semi outsourcing industry overview

Enrique ShadahBusiness Ecosystems LLC1005 Boylston StSte 235Newton Highlands, MA 02461

SEMI Outsourcing Market

Research Document

2© 2002 Business Ecosystems LLC. All rights reserved.

Contents

This presentation is divided into 2 parts.

2 Semiconductor Equipment Market

1 Semiconductor Market


Semiconductor Markets

The semiconductor market is expected to continue growing but at a lower pace.

• Global semiconductor demand has grown at CAGR 10% since 1991 from to $139 billion in 2001, however growth is expected curb as the main markets for semiconductors are maturing.

• Global semiconductor equipment demand has grown at 12% CAGR since 1991 to $28 billion in 2001, following closely that of semiconductors, but there is still debate of how new technology will off-set reduced growth expectation of end-user markets.

• Outsourcing of non-core activities by equipment makers has become almost an industry standard and many companies still have more room for outsourcing.

• Currently, there are many suppliers that provide outsourcing services to equipment OEMs, however there are niche markets that do not have high competitive intensity (I.e. manufacturing outsourcing).

Semiconductor equipment is an attractive market for outsourcing providers.


Global semiconductor demand has grown at CAGR 10% since 1991 to $139 billion in 2001 and equipment demand has grown at 12% CAGR since 1991 to $28 billion in 2001, following closely that of semiconductors.

Source: “World Market Shares 1982-1990, 1991-2001,” SIA Industry Statistics, 2002; “World Wide SEMS,” SEMI, 2002.

Semiconductor Demand and Equipment Billings


$-

$50.00

$100.00

$150.00

$200.00

$250.00

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Billings ($billions)

Sales ($billions)

$-

$50.00

$100.00

$150.00

$200.00

$250.00

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Billings ($billions)

Sales ($billions)Semiconductor sales ($billion)Equipment billings ($billion)


World semiconductor markets are driven by computer and telecommunications chips; the former entering transition from growth to mature stage.

Semiconductors End Use

Source: ICE; Status.


27% 24% 21%20% 17% 17% 16%

13% 12% 13% 13% 12% 12% 13% 13%

41% 45%45% 49% 51% 50%

51% 56%56% 51% 49% 48% 44% 41% 39%

13% 13% 15% 15% 16% 18% 17% 19%22% 24% 26%

29% 32% 33%

15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%19

91

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

F

2002

F

2003

F

2004

F

2005

F

Automobile

Communications

Computer

Consumer

Government

Industrial


The Americas have maintained leadership in semiconductor demand since 1992 and lost its place by a small margin to the Asia Pacific Region in 2001.

World Market Sizes ($billions of sales)

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

$-

$25.0

$50.0

$75.0

$100.0

$125.0

$150.0

$175.0

$200.0Americas EUR Japan Asia Pacific Total

World Market Sizes ($billions of sales)

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

$-

$25.0

$50.0

$75.0

$100.0

$125.0

$150.0

$175.0

$200.0Americas EUR Japan Asia Pacific Total

Source: “World Market Shares 1982-2001”, SIA, 2002.


Total


As telecommunications chip use is increased on a global basis, semiconductor production outside the U.S. will also increase, pressing equipment makers further towards globalization.

•High-end Microprocessors

•Wire-line telecommunications chips (broad-band)

•PC hotbed•Innovative companies

•Pioneers in wire-less telecommunication chips

•Non-volatile memory for telecomm applications

•Innovation in chip production techniques

•DRAMs, flash and other memory chips

•Largest consumer of wire-less telecommunication chips

•Houses world’s largest Foundries and Contract Electronic Manufacturers

Source: “Semiconductor Industry Survey”, Standard and Poor, February, 2002



American and Japanese based firms continue to dominate worldwide semiconductor markets.

Other

Japanese

American

Americas Europe

Japan Asia Pacific

0%

25%

50%

75%

100%

1982 1985 1988 1991 1994 1997 20000%

25%

50%

75%

100%

1982 1985 1988 1991 1994 1997 2000

0%

25%

50%

75%

100%

1982 1985 1988 1991 1994 1997 2000

0%

25%

50%

75%

100%

1982 1985 1988 1991 1994 1997 2000

Source: “World Market Shares 1982-2001”, SIA, 2002.



