Shifting costs may weaken suppliers
04/01/2004
At this year's International Strategy Symposium, speakers from major equipment and materials companies pointed out that R&D and other costs have moved upstream in the semiconductor supply chain, from chipmakers to their equipment and materials suppliers.
For example:
- Mike Splinter, president and CEO of Applied Materials, presented data that compared R&D expenditures of equipment suppliers with semiconductor manufacturers. The growth rate trend of equipment suppliers in recent years is about 14%. For chipmakers, the rate is about 8%.
- Don Mitchell, chairman and CEO of FSI International, said that toolmakers now spend about as much on R&D as chipmakers, but the semiconductor industry is more than four times larger on a revenue basis than the equipment industry. Mitchell summed up the concerns of many ISS attendees with this question: "How are equipment suppliers going to fund this?"
- Nabeel Gareeb, CEO of MEMC, pointed out that although unit volumes of semiconductor devices and silicon shipments have moved in tandem for years — despite continuous device shrink — profits of semiconductor companies as a percentage of revenue have always been significantly higher than those of silicon suppliers. Increasing cost pressure, said Gareeb, is forcing MEMC to limit future capital expenditures to around 15% of sales revenue, a significant decrease from historical levels.
To make matters worse, at the same time that equipment companies are carrying a heavier R&D burden, chipmakers are spending less on capex relative to revenue than they have in the past. And chipmakers demand low prices for new tools, which must perform at unprecedented levels of automation and cost efficiency.
Part of the reason for the shifting costs — as Chris Chi of UMC pointed out during his presentation at ISS — is a natural evolution of semiconductor manufacturing. In the early days of the industry, process engineers at chipmakers tended to perform much of what could only be called R&D. Today, "you can't separate the interaction between process and tool," said Chi. The complexity of the process demands some shift in R&D work to toolmakers.
Nevertheless, chipmakers may be walking down a dangerous path if they don't pay attention to the possibility that shifting costs may weaken suppliers. Semiconductor manufacturers depend on the strength and vitality of their entire supply chains more than ever before. This is an evolution that other major manufacturing industries have experienced, and there may be lessons that chipmakers can learn.
The most striking may be what happened to US automotive manufacturers in the 1970s and 1980s, when Japanese auto manufacturers were able to gain large chunks of global market share. There were several reasons for the success of the Japanese auto industry, but one of the most significant was the value created by suppliers.
The Big Three US automakers had pushed development and production work to their suppliers, while at the same time continuously applying a great deal of pricing pressure. It became very difficult for these suppliers to maintain healthy profit margins and reinvest in their businesses. Many suppliers that had been technology leaders in their fields were no longer able to survive, and a good deal of consolidation took place.
Meanwhile, Japanese automakers, especially Toyota and Honda, built US manufacturing plants, and many key suppliers followed them. The Japanese automakers collaborated closely with suppliers, sharing key technologies and development plans. They focused on removing cost from design, manufacturing, and other business processes, instead of simply beating up suppliers on price. In some cases, they invested in key suppliers, helping them through tough times. The result was higher-quality products and a competitive edge.
The comparison to the global auto industry is far from exact, but it does illustrate a key point: The ability to innovate and compete globally can be greatly helped — or greatly hurt — by the strength of the overall supply chain.
If semiconductor equipment and materials companies cannot continue to provide innovative technologies to chipmakers at the same rate as in the past, the entire industry and its customers could suffer. Fewer killer apps may surface, and technology products that depend on semiconductors will become commodities.
Worst of all, technologies and applications that no one can foresee could remain unknown, and an industry that has long surprised all observers by spurring new demand with technical innovation will become just another mature industry. And that would be a shame for everybody.
 |
Kevin Fitzgerald
Editor-in-Chief