How the biggest get bigger
By Ed Sperling, Editor in Chief -- 7/13/2007
Michael Splinter, president and CEO of Applied Materials, sat down with Electronic News/Electronic Business to talk about his company’s new target markets, what its core competencies are and how the company measures success. What follows are excerpts of that conversation.
Q: Applied Materials has expanded beyond its traditional semiconductor equipment into equipment for making solar cells and glass for large flat-panel displays. Are there other markets you intend to target?
Splinter: So far we haven’t talked a lot about this, but we have glass coaters for low-E glass for windows. There might be as many as 17 different layers on a sheet of glass. The machines are gigantic. It’s part of our thrust into energy. In this case, it allows you to reduce the amount of heat that moves through the glass while allowing the photons to go through. We also do flexible coatings. We have roll coaters that operate at 50 miles per hour. This is for all sorts of applications such as RFIDs, any kind of flexible electronics, even making potato chip bags and coating them with metal on the inside. Those areas will play a bigger and bigger role as more energy consciousness gets into the building industry and high-volume, low-cost electronics on flexible substrates really start to take off.
Q: The focus, then, is on expanded ways to use coatings?
Splinter: Thin films ’R’ us. We sell quite a few products for MEMS (microelectromechanical systems) makers and inkjet makers. You can use commercial inkjets for all kinds of commercial applications. This is not just printing on paper. It’s printing on a lot of different things. One of the things we’re finding in our PVD (physical vapor deposition) products is the types of packages that will be used in the future will have to be much more sophisticated, with the number of pads or bumps increasing. Today, memory devices are stacked and wire-bonded. That can’t be the future. More thin film applications can be utilized there. When you look at the cost of an integrated circuit, there’s as much cost in the package and test as there is in the making of the IC. Perhaps there’s opportunity there.
Q: Five years from now, will the core of Applied market be semiconductors or something else.?
Splinter: I like to say we will be a nanomanufacturing technology company. We coined this word at a time when we were a silicon systems company. We want to put more and different products in different markets under the umbrella. You’ve seen our entry into solar. We’re doing coatings on E glass. We’re expanding our capabilities in services. Over a period of time, if we look out five or seven years, we’ll really supply depth and breadth to nanomanufacturing technology.
Splinter: While a lot of these applications are using nanotubes or organic nanostructures—and we might use these technologies for self-assembled films that can be used in integrated circuits—the reason we put nano and manufacturing together is that we’re not just doing science projects. We’re doing things that will be in big volumes and big markets. Nano can be the thickness of a film, measured in nanometers. It can be any thin film, structure or coating.
Q: Because Applied is expanding its customer base with these new markets, are you finding that your customer base is no longer predominantly in the Asia/Pacific region?
Splinter: Solar is very active in Europe, as well as Asia. Asia is doing a lot of manufacturing, as well as putting together government policies to encourage the use of solar energy. There is still not much activity in the United States. But if you look at the past six announcements that we or our customers have made, there was one in India, one in Taiwan, three in Germany, one in Spain. You can manufacture anywhere in Europe and move [solar panels] around. It’s a lot more difficult when you have to put them on ships.
Q: Why is solar so difficult to manufacture in one location?
Splinter: They’re big and heavy, so they’re much more suited to regional manufacturing. Semiconductors can be shipped anywhere—a lot of them in the back of an airplane. You can’t get many solar cells in the belly of a 747. But there is great opportunity for huge solar farms. We’re seeing them in Europe, China and India already.
Q: Is this an easier sales process because the solar market is a hot growth market now?
Splinter: No, because we’re relatively new to this market and a lot of the companies are new. There’s a process of getting to know each other and building a relationship of trust that we’re going through with solar customers today. It’s a different challenge for our salespeople. In the semiconductor and flat panel markets, we’ve known our customers for a long time. There aren’t really any new companies putting up semiconductor fabs. The growth in China a few years ago was the last time we had new companies. There is a whole wave of new solar companies. Some we know, some we don’t know.
Q: But there’s a lot of attention on that market these days, which should make it lucrative, right?
Splinter: Energy and environment are the two great social engineering problems of the time. Some people may argue that health care should be included, as well. It’s not that health care science isn’t good or advancing at the right rate, but that’s a cost problem. Energy and environment are really difficult engineering problems that are going to take years to solve and drive down the cost of solar energy to give people environmental solutions. There is a lot of work to be done over a lot of years. For us, that creates great opportunities.
Q: From a business standpoint, that also creates challenges about how to apportion your R&D resources, doesn’t it?
Splinter: Of course.
Q: So looking at your R&D budget, where is it shifting? At one point it was almost entirely semiconductors. How is it changing?
Splinter: Today it is still largely in the semiconductor area. You can assume it’s still 75 percent or more in semiconductors. But we have a fairly large R&D budget. We projected $1.2 billion this year.
Q: What is that as a percentage of revenue?
Splinter: Last year we did $9.3 billion. If we grow this year to roughly $10 billion, that would be 12 percent of revenue. This whole industry cycles, too. We’re very fortunate to have the money to invest in some of these other markets. That’s really what R&D is for—to invest in areas where you feel you can grow. We had to prioritize some things. We got out of the implant business.
Q: Not all of this is done by Applied working alone, either. You have relationships at the Nanoscience center in Albany, N.Y. Any others?
