Managed risk: The Applied story

11/01/1997

Managing risk: The Applied story

An interview with CEO James C. Morgan

Cell teams show results

Mary Swedberg

James C. Morgan, chairman and CEO of Applied Materials, joined the company in 1976 as president and became CEO in 1977 and chairman in 1987. He was previously a senior partner with WestVen Management, a VC affiliate of Bank of America. Prior to WestVen, he was an executive in two high-technology divisions of Textron. Morgan received the 1996 National Medal of Technology, and has advised US presidents. He is director emeritus and past president of Semi, and a past board member of the American Electronics Association and Semi/Sematech. Coauthor of the book, Cracking the Japanese Market: Strategies for Success in the New Global Economy, he earned his BSME and MBA from Cornell University, Ithaca, NY.

Ed Korczynski, Solid State Technology`s West Coast Editor, met with Morgan to find out what it`s like at the top, and what it took to get there.

Ed: I`d like to discuss how equipment companies are taking on more responsibility for process, including Applied, which has done a big push on process sequence integration.

Morgan: We focus more on doing unique solutions within some process sets, where we integrate a couple of steps in order to put together a chip set of a type of a process cell. That`s worked quite well for us, and it fits within our Total Solutions* theme of trying to work more closely with the customer. That`s really been our focus. We started out in the early days with epi in the application lab activities. Then, as the customers relied more on our industry for process work, our early start helped us to work in partnership with them.

Ed: What do you see as a limit to how far that can go? How much responsibility can an equipment company take for process, either within an individual module or in terms of integration? One logical extreme of this trend (and I`ve heard people from both the equipment and the chip side argue for it) is that equipment companies could lease space in a fab and the IC manufacturer wouldn`t buy equipment, but just pay per wafer. That would be a case of 100% process ownership by the equipment companies. Do you see that coming at some point?

Morgan: I think that`s a little far off. In order to take responsibility, you have to be in control of all of the variables, and that`s pretty hard to do based on the current level of knowledge and capability within the equipment industry. So I think it will develop slowly over the next several years, but I don`t see it moving that way rapidly. Different customers want different levels of support, and we`ll develop a partnership where we`ll meet their level of need. But I think it will be quite awhile before there`s a total change in the dynamics of the industry.

Ed: How about short term? Do you see the trend continuing?

Morgan: Sure, because we have more and more knowledge and the customers clearly rely on us more and more. There`s clearly a trend.

Ed: As Applied gets larger, additional revenue growth seems to become more difficult. How can Applied continue to demonstrate the 15-20% sales gains that Wall Street analysts would like to see?

Morgan: That has not been our concern. What we`re seeing as we grow is that the customers have more confidence in us and are therefore willing to ask us to work on more of their problems. I tell people on Wall Street who have invested in the company for the 20 years that I`ve been here, that the relative opportunities are greater today than they were 10 years ago. Once you have a global distribution capability and you think about our broad set of core technologies and core capabilities, there`s clearly a need to solve more and more problems for the customer. I think our opportunities are accelerating.

Ed: If I understand it correctly, is this a combination of emerging markets?

Morgan: I think it`s solving new problems. Whether in sub-markets within the markets we`re currently in, or newly added markets.

Ed: As well as diversifying into new product lines for the company.

Morgan: For example, a couple of customers asked us to work with them to help with flat panel display equipment. That technology could represent several billion dollars. So there are opportunities for Applied.

Ed: That`s the Applied/Komatsu JV?

Morgan: Yes.

Ed: Related to all of these moves into new markets or into new niche applications, there is a substantial investment required to produce a solution that`s manufacturable. Applied has obviously been willing to make the investments needed to produce solutions. Currently, companies have announced some very large investments for the 300-mm transition. Do you see that your current investment level will continue?

Morgan: We`re spending about a half billion dollars on R&D, plus we are making a fairly heavy investment in facilities and infrastructure. That`ll be expected to continue over the next several years because of the underlying growth of the industry coupled with the movement to tighter geometries plus the movement to 300 mm. So all those factors are driving the growth of the industry over the next 5-10 years.

Ed: Is it possible to say on average how many years it takes to break even on the investment for a product line?

Morgan: No, because we look at R&D a little differently. What we do is spend dollars when we see an opportunity to commercialize technology where we have a market requirement, the technical concept, and the talent to work on it. That really drives our investment programs and we`ll spend what we need to in order to support that. If we have a good product, we`ll realize several hundred million dollars of business, so the return on investment will come. The key is to hit the technology window both in terms of the customer`s need and your ability. That drives more of our decisions than anything. We spend with an overall framework of between 11-13% of sales depending on what we need - we provide a strong flow of funds for R&D.

Ed: Given that, is there an average time from when you turn on the funding for a targeted application to when the program breaks even?

Morgan: We don`t tend to analyze it that way.

Ed: It isn`t necessary to track it?

