Increasingly complex technological demands, a changing customer base and the spiraling costs of their products are making the industry more vulnerable than in the past to financial swings and pressures to consolidate, according to equipment executives attending the Semicon West conference on Monday.
"As the customers consolidate, it will exacerbate the up and down cycles," said Robert Atkins, CEO of Cymer, which specializes in light sources for the lithography machines used to "draw" circuits onto chips. "There is no doubt lithography is getting more expensive."
The semiconductor equipment industry, gathered in San Francisco for the three-day conference, is largely preoccupied with an age-old technical problem--namely, shrinkage.
dictates that, largely through the use of ever smaller elements, the number of transistors on a single chip doubles about every two years. But chip designers are getting to the point where transistor gates and other chip features are only a few atoms thick, making it a to go any smaller.
Since the late 1990s, lithography equipment has been designed to make chips with circuits smaller than the wavelength of the light source used to draw the circuits, said Ken Schroeder, CEO of KLA-Tencor. That's like trying to paint a 1-inch line with a 4-inch paintbrush, he said.
"The problems are much tougher than people have ever faced before, in terms of yield," Schroeder said. Yield, the percentage of good chips popped out of each wafer of semiconductor material, is an important metric for semiconductor profitability.
Meanwhile, costs for equipment have risen dramatically. Some lithography gear costs $15 million to $17 million, while the bill for completely outfitting wafer fabrication facilities, or fabs, can exceed $2 billion.
Manufacturers can find themselves paying hefty sums. Because of the rapid rate of technological change, many have to migrate to new generations of equipment before amortizing existing facilities, said Richard Hill, CEO of Novellus Systems, which makes deposition equipment for applying metal to silicon wafers.
"For the marginal IC (integrated circuit) producer, the economics might not be compelling," Hill said.
These rising costs couldn't come at a worse time. Semiconductor manufacturers are also contending with price wars and depressed revenue, a combination that industry stalwarts say could split the semiconductor manufacturing market into two groups: companies such as Intel that can afford to build fabs on their own, and companies that instead hire foundries such as Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. to perform their manufacturing for them, according to Don Mitchell, CEO of FSI International.
For gear makers, that is going to mean fewer customers for equipment. Their capital budgets may increase, but the number of selling opportunities will decline. Panic buying will also set in, Atkins predicted. Companies will hold off on purchases until their competitors move, then they will all jump en masse, leading to wild purchasing oscillations.
Despite the challenges, though, the equipment industry will improve, at least for the short term. Revenue will grow approximately 5 percent this year, 24 percent in 2003 and 27 percent in 2004, respectively, according to forecasts reported by Semiconductor Equipment and Materials International, a trade group for the industry. In 2001, revenue dropped 41 percent, from $47.7 billion to $28.1 billion.
"We are never going to see the bubble of 2000 again, but overall we'll definitely see a resumption," said Hill.