Appled Materials: Well equipped
Applied Materials, the No. 1 maker of semiconductor equipment, works to strengthen its position
By Erik Sherman -- Movers & Shakers, 8/15/2002
If 2001 was a problem for electronics companies in general, it was a disaster for those involved in the semiconductor industry. And when chip manufacturers suffer, so do those who sell them equipment, even when they are the biggest.
 “What we did in the first six
months [of the downturn] was get our priorities sorted
out. After a short period of time, we focused mostly on the
long-term future.” James Morgan, Chairman and CEO,
Applied
Materials |
The abruptness of 2000’s sudden business upswing, followed by an equally rapid drop in 2001, was difficult to navigate. “What we did in the first six months [of the downturn] was get our priorities sorted out,” Morgan says. “After a short period of time, we focused mostly on the long-term future.” The key was to retain all investment in long-term technology.
“Their tools are really some of the best out there,” says Robert N Castellano, president of The Information Network, a market research firm that follows the semiconductor equipment industry. “When you have billions of dollars in your pocket, you can hire some good engineers for R&D work. [And] their sales and marketing strategies are the best out there.” The company focuses on a good sales process, customer service, equipment performance, and reliability, Castellano adds.
Morgan believes that the approach has been paying off. “Our market share at 300mm [wafer equipment] is higher in all the accounts [I’ve read] than 200mm,” he claims. “We were the first ones to introduce the broadest line of product. We’ve got those positioned in the accounts around the world doing the pilot lines of 300mm.” Because of the early availability, Applied has also been receiving feedback that has fed into product improvement. “For the business to pick up during the next year is good timing for us,” Morgan says.
Good timing is important, and yet timing and unusual market conditions could also create their own problems. Morgan estimates that only 5 percent of the world’s semiconductor capacity is up to leading-edge technology. To date, that’s been fine, as none of the products requiring advanced capabilities has broadly hit the market. A single consumer fad, though, could begin to change the status quo at a perilous rate. “If these applications, whether the [Microsoft] Xbox or one of the new video games or PDAs or high definition TV, take off, then all of a sudden these global markets are enormous,” Morgan says. “You go from low demand to high demand almost overnight.”
That is a fundamental change from the way technology once proliferated geographically. Suddenly, Morgan’s customers could be faced with filling end-user demand and trying to fill the chip pipeline—and its associated production needs—to support the sales. Such possibilities leave him concerned as to whether Applied can continue to develop its capability to match industry growth. “They all want it the same day,” he says. “They tried to postpone it because of their profitability and uncertain outlook in the global economy. But the further you do that, the further the technology moves ahead and the harder it is to catch up.”
| “If these applications, whether the [Microsoft] Xbox or one of the new video games or PDAs or high definition TV, take off, then all of a sudden these global markets are enormous. You go from low demand to high demand almost overnight.” James Morgan, Chairman and CEO, Applied Materials |
Applied has undertaken some major initiatives to help anticipate and manage such rapid change. First, the company broadened the advisory capacity of its board about a year ago by adding the vice-chairman of Sony. “That’s because we see a large portion of the business driven by the consumer parts of the market,” Morgan says. Second, the company is leveraging investments in processes and information systems to better control the business. “That was a major investment and a major effort which will pay off in the next decade,” Morgan says. “Part of our effort has been to substantially enhance our information for our supply-chain management. In the last upturn we were in the middle of putting one of those [systems] in.” Now Morgan feels confident that the company is in good shape to optimize the flow of goods and respond to customers. New distribution centers in Taiwan, Europe, and the US add to shipping flexibility.
Yet growth will not come from the sale of new equipment lines alone. “When you’re a large player and you’re going to try to continue to grow, it’s hard to go from 80 percent market share to 100 percent market share,” Castellano says. At such a point, a company usually acquires others if it hopes to continue expanding its revenue.
Applied has been actively adding companies to its stable, but in the opinion of Castellano, over the last couple of years, the company has lost its vision. “Their acquisition strategy over the last few years has been extremely poor,” he says. Expansions into software have not delivered the expected success. “When you have management that is focused on hardware trying to work a software business, you sometimes don’t have that same vision that the [software] people had,” he says.
Another problem Castellano points to is that customers sometimes get nervous about dealing with the largest company in a market. “Applied has the image of being an 800-pound gorilla,” he says. “Often times, semiconductor companies don’t want to feel locked into the whims and vagaries of a company when so much of their business rides on that company.”
It’s an unavoidable trade-off for Applied, which is determined to continue its growth by bringing together assets, whether future ones or those in hand, through service. “Because we continued to invest in our infrastructure around the world, we’re better able to support our customers in the products they have,” Morgan says. The service business is offering about the same contributed margin as the hardware business, and allows Applied to sell a “solution” rather than individual machines. That reflects a growing trend in the semiconductor-equipment business. “It’s a question of do they spend [on their own integration] or do they outsource it to us?” Morgan notes. That type of outsourcing means additional margin, which is always good.
Now all Morgan has to do is contend with the rapid changes that have slapped the industry about so often. “Anticipation is probably what I worry about most,” he says. “We try to get our people prepared so that when things change they aren’t like deer in the headlights.”
