tools that will ship this summer and said rivals Nikon and Canon are likely to outline their plans for 12-inch production as well.

The key question is whether the added capacity will push the industry into oversupply. Salomon Smith Barney analyst Jonathan Joseph shook up the industry this week when he suggested there are already warning signs that excess supply could hit within six to nine months.

Billat said she strongly disagrees with that assessment.

"I don't think we're anywhere near as close as that," she said.

Though the move to larger wafers will eventually lead to a dramatic increase in industry capacity, Billat said the move could actually slow the end of the up-cycle, as it could take twice as long to get the larger wafer plants into production.

Morgan said demand in the industry appears strong and could continue, with increased demand for new types of electronic gear and increased spending from new markets such as China and India. Even Japan, which had dramatically cut its spending on chip production in recent years, is showing signs of life, Morgan said.

"I'd expect the next couple of years to be a pretty good investment cycle," Morgan said.