Downsized industry considers staying that way

By Paula Doe
WaferNews Contributing Editor

Suppliers of semiconductor equipment trimmed at least 20,000 workers worldwide and cut out at least $1 billion a year in overhead expenses as they aggressively sliced costs in 2001 to survive the industry’s worst downturn. And this time many are thinking seriously about not building back up so much again in the next upturn, hoping leaner management and more reliance on outsourcing can make it easier to survive these cycles.

“You can manage by thinking about the next upturn during the downturn, or by thinking about the next downturn during the upturn, and the results will be very different,” explains Lam VP of Business and Finance Terry Plette. “We’re going to be thinking in the next upturn about the next downturn, and be very cautious about adding permanent resources. In the last upturn we consciously put as much variability as we could into manufacturing, making 30% of our manufacturing employees temporary. This time we’re actively looking to outsource as many things as it makes sense to for the next upturn.”

“As to growing the infrastructure again, I don’t think we will,” concurs Tegal Corporate Controller Kathy Petrini. “We’re going to have to stay lean and mean to contain costs.” She also notes that after the experience of the last downturn, “We reacted more quickly this time, were more nimble.”

Indeed, the sector cut back drastically and fast to remain viable as sales fell. Tool companies tracked by WaferNews had cut back spending on selling, general, and administrative expenses by a total of some $223 million by 3Q01 compared to the same period a year before, or some 16.5%, and expected further reductions in 4Q, for which results are not yet available. That suggests the toolmakers have reduced overhead expenses by roughly $1 billion a year.

WaferNews looked at SG&A as representative of overhead costs within a company’s control, not so determined by volume and overhead absorption as manufacturing costs, and not muddled by R&D and one-time write offs as are total operating costs. We track companies that get more than 50% of revenues from semiconductor equipment, and have quarterly revenues of $3 million or more.

A number of companies managed to make impressive reductions to get expenses down to industry benchmark levels, even with significantly reduced sales.

Speedfam-IPEC cut SG&A spending by 51%, PRI Automation by 42%, to bring these overhead expenses down to under 20% of sales. Micro Component Technology, Varian Semiconductor Equipment Assoc., Tegal, and ASM International all also cut SG&A expenses by more than 30%. Other companies among the low-overhead leaders who still managed to make 20 to 30% reductions were Cymer, Applied Materials, Novellus, and Rudolph.

Biggest cost savings naturally came from layoffs. Suppliers of semiconductor equipment announced work force reductions of at least 20,000 worldwide during the year, according to a running count of press releases and media reports kept by semiconductor Equipment and Materials International (SEMI), plus additional data collected by WaferNews from conference calls and interviews. Most companies have apparently trimmed their work forces by about 10 to 20%. But Mattson has announced reductions that trim its headcount at merger by 53%, Speedfam-IPEC has cut staff by 45%, VSEA has reduced fulltime equivalent headcount by 44%, and Tegal by 30%.

On the other hand, Novellus figures it will reduce expenses by $50 million a quarter by 4Q01 from 1Q01, or some $200 million a year, without a layoff, though it may consider them in 2002. Risto Puhakka, VLSI Research’s VP of operations, credits Novellus for recognizing the need to cut costs early on and holding on to its employees. “You want to maintain the labor force and cut everywhere else,” he notes. “Don’t show up at trade shows in order to save money.”

Industry salaries were down sharply too, with pay cuts for executives and companywide shutdowns and down days common. One company has put essentially everyone on a four-day workweek, for four day’s pay, effectively cutting all salaries by 20%. All employees at Agilent took 10% pay cuts. Novellus employees took up to 5% cuts, executives 25%. Executives at Advanced Energy, FSI, and Lam took 10% pay cuts.

Forced to cut costs, companies find more efficient ways of doing things

Besides these basic savings on labor costs, companies have come up with a host of other creative ways to save money as well, and which will keep saving money in the next upturn as well. Tegal, which cut SG&A 30%, says it got major savings from consolidating its European offices, dissolving its separate entities in Europe and making them into US subsidiaries, and closing some offices and having people work out of their homes instead. Though arduous and expensive, the consolidation has resulted in major cost savings.

ASM International, which also cut SG&A by 30%, found it could reduce costs by rethinking internal procedures to do things more efficiently, and reduce the time spent shuffling paper around. Instead of filing time sheets with human resources every week, for example, it has started reporting the exceptions only, filing a sheet only when someone is not there. It also cut back internal distribution lists and found very few people noticed or complained. Next the company plans to implement a new enterprise resource planning system – and change its procedures to match the software.

“We plan direct implementation without any customization,” says ASM COO Daniel Queyssac, president of ASM America. “The system will direct us how to organize work and force us to go to the best practices.”

He also notes that ASM had to cut back employment less this time since the company learned in the last downturn to do more outsourcing, now doing only the 30% of final assembly in-house.

Lam Research led the sector with the lowest SG&A as percent of sales in 3Q, though of course the ratio got a boost by the way the company’s sales held up better than most in the period. Still, Theodore O’Neill, senior analyst and managing director at C.E. Unterberg, Towbin, cites Lam, along with LTX, as doing a “spectacular job of cutting costs.” “Looking back at last downturn, [LTX and Lam] have significantly improved their operating margins,” O’Neill said.

Lam’s Plette explains that it’s a lot of little things that add up to keeping costs down in line with revenues. The company consciously built as much variability into its costs as possible after the last downturn, with a variable compensation (profit sharing) program and a manufacturing workforce with 30% temporaries, and leasing its buildings to expand and contract out of them through the cycles.

Besides the usual layoffs, shutdown days, reductions in travel and the like, the company figures it has saved an additional 0.5 to 1% by asking people to volunteer for pay cuts, or to take stock options in lieu of pay. The company is not as liberally staffed as some of its competitors in finance, human resources or marketing, and during the downturn it has implemented a program to train senior managers in finance and human resources so they can do more on their own.


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