Balancing risk and opportunity in the pre-owned equipment market
11/01/2004
Equipment Buying in Japan Part Two: OEMs
Bolstered by a booming digital consumer products market, the Japanese semiconductor industry has reclaimed a dominant position [1], with manufacturers committing substantial R&D investments to 65nm and 45nm production capabilities. But this isn't the story for all Japanese chipmakers. While many new fabs forge ahead on "bleeding-edge" technologies, Japanese manufacturers adding capacity at larger design rules are fueling one of the industry's most robust sectors — sales of pre-owned tools and equipment.
Japanese chipmakers that are operating at the larger design rules — defined currently as those running 0.18µm processes or larger — account for ~$350 million a year in sales in this increasingly active market segment. Roughly half of the pre-owned tools being sold are purchased by chipmakers adding incremental capacity, with the other half going to fabs that are progressing toward smaller-geometry processes. In general, these companies don't want to pay for unnecessary performance and features. They seek tools capable of completing the particular job at hand, at prices that fit within their operating budgets.
Manufacturing equipment typically has a lifespan of 7–10 years, with leading-edge manufacturers trading up as needed to keep pace with Moore's law. Considering this, larger design-rule manufacturers can procure previously owned high-performance equipment at affordable price points to increase yields and, ultimately, profits. For semiconductor equipment suppliers, this trend presents a way to provide a product with a higher return on investment (ROI) to end users as they purge their fabs of surplus earlier-generation tools. Once regarded with skepticism, the exchange of previously owned tools and equipment has clearly gained acceptance in the Japanese semiconductor marketplace, and increasing competitive pressures for manufacturers to be low-cost producers have no doubt been a factor.
Unlike many other markets for pre-owned products, the semiconductor tool market — given the technical complexity of the end products and the high capital expenditures involved — can be fraught with risks that are damaging to both buyers and sellers. Much of the risk comes from "as is/where is" equipment — in other words, equipment that is sold without any refurbishment or testing to ensure proper function and performance. In addition to the obvious risks surrounding the ultimate cost to get the tool operating at required specifications, there are risks associated with delivery, installation, warranty, service, and applications support, not to mention the management of multiple suppliers to mitigate those risks. On the sourcing side, industry studies show that as much as 20% of all installed manufacturing equipment is underused, idle, or misplaced at any given time [2]. Many of these tools will pass through multiple parties before finding homes with an end user. With this kind of potential lineage for a given tool, the buyer needs to be aware. While many brokers and buyers have found success trading as is/where is equipment, chipmakers are becoming increasingly wary of these risks and the impact they can have on ROI and factory output.
OEM backing creates comfort zone
Pre-owned equipment buyers have a number of options when they need to increase capacity or implement new design rules quickly and cost-effectively. Aside from brokers, there are organizations such as SEC/N (Surplus Equipment Consortium/Network) and the Japan Electronics and Information Technology Industries Association (JEITA) that operate an online information source for as-is surplus semiconductor-manufacturing systems and equipment. Buyers can learn about equipment availability from this English-language web site (http://www..jeita.or.jp/), but in most cases, buyers themselves need to arrange all logistics, including system audit, refurbishment, system upgrades, shipment, installation, warranty, and service and applications support.
Largely driven by the various risk factors, the market is maturing to become more structured, with some original equipment manufacturers (OEM) playing a greater role in providing comprehensive solutions. Increasingly, equipment suppliers with the most success in meeting the needs of larger design-rule manufacturers are those OEMs delivering full life-cycle management with their equipment, and working much more closely with end users to understand their manufacturing needs and cycles. With these insights, OEMs can provide a fully refurbished and tested product to meet unique manufacturing requirements in a timely manner, as well as a channel for the redeployment of their surplus equipment. OEMs can further minimize risk by delivering value-added services such as performance guarantees, upgrades, customized service plans, and warranty programs (Fig. 1).
