Asias equipment supply: Buying and selling used
11/01/1998
Asia`s equipment supply: Buying and selling used
Paul C. Bellows, Rosalind Tao, Pacific Asia Tech Trade Inc., Pacifica, California
In certain situations, adding used semiconductor manufacturing equipment to your production line is a good choice; increasingly, this is a viable choice for the growing semiconductor industry in Asia. Finding the right piece of equipment and a reasonable price, however, requires knowledge of buyers and sellers and the dynamic in the used equipment market. Here is a valuable check list of what to do and not to do.
The semiconductor industry is the worldwide economic success story of the 1990s, especially in Asia. Worldwide semiconductor sales, which began the decade at $50 billion, are expected to exceed $220 billion by 2000. Despite recent financial turbulence and the volatile DRAM market, Asia (excluding Japan) is still the fastest developing semiconductor market. The combined sales of South Korea and Taiwan (the world`s third and forth largest IC producers) should overtake Japan (the number two IC manufacturer) within two years. It is no secret that the semiconductor industry is very important to the economies of other countries in the region as well, including Singapore, Malaysia, and Thailand. And everyone seems to be watching China`s big push-rapidly increasing its capital investments and launching new wafer fabs and IC assembly factories. Indeed, the continued growth of the semiconductor industry is necessary for Asia to recover quickly from its current financial problems and maintain its role as a major exporter and user of ICs.
Global sales of equipment used in wafer processing, assembly, packaging, and testing of ICs has increased fourfold this decade to almost $30 billion. During the first half of 1997, the combined buying of Southeast Asia, China, Taiwan, and Korea accounted for 57% of the world`s total investment in assembly equipment, whereas North America, Japan, and Europe accounted for only 11%, 25%, and 7%, respectively. As the data in the table show, Japan, Korea, and Taiwan alone are forecast to make 45% of semiconductor capital equipment purchases in 1998. The countries` companies will make these purchases despite the fact that in 1998 Korea`s semiconductor industry capital spending is expected to decline 25%, Japan`s will be flat, and Taiwan`s is up only 12% compared to past 15-20% increases.
Throughout Asia, the increased need for semiconductor manufacturing equipment and the emergence of new technologies has created new opportunities for companies that purchase and resell used equipment in the global market. We have seen a recent flood of new brokers, dealers, and refurbishment companies filling the sales and technical gaps left by OEMs. Furthermore, unemployed high-tech engineers in Korea and elsewhere are turning to careers as brokers of used equipment. Together with existing resellers, these firms are providing a viable option for semiconductor manufacturers who are always looking at ways to reduce cost as they expand production.
 |
In the early 1990s, buying used capital equipment was new and unsettling for many IC manufacturers in Asia. Educating users required tenacity and tact. Multinational and local companies in Singapore, Malaysia, and Taiwan took to the concept well and developed strong relationships with resellers. Korea and Japan resisted and became sources for used equipment, rarely buyers.
Without looking at possible cultural or social reasons behind any reluctance to "buy used," we have noticed over the past few years that buying and selling front- and back-end equipment in Asia requires more than posting a "for sale" sign. Rather, increasingly, it requires an understanding of the global market and knowledge about a few specific strategies. This understanding is necessary so that purchasing managers and engineers can get the best return possible for their capital investment.
Buying
In some ways, purchasing used semiconductor equipment is just like purchasing new equipment. A company must decide on the technical platform, budget, time frame, and vendor. However, there are also some significant differences. Purchasing used equipment comes with additional risk. What about warranty, after sale service and support, payment terms, software, and the OEM? While the biggest benefit to buying used equipment is price difference, can this advantage be enough to overcome the obvious pitfalls? If the buyer is diligent, asks the right questions, and minimizes risk, then the answer is an unqualified "yes."
Before actively looking for used equipment, an Asian company (or any company) should be aware of a few pertinent facts:
The vast majority of companies that purchase used systems are only interested in duplicating a system that they are already using. In other words, if you have an existing line of systems and are looking to purchase another identical system, think about the secondhand market. If you want to add a system that is different than your existing line, think twice.
The used high-tech equipment industry is a global market with global players. Systems are seldom bought and resold in the same region; savvy resellers must be able to source equipment anywhere on the globe. Up to a few years ago, it was common for companies in Asia to be the hottest buyers. Recently, however, systems are rapidly coming out of Asia and finding new homes in the US and Europe.
Most companies are now too smart to go through a broker or dealer for a system that is in their own backyard-local end-users contact each other and avoid involving the middle person.
Asking and answering the following questions is the first step to maximizing your investment and minimizing your risk:
From Asia, where do I find a reputable company that can provide the equipment I need?