Splinter: We have very close relationships with IMEC, too. And when you work closely with customers, you can get insights into how they use the equipment. Our triangle is our own Maydan Technology Center in Santa Clara, coupled with Albany and IMEC in Europe. Between those three locations, we can pretty much get every part of our semiconductor research done. We can’t make integrated circuits here. We can test unit processes and see our machines are working and films are going down, but we have to go someplace else to get the more advanced IC structures done and really measure the integrated effects.
Q: In the past, the same names popped up in the capital equipment space—Applied, Novellus, Tokyo Electron and KLA-Tencor in metrology. Is there still head-on competition, or are these companies beginning to specialize in different areas?
Splinter: We chose to get out of implant because our assessment of where we would be and how much we had to spend to be competitive were such that it didn’t make sense to be there. But if we think there’s a market where we have technology that’s differentiated, we’re going to be there. We invested with Dainippon Screen in the track business a year ago and we continue to look at all sorts of different applications and products in the semiconductor area. We’ve been quite competitive in our thin-film products and CVD (chemical vapor deposition) and PVD (physical vapor deposition).
Q: Has thin film become a core business that you will leverage off of for the foreseeable future?
Splinter: It is one of our core competencies—thin film engineering, system manufacturing and our global capability to deliver service.
Q: But looking at the company historically, thin film wasn’t always the core business, was it?
Splinter: That’s right. But a few years ago when we went through and looked at all our skills and capabilities, we identified thin-film engineering—whether that’s putting them down, taking them off, measuring them, inspecting them—we classified all of that as thin-film engineering. That’s really a core competency of Applied Materials. That’s the applications space. We also have a tremendous capability to build very complex, well-engineered systems, and to manufacture them to customer specifications. And we can do that anywhere in the world and deliver service and support. Those are our three core competencies. So when we look at a new market, we ask ourselves how many of those core competencies can we apply. The more we can bring to a market, the better chance we have of providing differentiation. We can’t go into a new market as a ‘me too’ player. The chances of success drop significantly.
Q: Are service and support more crucial in new markets?
Splinter: Yes, because some of those customers don’t have the infrastructure that chip companies have built up over a long period of time. We can help provide that and deliver it at the right cost. The truth of the matter is, when we take care of our equipment it runs better. That’s why our service business has been so successful.
Q: Last year you said Applied was beginning to really look at its R&D budget and figure out ways to get synergies from various development efforts. Is that harder in new markets like solar?
Splinter: Yes, but even there, we ask whether we have a sustainable differentiation in the products we are designing and developing. On top of that, services like developing the process technology to solar modules is a capability we can add. In those systems, do we offer a sustainable differentiation? I think we do. If you look in the solar area today, the CVD and PVD systems we have and the intended acquisition of HCT [Shaping Systems]—that technology really matters to driving down the cost per watt in solar cells. We won’t get every one of these right, but we will be very tough on ourselves about establishing a sustainable differentiation or we won’t enter the market.
Q: How do you know when you’ve succeeded in a developing market?
Splinter: It’s all about market share. You can see that with our thin-film solar contracts today. Anyplace where there is competition, we’ve won—at least so far.
Q: Who is the competition?
Splinter: In thin films, Oerlikon (Pfaffikon, Switzerland) and Ulvac in Japan. When you look at our product, the efficiency of the cells coming out, the 8.5-level glass we can produce makes it hard to keep up.
Q: Where will the competition come from in the future, though? Will it be a company like GE or a government?
Splinter: GE will sell to the end consumer. We’re hoping, though, that we’ll convince them to be a great customer. The competition will not come from the traditional semiconductor manufacturers. What you’re seeing so far comes from the LCD manufacturers. In the crystalline silicon space, it’s all up for grabs.
Q: What effect will the price of silicon wafers have on all of this?
Splinter: The solar industry, which produces 1 percent of the energy in the world, uses more silicon than the semiconductor industry. If you multiply this and get it up to 2 percent of the energy, you’d have 20 times the amount of silicon moving.
Q: If the cost of manufacturing goes down, will the cost of silicon continue to go up and offset those cost efficiencies?
Splinter: That won’t be an issue. It will be normal supply and demand. For the solar industry to really take off and supply 20 percent of the total energy, the cost has to come down. For people familiar with our company, it’s always been, ‘We’ve got to move on Moore’s Law’ or ‘We’ve got to get the display cost down.’ You’ve got to get the cost down or the market doesn’t materialize. So yes, there might be a short run where prices can move up and be absorbed. But over the next 10 years, the cost per watt has to come down to be competitive with fossil fuels or the market won’t materialize the way we want to see it.
Q: At what point is there a cross-over in Applied’s business where you’re diversified enough that you’re no longer subject to the cyclicality of the semiconductor business?
Splinter: I don’t know if that will ever happen. We expect our semiconductor business to grow. There are still tremendous opportunities out there for semiconductors. We want to be there to supply that. Our semiconductor systems group will be tied to that cycle. Our service group is tied to a utilization cycle. And our display is much more tightly coupled to consumer. Solar is a completely different cycle. It may be on the building cycle or the energy cycle. We are good at operating in cyclical businesses. We’re not afraid of them.
Q: But if you get enough different businesses, do all of these things even each other out?
Splinter: That would be nice, but it’s not something we’re going to worry about. We will try to optimize the performance of each of these businesses.
Q: Wall Street tends to analyze companies on a quarterly basis. Does that have an impact?
Splinter: It takes about four years to develop a new product from concept to being manufacturable. If we ran the company on a quarter by quarter basis, we wouldn’t have any new products. We have to set our investments that way. Are we going to be sensitive to what’s happening in the market today and tomorrow? Absolutely. But are we going to compromise the long-term direction of the company and key investments? Never.
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