 Figure 1. Potential tool value by vendor type. |
By involving the OEM at the beginning of the procurement process, chipmakers can decrease the likelihood of costly, unwelcome surprises with delivery, performance, and support. All too often, the enticing price tags on as is/where is products are soon offset by the added costs that are incurred following system audit, packing, shipment, refurbishment, licensing, installation, and warranty. For approximately the same price, an OEM can provide all of this without the associated risks mentioned above. By far the largest risk is the impact to factory output if a tool arrives late, does not meet specifications, or in some cases does not arrive at all due to the insolvency of a financially strapped broker/supplier. This dynamic is driving a larger number of OEMs to more formally enter the pre-owned market, most often at the urging of their customer base.
Unique business challenges and opportunities
Tools that were "best in class" at the time of their introduction — from etch tools to wafer inspection systems — make up the majority of the pre-owned equipment market in Japan and stand up best to the test of time. Their fair market value is determined in large part by availability. The cyclical nature of the industry affects this market segment in much the same way as it does the leading-edge segment, but with some unique business challenges. When there is an upturn — as the industry is experiencing now — the demand for secondary equipment often outstrips the supply as semiconductor manufacturers are in ramp-up mode. Unlike the supply line for new equipment, the one for used equipment is constrained by what was already manufactured two or more years ago. Equipment suppliers can't dial up manufacturing to meet demand; they must source from the available supply, and pricing is dictated by the supply-side equation. In the downturn, supply increases significantly, and a balance must be struck while acquiring inventory in preparation for the next cycle.
 Figure 2. KLA-Tencor used tool revenue. |
To thrive through the market's ups and downs, OEMs and other market participants must have a comprehensive business strategy that maps to the business cycles of the end user. In doing so, an OEM can reap significant rewards; KLA-Tencor, for example, has seen its revenue from pre-owned equipment more than double from 2003 to 2004 (Fig. 2). In a downturn, asset management for surplus inventory is emphasized, which requires partnering with the customer to provide a channel for its inventory through trade-in programs, remarketing agreements, or outright purchase of surplus assets. In an upturn, supply becomes limited, and great value is provided by those with the most comprehensive supply strategy, as well as the ability to guarantee performance and fully support the product. Here again, OEMs can provide significant value by having unique sources of supply through their trade-in programs, and also from their own internal demo and training tool inventories, which are often substantial.
Trade-in programs create a win-win situation, providing the fab with budget-friendly options when procuring a next-generation toolset or credit toward spare parts and services. For the OEM, such programs generate more supply to sell into the pre-owned market segment. With surplus buy-backs, the fab can free up cleanroom space for its next equipment set by moving surplus tools, while the supplier gains inventory to sell. In a redeployment arrangement, a partnership is set up with a fab's asset manager to market and sell the fab's surplus tools, usually with a previously agreed-upon price structure. For fabs, redeployment provides an asset management advantage by enabling them to recoup as much of the value of their capital expenditure as possible, while leveraging the sales channels of an OEM to gain the highest return possible for that asset.
As the semiconductor manufacturing industry strives to break new barriers, Japanese chipmakers will undoubtedly continue to nourish a robust market for secondary equipment. Increased chip demands across technology generations will continue to fuel a need for pre-owned equipment. As this market segment grows and matures, and semiconductor manufacturing cycles continue to fluctuate as they traditionally have, fabs at all technology levels will likely need support to manage surplus inventory and procure pre-owned tools at value price points. OEM resellers are poised to reap the benefits of this thriving market, extending the value of previously owned equipment to help fulfill the needs of those moving down the design-rule curve or adding capacity to existing operations.
Acknowledgment
K-T Certified is a trademark of KLA-Tencor Corp.
References
- D. Manners, "Japan's Semiconductor Firms Build on Their Strengths," ElectronicsWeekly.com, April 28, 2004.
- T. Brown, "Take Control of Capital Equipment," Semiconductor International, July 1, 2003.
Jon Geniesse received his BSIE from the U. of Wisconsin and is VP and GM of the K-T Certified division at KLA-Tencor Corp. in San Jose, CA.