Searching the web will result in a wide array of companies and services. For example, in a recent Internet search, we found over 200 companies involved in the buying, selling, servicing, or upgrading of semiconductor-related equipment. Some claimed to be the best source for refurbished testers or fab equipment, while others seemed happy to broker any equipment that might come their way. The Internet is a good place to start, but don`t be fooled by the size of the company (or its web site). Not all large companies are good; not all one-man operations are bad. Reputation is the best way to determine a vendor of pre-owned equipment. One way to do this is to simply ask around-even competitors may be willing to share their experiences. Also, don`t hesitate to inquire about the firm`s experience in Asia, specifically in your country, and, most importantly, ask about experience with the specific equipment that you need.
Do I need a system to be refurbished, rebuilt, or is "as-is, where-is" acceptable?
Depending on the type, age, and technology of a particular system, it may or may not be difficult to find a refurbished system. Although refurbishment means different things to different companies, one aspect of the concept is clear-the system must be fully operational and able to pass diagnostics. When buying refurbished, however, be prepared to pay more. Buying a system "as-is, where-is" through a broker or end-user obviously involves increased risk, but this can be minimized through an inspection and review of the maintenance records and, if possible, a talk (through an international phone call or even a trip) with the previous owner. Savings made buying this way may be worthwhile, especially if you have competent in-house service and maintenance people that can diagnose and fix problems. In either case, a thorough inspection of the system is always a good idea. In addition, don`t be pushed into placing a purchase order or making a deposit without obtaining a system serial number, a detailed understanding of the system`s configuration, and the terms of sale.
How much savings should I expect when buying a used system?
The amount that you can save will depend on the specific type and model of equipment that you are aiming to purchase. Typically, used systems should cost 40-60% of the new system. However, if the system is only a couple of years old and is still being produced by the OEM, then expect to pay more. Likewise, if the system is older and demand is low, then expect to pay less than 50% of the new list price. Researching and knowing market prices and supply-demand dynamics are keys to avoid overpaying for equipment.
Do I need warranty, after-sale support, or service? Is such available in Asia?
The after-sale support and warranty will depend primarily on your comfort level and the types of services available. In some instances, a reseller may have the resources, spare parts, and mechanical know-how to provide warranty, board repair, or parts exchange. In addition, there are numerous small, local, third-party companies throughout Asia (and other areas of the world that service Asia) that provide very competitive after-sale service and pricing. Some OEMs may also be willing to offer warranties for used systems, but don`t always count on it.
Ask OEMs about their policy, but don`t let them push you around, especially if you already have a large number of their systems in place. Remember, although the OEM may be hesitant about servicing pre-owned systems, you are the customer. The more enlightened equipment manufacturers will understand and work hard to keep your business. If they don`t want to service a used system, they are opening the door to competitors. In fact, many of the small service companies that exist today were created by previous employees of the OEMs. They are effectively filling the gaps left by OEMs who are unwilling to support their own equipment.
What payment terms should I use when buying a used system?
Very few resellers have the luxury of offering 30- or 60-day terms on the equipment they sell. More likely, they will want full payment prior to shipping. This can be a nervous decision for the prudent purchasing manager. Perhaps, a better strategy is to make a majority payment before shipping and the balance after the arrival and installation of the system. Again, the best way to prevent a "lemon" purchase is to inspect the system and, in some cases, supervise the crating and shipping of the system. A red warning flag should come up if the reseller wants to be paid now, but won`t tell you where the system is located. A reseller who uses your money to buy the system it is reselling to you is an acceptable tactic in some cases, but the seller shouldn`t be scared to tell you that it is doing such. Furthermore, if you want to use a letter of credit, but the reseller is unwilling or uneducated about such vehicles, then this reseller may not be the right high-tech, value-added company for you.
In addition to answering the questions above, it is equally important to understand the economics and supply-demand dynamic of the used semiconductor manufacturer market. For example, it may sound like a good idea to tell 20 or more brokers and resellers that you are looking for a particular piece of equipment. Let them fight it out and you will buy from the one with the lowest price. However, this strategy can sometimes backfire, especially if you are looking for a high-demand, low-supply system. By advertising to a large number of brokers (most of whom are somehow interrelated or at least networked with each other) you can actually create a false demand.
Say that you want a certain system and only one or two are on the used market. Many of the middle people you told may find this one system and push the seller for quotes. The seller naturally believes that there are many buyers in the market and raises its price expectations accordingly. The added cost resulting from the false demand is passed on to you.
On the other hand, if you only tell one or two reputable companies who have expertise in the global market and specialize in the equipment you need, they may find the seller and quietly gather information and pricing without creating a false demand and passing higher prices to you.
In summary, the balanced way to obtain competitive quotes is to send requests to a few experienced, reputable vendors who have technical and sales expertise with the type of equipment you need. With their response, you should be able to take a pulse of the market without needlessly saturating it and adding more players and higher prices to the mix. If you can`t find the system through these channels, then feel free to tell the world, but don`t expect to get it cheap.
Selling
Selling your surplus or under-utilized equipment also sounds like an easy task, but many of the same important questions and strategies apply. It is also imperative to choose buyers carefully, understand the market value through careful research, and retain pricing and technical documentation and records.
