Cleverly Chasing The Chip Boom
You can't steer a roller coaster. You can only hang on and ride out the drops, twists, and loops. That's how things work in the chip industry, where the best companies routinely white-knuckle their way through precipitous ups and downs. As a leading supplier of robotic fabrication gear used by Intel (INTC ), Samsung, and others to turn silicon wafers into integrated circuits, Applied Materials Inc. has learned how to keep its cool. The Santa Clara (Calif.) company saw revenues slide to $4.5 billion last year, from $9.6 billion in 2000. Profits in the same period sank to a net loss of $149 million, from $2.1 billion.
Managing that kind of plunge might cause some execs to panic. But for Applied Materials CEO Michael R. Splinter, it's all part of the ride. And these days, he's enjoying the rush as the chip biz gathers speed for another period of expansion. A 33-year industry veteran, Splinter joined Applied Materials in April, 2003, after nearly two decades at Intel Corp., where his posts included top spots in both sales and manufacturing. He recently met with a panel of BusinessWeek staff, including Industries Editor Adam Aston. Here are edited highlights of that discussion:
At long last, the chip sector is back. How are you doing?
In the past six months, we started to see an upturn. The chipmakers began to see strong growth several quarters before that. It took them a while to absorb the existing capacity. By autumn last year, companies that had been cautious about buying new tools quickly started to do so. Our financials reflect this: In the last quarter of 2003, revenues hit $1.22 billion, followed by $1.55 billion the next quarter and $2.02 billion in the second quarter of 2004. In that time, we've also gained market share.
Where is this boost coming from?
Our growth is being driven by three main factors. One is [strong sales of] our existing products. We still can gain share in every one of our existing product lines. The second part is rolling out new products: We introduced a few last year and quickly grabbed more than 50% share for those markets. The third piece is our service business. Right now we're getting a little over 20% of revenues from services. In a few years, I'd like service revenues to be twice their current size.
By region, this upturn has been primarily centered in Asia, including Japan. China is playing a growing part, too. This year, between the products and services, we'll do around $1 billion in business there. Overall, about 75% of our sales are in Asia.
In the wake of the recession, how have your operations changed?
We're managing this upturn differently. We have record employee productivity this quarter. Typically companies in this industry chase the upturn by hiring people and adding facilities when demand heats up. We're trying not to do that. Instead, we're pushing for 10% to 15% productivity gains every year and will only add people and resources beyond that level. It's more of an ongoing, steady management style.
How will you get these gains?
We decided our goal was to cut the through-put time -- from order to when the equipment starts up in our customer's factory. This is all dead time, with no value from the customer's point of view. We went in and looked at the time for every process, from how we take an order, to our manufacturing lines and how we install the machines. For example, our engineers reoriented the components in the work area so they could be assembled more easily.
What are the results?
In the same manufacturing space that we used in 2000, we can make twice as many tools. Back in 2000, at the last peak of business, it took over 300 days from order to startup. Today it's 150. We think we can get it to 100.
Faster production prevents overcapacity from developing. With shorter lead times, you're more sure about the capacity you need to add. So we order the right amount of components and cut the amount of undelivered finished goods.
How has your Intel experience influenced the way you manage?
I knew Applied Materials from the outside, but learning it from the inside is challenging. I came from a very flat organization -- I like that. I took several layers out of the organization here; there are five or six now. We're about where we want to be, with some 12,000 employees. Another example: I use e-mail to stay in contact with as many employees as possible. In one town-hall meeting, I asked folks who had questions they couldn't ask in public to send me e-mail. From a couple hundred attendees, I got 30 or so e-mails, about everything from new business ideas to their stock options to internal political issues. Now I get a steady flow, which I read and personally answer.
The chip sector is notoriously cyclical. Where are we now?
Our customers have been cautious about adding capacity, mostly because the downturn was so painful. No one wanted to get caught with the huge overcapacity that they ended up with in 2001. So they're trying to grow in increments that they believe they can pay for with proven demand. As demand has gone up, chipmakers have initially put new tools into older factories to augment capacity. That first burst of capacity is already absorbed. We're seeing that in the numbers: very high factory utilization and very low inventories. Now our customers have new fabs in the pipeline, too. This year, about 16 companies are investing more than $1 billion each in new factories.
Yet history shows chipmakers always forget and add too much capacity, right?
I'm waiting for the chipmakers to forget again [laughs]. Memory just doesn't last all that long. But there had to be several quarters of good profitability for the memories of 2001-2002 to abate. I have a lot of confidence right now. Factories are full, customers are absorbing capacity, demand seems to be continuing to grow, profits are up -- that gives customers confidence to invest. In the second half [of 2004], we see growth continuing, unless the economy slows down in a big way.
What about overseas markets?
Japan's economy is alive again, for the first time in a decade. China should continue to grow strongly, too. In time, I think, we'll see some of the chip industry move to India, but [that's] not on the horizon today.
How important is China?
In the near term, I don't think China's chip sector is going to have a particularly big effect in this cycle. In the long term, this is a very big market. It's a strategic industry for the government, and infrastructure is being built. Domestic Chinese companies will continue to grow, but we'll also see accelerated international investment into China. Over the next 10 years, we'll see a large percentage of new fabs go into China.
It took Taiwan's chipmakers a decade or so to catch up with the industry's best. How long will it take China?
China's chipmakers will move fast because there's so much pressure from the government, so much capital, and so many good engineers and chip-industry veterans [who] have moved from existing semiconductor companies. But it won't be easy.
Where are the engineers for China's chip boom coming from?
Most of them are Chinese natives. As indigenous companies emerge, the trend is for students to study in the U.S. and -- instead of working here first -- to return home immediately. Chinese companies have also repatriated a number of industry veterans who either have roots in China or are from China. Local Chinese universities are coming up, too.