The top 10 semiconductor companies have represented about half of industry revenues in the past five years, however companies in the list have changed.

Source: “Semiconductors Industry Survey,” S&P, February, 2002, pp.9; www.instat.com


Largets Semiconductor Companies(Ranked by 1995 and 2001 revenues, in millions of dollars)

RevenueRank Company (Country) 1995 Rank Company (Country) 1999 2000 2001 1999 2000 2001

1 Intel (U.S.) 13,528 1 Intel (U.S.) 26,806 29,750 23,850 11.0 (19.8) 15.9 13.4 17.6 2 NEC (Japan) 9,739 2 Toshiba (Japan) 7,618 11,214 6,781 47.2 (39.5) 4.5 5.0 5.0 3 Toshiba (Japan) 9,668 3 STMicroelectronics (Switz.) 5,077 7,948 6,359 56.5 (20.0) 3.0 3.6 4.7 4 Hitachi (Japan) 9,422 4 Texas Instruments (U.S.) 7,120 9,100 6,100 27.8 (33.0) 4.2 4.1 4.5 5 Motorola (U.S.) 8,575 5 Samsung (S. Korea) 7,125 10,800 5,814 51.6 (46.2) 4.2 4.9 4.3 6 Samsung (S. Korea) 8,404 6 NEC (Japan) 9,210 11,081 5,309 20.3 (52.1) 5.5 5.0 3.9 7 Texas Instruments (U.S.) 8,000 7 Hitachi (Japan) 5,554 7,282 5,037 31.1 (30.8) 3.3 3.3 3.7 8 Mitsubishi (Japan) 4,690 8 Motorola (U.S.) 6,394 8,000 4,828 25.1 (39.7) 3.8 3.6 3.6 9 Fujitsu (Japan) 4,271 9 Infineon (Germany) 5,223 6,715 4,558 28.6 (32.1) 3.1 3.0 3.4

10 Philips (Netherlands) 4,040 10 Philips (Netherlands) 4,557 6,812 4,235 49.5 (37.8) 2.7 3.1 3.1 Others 64,163 Others 84,179 113,305 66,129 34.6 (41.6) 49.9 51.0 46.2 Total Market 144,500 Total Market 168,863 222,007 139,000 31.5 (37.4) 100.0 100.0 100.0

* Formerly Hyundai.

Revenues %CHG. 99-00

%CHG. 00-01

S.O.M. (%)

Largets Semiconductor Companies(Ranked by 1995 and 2001 revenues, in millions of dollars)

RevenueRank Company (Country) 1995 Rank Company (Country) 1999 2000 2001 1999 2000 2001

1 Intel (U.S.) 13,528 1 Intel (U.S.) 26,806 29,750 23,850 11.0 (19.8) 15.9 13.4 17.6 2 NEC (Japan) 9,739 2 Toshiba (Japan) 7,618 11,214 6,781 47.2 (39.5) 4.5 5.0 5.0 3 Toshiba (Japan) 9,668 3 STMicroelectronics (Switz.) 5,077 7,948 6,359 56.5 (20.0) 3.0 3.6 4.7 4 Hitachi (Japan) 9,422 4 Texas Instruments (U.S.) 7,120 9,100 6,100 27.8 (33.0) 4.2 4.1 4.5 5 Motorola (U.S.) 8,575 5 Samsung (S. Korea) 7,125 10,800 5,814 51.6 (46.2) 4.2 4.9 4.3 6 Samsung (S. Korea) 8,404 6 NEC (Japan) 9,210 11,081 5,309 20.3 (52.1) 5.5 5.0 3.9 7 Texas Instruments (U.S.) 8,000 7 Hitachi (Japan) 5,554 7,282 5,037 31.1 (30.8) 3.3 3.3 3.7 8 Mitsubishi (Japan) 4,690 8 Motorola (U.S.) 6,394 8,000 4,828 25.1 (39.7) 3.8 3.6 3.6 9 Fujitsu (Japan) 4,271 9 Infineon (Germany) 5,223 6,715 4,558 28.6 (32.1) 3.1 3.0 3.4

10 Philips (Netherlands) 4,040 10 Philips (Netherlands) 4,557 6,812 4,235 49.5 (37.8) 2.7 3.1 3.1 Others 64,163 Others 84,179 113,305 66,129 34.6 (41.6) 49.9 51.0 46.2 Total Market 144,500 Total Market 168,863 222,007 139,000 31.5 (37.4) 100.0 100.0 100.0

* Formerly Hyundai.