One of the best ways to get the best return on your capital equipment investment is to start early. When you purchase the new system from the OEM initially, ask the OEM about its buy-back plan or any restrictions, especially on software issues.
For example, one particular manufacturer of automated test equipment has been known not to allow the system software to be transferred with the system. This particular OEM will even threaten lawsuits against sellers unless they remove the software from hard drives on systems for sale. New buyers for this pre-owned tester are forced to purchase a $50,000 software license. Effectively, this hurts the original user who is now a seller. The used system is now worth $50,000 less on the market; thus, the user will get considerably less than he originally planned in the resale of his equipment. The real winners of this anticustomer (and perhaps anticompetitive) practice are the OEM`s competitors who have much more liberal software policies.
The lesson here is always to negotiate with the OEM on software transfer and related issues before you place an order for new equipment, when you still have buying leverage.
Another easy way to maximize selling semiconductor manufacturing equipment is to keep complete records of service and maintenance. You may not sell the system for much more than you would without the records, but the process will be considerably easier and faster. In addition, as with buying used equipment, involving a considerable number of brokers in the selling of your surplus equipment can backfire, especially if you want to release several systems at once. Unless there is a very high demand for all of these systems immediately, you will only saturate the market, and the prices that you can sell these systems for will drop. A smarter method is to sell (or have a knowledgeable middle company help you sell) the systems one at a time, thus preserving their market integrity and prices.
As for payment terms when selling your surplus system, the safest way, aside from special circumstances like consignment or trade-ins, is always to collect 100% prior to releasing the system. This policy will prevent a situation where you are left unpaid by an unscrupulous or even well-meaning company that cannot come up with the funds in the agreed time period. If a buyer is serious and real, it will work very hard to find a way to finance the system and come up with cash.
Other options
In addition to outright selling or buying used semiconductor equipment, there are several other viable options to explore:
It is now popular, especially with expensive, high-end equipment, to lease or rent late-model, secondhand versions. True leases, conditional leases, and leveraged leases are all options available through a number of large and reputable leasing companies that have opened divisions specializing in purchasing and selling used, high-tech equipment. Similarly, some of the smaller resellers also offer this option.
Instead of purchasing new and expensive systems, some semiconductor manufacturers and assembly and test foundries are now choosing to upgrade older systems with newer technology. From rebuilding and retrofitting dicing saws and handlers to replacing obsolete storage devices on testers with Pentium PCs, there are a few qualified firms that are bringing new and productive lives to older equipment. For example, some PC upgrades on the current market can actually increase productivity so well that they pay for themselves in a few months. Networking older systems through PCs and converting old DOS programs to Windows are also popular upgrades. These PC upgrades can also help solve "Year 2000" issues. Selling an older, inefficient system can be postponed if the right upgrade or peripheral enhancement can be located. This is simply another tool that will enable you to generate greater returns on your investments in capital equipment.
Trading an existing system for another system, a significant subsystem, or parts is an alternative to outright selling. For some engineers, this makes good sense because they receive a tangible asset that can be used instead of getting nothing when the proceeds from the sale end up in the company coffers.
Conclusion
Buying used equipment is not for everyone. Designing, manufacturing, and testing the latest ICs usually require the latest equipment from OEMs. Trying to locate the latest technology on the used market is often a waste of time, as new generations of equipment usually do not appear on the used market for at least three years.
Furthermore, as Jim Rohwer correctly points out in his book, Asia Rising, "High accumulation of only old capital goods quickly leads to declining returns on investment" [1].
No one should advocate the purchase of only used systems, but it can be suggested as a viable option instead of a scary proposition. Whether you are looking to buy, sell, service, or upgrade pre-owned semiconductor equipment, make sure to minimize the risk and maximize your investment through good old-fashioned research, analysis, and inquiry. If done correctly, it can become a welcome addition to your investment portfolio that gives your company a pricing, production, and competitive edge.
Acknowledgments
Windows is a registered trademark of Microsoft Corp.
Reference
1. J. Rohwer, Asia Rising, Touchstone Books, 1996.
PAUL C. BELLOWS received his BS in business administration and his MS in Asia Pacific studies from the University of San Francisco. He has lived in Thailand and Singapore, and has sold and bought used semiconductor equipment in Asia for eight years; he was one of the pioneers who introduced refurbished ATE into Asia. Bellows is president of Pacific Asia Tech Trade Inc., 106 Esplanade Ave., Suite 150, Pacifica, CA 94044; ph 650/738-8793, fax 650/738-8794, e-mail paulb@asia-
partners.com,www.asia-partners.com.
ROSALIND TAO received her BS in finance from the University of Arizona and her master`s degree in international management from (Thunderbird) American Graduate School of International Management, Glendale, AZ. She has worked in the telecommunications, software, and semiconductor industries, and has lived in Taiwan. Tao is VP of Pacific Asia Tech Trade, e-mail [email protected].