Morgan: If you have the right idea, it`s great. If you have the wrong idea, it fails. Either way, the "payback time" doesn`t make much difference. If you have the right product and you know the markets, you know you`re going to get the sales and it`ll pay back pretty quickly. If you don`t get the right product or you don`t hit the window, tracking ROI doesn`t matter. The main thing is to focus on running tight schedules in your products because that controls your cost and hitting your market windows - that assures the success of your opportunities.

Ed: In having the combination of the right product and hitting the window right, both marketing and engineering talent are required. What is the relative importance of both - is it 50/50? Also, across the whole company, can you say that Applied has greater strength in one area or the other?

Morgan: What we do is put together a team of people to work on a project, and our whole focus is on the effective commercialization of technology. We`re able to do that because the customers give us their family jewels to hold and work with - that is, they show us the things they`re going to do in the future. That helps us to understand what we should do, and we do that with several customers so we don`t have just one approach. As a result, we`re able to target our R&D investment effectively.

Ed: For relatively new applications or new markets, say something that didn`t even exist 2-3 years ago...

Morgan: Like CMP.

Ed: Yes, or the RTP market that Applied wasn`t even in 2-3 years ago. What percentage of Applied business do those relatively new applications represent?

Morgan: They`re small right now, but they`re clearly going to grow. They`re a hundred million type of business now, but rapidly growing. They`ll be half a billion dollars before too long.

Ed: Is that fairly standard in terms of relatively small new market applications for the first few years?

Morgan: In the pilot stage, they don`t represent too large an amount and then they go up pretty fast. It`s almost exponential growth.

Ed: For any of these new product developments, how much continued subtle direction does corporate provide versus just making sure you`ve got the right people in the right positions and letting them take off?

Morgan: Each organizational unit, whether it`s new or old, has a product roadmap that it`s developed for future customer requirements. Corporate management has the responsibility to track new products across the technology and to ensure product excellence within a market. If we start up in a new area, we`ll put that activity under corporate. So, that`s where CMP began, and then it was moved to a product business group. But the new business areas start with corporate sponsorship. The new products that start up within established product business groups like etch, CVD, or PVD stay in the product group, but we track them. We approve the technology roadmap and review progress monthly.

Ed: So corporate`s responsibility in all this is to...

Morgan: To assure that the groups are covering all the sub-markets in their sectors properly, and then to establish new markets.

Ed: Within that, as long as they`re meeting roadmaps and addressing the market properly, the specific tactical decisions are entirely their responsibility?

Morgan: It`s their responsibility. A lot of us may give them advice, but the unit head has the final responsibility.

Ed: What would you say is the overriding principle you use in reviewing business plans or roadmaps?

Morgan: I think that one of our keys has always been to introduce leading-edge technology because then it lasts. The other question I always ask is, "Do we have the talent, and the concept to be successful?" So those are the two things that we focus on to commercialize it. It`s always a case of commercializing technology to hit expected market windows.

Ed: Is there an aspect of your personality that you could look to as being one of the main reasons why you`ve been so successful in running Applied Materials and building it into the dominant company that it is today?

Morgan: I can think of two. First, I`ve always had great respect for people at all levels and all types of responsibilities. That`s helped me to give people the confidence to take risks and try and do things. Second, I`ve always personally focused on helping both organizations and individuals meet their potential, so they always understand that that`s where I`m coming from in any dealings. So I think probably those are the factors that are most important.

Ed: How much risk do you see in Applied`s business? When you`ve narrowed it down and decided you`re going to enter a market, how risky do you regard that decision?

Morgan: One thing that`s wrong with large companies is they don`t take enough risk. I`ve always tried to share with people the idea that as we get larger, we can afford to take more risks. So I don`t see those kind of issues as long as I feel confidence in our people, because generally we know the market well.

Ed: It sounds like that`s saying there really isn`t a risk ... maybe we look at risk in different ways...

Morgan: There`s always a risk of not being successful and wasting a lot of personal talent and funding, but the other side of that is you can stop if you have the courage to stop. That`s really where the challenge is - when you decide not to do something. But we can afford to take risk. I encourage people to take as much risk as they can manage. That`s become a mindset that we`ve tried to develop in the company.

Ed: If I`m hearing this correctly, it sounds like you`re saying you`re encouraging risk in the development phase or in exploring potential markets?

Morgan: Well, if they really believe they`ve got a concept and a product, then we`ll spend the money to take it to fruition.

Ed: A complete product roll out?

Morgan: Right. Though we have to go through milestones. You protect risk by milestones. You get into trouble if you forget to manage by milestones and just spend the money.

Ed: Or if you set the milestones too far apart.

Morgan: Yes, that`s a possibility, too. You need good solid milestones. So we have things like concept feasibility, an alpha phase, a beta phase, and a gamma phase. We go through these disciplined phases and we have to meet certain requirements to get to the next phase. That`s important. But I think you can afford to start on those journeys and you should encourage a lot of them because not all of them will succeed. You have to be willing to be wrong once in awhile.