%CHG. 00-01

S.O.M. (%)

10

© 2002 Business Ecosystems LLC. All rights reserved.

Contents

This presentation is divided into 2 parts.

2 Semiconductor Equipment Market

1 Semiconductor Market

11


Semiconductor Equipment

Although the semiconductor market has experienced healthy growth, its cyclical nature poses challenges for semiconductor and equipment companies.

Semiconductor equipment companies are exposed to stronger demand cycles than semiconductor manufacturers due to long equipment lead times and high inventory costs.

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

BillingsSales

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

BillingsSalesSemiconductor salesEquipment billings

7 years cycle 5 years cycle

Source: “World Market Shares 1982-1990, 1991-2001,” SIA Industry Statistics, 2002; “World Wide SEMS,” SEMI, 2002.

Yo

Y c

ha

ng

e

12



In 2001, WFE semiconductor equipment market plummeted 41% to $21 billion from $36 billion in 2000.

Source: “World Wide SEMS,” SEMI, 2002

17%

14%

13%

10%

8%

7%

6%

6%

5%

5%

4%3%

1%1%

Inspection & Measurement Equipment

Expose & Write Equipment

CVD Equipment

Etch Equipment

Resist Processing Equipment

Sputter Equipment

Surface Conditioning/ Clean & Dry Equipment

Mask/Reticle Equipment

CMP Equipment

Ion Implant Equipment

Thermal Processing Equipment

Other Deposition Equipment

Other Wafer Processing Equipment

Wafer Manufacturing Equipment

WFETotal 2000: $36.2 billionTotal 2001: $21.3 billion

Note: the proportion of each type of equipment category was assumed to be similar to that of N.A. Billings YTD 2002

Semiconductor Equipment Front-End Estimated Market Size

13



The top 10 equipment companies have increased their share of the equipment industry’s revenues in the past three years, representing over 70% of the industry in 2001.

Largets Semiconductor Equipment Companies(Ranked by 2001 revenues, in millions of dollars)

Rank Company (Country) 1999 2000 2001 1999 2000 20011 Applied Materials (U.S.) 5,457 10,410 6,455 90.8 (38.0) 21.4 21.8 23.02 Tokyo Electron (Japan) 2,634 5,142 3,557 95.2 (30.8) 10.3 10.8 12.73 Nikon (Japan) 1,430 2,432 1,928 70.1 (20.7) 5.6 5.1 6.94 KLA-Tencor (U.S.) 1,049 2,003 1,685 90.9 (15.9) 4.1 4.2 6.05 ASM Lithography (Netherlands) 1,276 2,016 1,544 58.0 (23.4) 5.0 4.2 5.56 Canon (Japan) 751 1,418 1,135 88.8 (20.0) 2.9 3.0 4.07 Dainippon Screen Mfg. (Japan) 647 1,390 1,056 114.8 (24.0) 2.5 2.9 3.88 Novellus Systems (U.S.) 657 1,384 1,016 110.7 (26.6) 2.6 2.9 3.69 Hitachi High-Tech* (Japan) na 1,304 982 na (24.7) na 2.7 3.5

10 Advantest (Japan) 955 1,865 924 95.3 (50.5) 3.7 3.9 3.3Others 10,644 18,316 7,756 72.1 (57.7) 41.7 38.4 27.7Total Market 25,500 47,680 28,038 87.0 (41.2) 100.0 100.0 100.0

* Newly formed subsidiary of Hitachi LT (2001)


%CHG. 00-01

S.O.M. (%)

Largets Semiconductor Equipment Companies(Ranked by 2001 revenues, in millions of dollars)

