Perhaps the most intriguing thing about the semiconductor industry is the cycle that propels the business up and down by astounding amounts over short periods of time. People debate the fine points of each cycle and how they are different – a whole cottage industry thrives on this, in fact – but there must be something about the industry that makes these cycles happen repeatedly.
Like most topics worthy of discussion, this one bears a direct analogy to a phenomenon in baseball. The most influential literature of my college career was easily (and with apologies to my parents who footed that bill) the Bill James Baseball Abstract. This annual work sliced baseball statistics every way imaginable and included entertaining commentary on the game. Attentive readers could also find within those pages sophisticated mathematics, economics, statistics and psychology.
For example, James wondered why certain divisions in baseball seemed to be perpetually mediocre – the AL West at that time – while others routinely produced excellent teams. The theory was that if a collection of teams was perceived as being just so-so, then any of those teams thought that they would have a chance to win the title if they could just make one or two good personnel moves. Basically, the perception that they had a realistic chance to win that year against the competition pushed them into short-term strategies because the potential pay-off – the profits that go with a championship – were huge.
This short-term view generally led to chronic mediocrity…when that veteran free agent ended up not having the same kind of year that he did last year, for example. On the other hand, teams that saw a dominant team above them figured out that they needed long-term development of many players, because the ground to cover to reach the top was too great to be handled with a one-year plan. This longer-term approach resulted in a sequence of very good teams.
So, what's the analogy? In the semiconductor world of 2000-2001, companies typically behaved as if the only outcome that mattered was today's Holy Grail – having your product, process or equipment be part of each of the half-billion or so cell phones that we buy every year. Equipment manufacturers in particular tend to commit to a certain fraction of the markets, because of the nearly prohibitive resources required to handle customers in every possible application area. It's all a big gamble, with fingers crossed that the users of your equipment are the manufacturers who guessed right in this year's business plan.
The result is that the semiconductor back-end equipment industry saw its revenues plummet 80 percent in the space of six months (October 2000 to April 2001). Name another mature multi-billion dollar industry that does that.
Will we see the industry learn the lessons from the cycles and begin taking a longer view, smoothing out the supply, demand, pricing, partnerships, and everything else that goes with it? I wouldn't count on it. The prize for having the right product at the right time is too great for members of the industry not to take their best shot at it every year, no matter what the five-year plan says. Once in a while, there's an aging slugger who has one more year in him or a 19-year-old flame-thrower in triple-A ball who suddenly finds his control, and it makes all the difference in the pennant race. It's too tempting for baseball owners, and it's too tempting for the semiconductor industry.
Thanks for reading,
Jeffrey C. Demmin