There`s nothing worse than not making a decision. That`s why I suggest if you want to encourage someone to make a decision, you stand them on the edge of a cliff. They look out and have three choices. If they make the right decision, they stay; if they make the wrong decision, they go; and if they don`t make a decision, they go. So you learn how to make good, hard, right decisions.

Ed: A classic problem in both new product development and in investing in the stock market is when do you decide to cut losses? When you`ve already invested and already lost some money, there`s a natural human psychological failing to hold out longer or invest more in the hope that it will eventually pay off.

Morgan: You just have to remember those are sunken costs, and every decision you make is based on future costs. We`ve been pretty disciplined about that over the years, which is why we maintain our success. We hit a fairly high proportion of right decisions and we cut back the things that lose momentum.

Ed: Do you think you`ve tended to hit at a higher percentage than some of your competitors?

Morgan: Well, look at our results.

Ed: Perhaps that was an obvious question.

Morgan: If you look at the number of markets we`ve entered effectively, I think the team has done a good job.

Ed: Would you say that success is ultimately due to having the top people?

Morgan: I think we`ve hired some of the best people in the world. I think Dan Maydan has done a good job of staying close to the customers and understanding their needs. I think we`ve always worked on the leading edge and bypassed opportunities even where we could have had significant revenue. That`s why you hear Applied talk about leap-frog technology - it`s reflected in our culture and how we talk about introducing new products. We have two types of strategies. One is a leap-frog strategy and the other is a keizen strategy. So we leap frog to get the new products positioned and then we have continuous improvements for the products once they`re introduced.

Ed: So that means foregoing what looks like easy, short-term money, for what is ultimately going to be a much bigger payoff?

Morgan: Yes, that`s always been a rule.

Ed: So, from day one when you joined Applied, that has been one of the strategies?

Morgan: Yes. A good example is when we got out of the hot-wall (CVD) business in the early 80s. Because we were the third player, we didn`t have our strongest people on it, and we thought there was a technology shift taking place. Then in 1987 we returned with a good product in CVD and have forged ahead to the leadership position.

Ed: With the P5000.

Morgan: Right.

Ed: Have any of your basic approaches changed in the last 20 years?

Morgan: We`re trying to prepare the company to be a great global competitor in the twenty-first century. Fortunately, we`ve been doing a lot of things right for many years, so we have an edge over most corporations. It`s our way of breaking things down into units, of account managing and product managing on a global basis, and providing support services on a global basis. As we grow into new areas of opportunity, we try to set up a new unit to cope with these critical-mass/flexible-response paradoxes.

Ed: There`s a delicate balancing regarding how much centralized top-down management there is versus letting a business unit go off on its own and be small and flexible. The impression I`ve had from years of interacting with people from Applied is that the individual business units almost function like they are separate companies.

Morgan: Probably, though because of these paradoxes, they really are integrating more and more effectively. Part of it is that it`s important to have the segmentation, but really we always have to come back together with the customer. We sometimes provide unique solutions where we have overlap between the divisions. We also use common platforms, so there`s a lot of things that we do to enhance our value to the customer. That`s why Total Solutions is systematically focused on meeting customer needs. That`s an internal mindset so that we think about things in a more total sense.

Ed: I was under the impression that in certain situations Applied would actively encourage business units with different technology solutions to the same problem to essentially let the market decide which one was going to be successful.

Morgan: We do do that.

Ed: Like CVD or PVD titanium nitride?

Morgan: You may notice that we`ve combined and established a metallization organization that includes both CVD and PVD and other metallization techniques if that`s appropriate. Then we have a dielectric group that includes CMP to take care of dielectric planarization. We made some shuffles to minimize the number of issues the customer has to deal with.

Ed: That`s something that has changed in the last few years.

Morgan: Well, you still want them to compete, but you still have to help the customer work to a resolution, so we do that through account management. In places where we see there`re advantages to providing unique integrated solutions, we`ve put the units together and that`s what we did last year about this time.

Ed: Lawsuits, necessary evil or business strategy?

Morgan: Most of them are focused around intellectual property. It`s kind of like if you have a robber come into your house, you want to protect your house. Right? We spend more than $500 million/

year to develop intellectual property and have a broad portfolio of patents and trade secrets that provide jobs for our employees and value to our shareholders. We`ve won the two lawsuits that we pursued to conclusion, so we don`t pursue frivolous lawsuits. We focus on the areas where we think there`s a clear violation of our technology. We usually try to work out an agreement with the parties if they utilized our technology unknowingly, but if we believe they have deliberately stolen our intellectual property, we will take steps to protect it, including using the courts.

Ed: Thanks for your time, Mr. Morgan.

Mary Swedberg is plant manager at Eaton Corporation`s Semiconductor Equipment Division; ph 508/921-0750, fax 508/927-3652.