Rank Company (Country) 1999 2000 2001 1999 2000 20011 Applied Materials (U.S.) 5,457 10,410 6,455 90.8 (38.0) 21.4 21.8 23.02 Tokyo Electron (Japan) 2,634 5,142 3,557 95.2 (30.8) 10.3 10.8 12.73 Nikon (Japan) 1,430 2,432 1,928 70.1 (20.7) 5.6 5.1 6.94 KLA-Tencor (U.S.) 1,049 2,003 1,685 90.9 (15.9) 4.1 4.2 6.05 ASM Lithography (Netherlands) 1,276 2,016 1,544 58.0 (23.4) 5.0 4.2 5.56 Canon (Japan) 751 1,418 1,135 88.8 (20.0) 2.9 3.0 4.07 Dainippon Screen Mfg. (Japan) 647 1,390 1,056 114.8 (24.0) 2.5 2.9 3.88 Novellus Systems (U.S.) 657 1,384 1,016 110.7 (26.6) 2.6 2.9 3.69 Hitachi High-Tech* (Japan) na 1,304 982 na (24.7) na 2.7 3.5

10 Advantest (Japan) 955 1,865 924 95.3 (50.5) 3.7 3.9 3.3Others 10,644 18,316 7,756 72.1 (57.7) 41.7 38.4 27.7Total Market 25,500 47,680 28,038 87.0 (41.2) 100.0 100.0 100.0

* Newly formed subsidiary of Hitachi LT (2001)


%CHG. 00-01

S.O.M. (%)

Source: “Semiconductors Equipment Industry Survey,” S&P, February, 2002, pp.8; VLSI research Inc.

14


Outsourcing of non-core activities by equipment makers is almost a standard step towards effective management of the industry’s cycles.

• Equipment companies that successfully lower their operating leverage will most likely survive to the industry’s cycles.

• Additionally, the semiconductor equipment technology roadmap poses many challenges to toolmakers, which need to focus on their core to be successful.

• Semiconductor companies are suffering increasing pressure to manage the growth of manufacturing equipment prices as Fabs and IDMs are facing shorter electronic product life cycles and saturated customer’s preferences for more hardware functionality.

• There is consensus among many of the companies interviewed for this study about the need to outsource manufacturing operations, but still there is no clear indication of what type of companies would survive as the supplier of choice.


Thus, a window of opportunity is still open for companies that are positioned to provide outsourcing services to toolmakers.

15


Changes in Operating Leverage

(30.00)

(20.00)

(10.00)

-

10.00

20.00

30.00

1997 1998 1999 2000 2001

Lam Research

Tokyo Electron

Axcelis

Varian SEA

Applied Materials

Novellus

Mattson

KLA-Tencor

Changes in Operating Leverage

(30.00)

(20.00)

(10.00)

-

10.00

20.00

30.00

1997 1998 1999 2000 2001

Lam Research

Tokyo Electron

Axcelis

Varian SEA

Applied Materials

Novellus

Mattson

KLA-Tencor

Equipment companies that successfully lower their operating leverage will most likely survive to the industry’s cycles.

~

~

Source: Company annual reports, Innovent analysis.


Note: operating leverage is defined as the percentage change in operating earnings as a result of a 1% change in revenues over the same period.

16


Toolmakers are facing the challenge of lowering inventory levels throughout the value chain.

• For leading companies such as Applied Materials, Axcelis, Novellus, KLA and Varian, inventories have been declining relative to total current assets in the last six years.

• This has been achieved mainly by following principles of lean manufacturing, outsourcing and world class supplier management practices.

Source: Company reports, Innovent analysis


Inventories as % of Current Assets

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

1996 1997 1998 1999 2000 2001

Lam Research Tokyo Electron Axcelis Varian SEA

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

1996 1997 1998 1999 2000 2001

Applied Materials Novellus Mattson KLA-Tencor

17


Technology roadmap poses many challenges to toolmakers, which need to focus on their core to be successful.

Tool-maker

Core

Non-core

Integration level, cost, speed, power, compactness, functionality, imply, among other things:

• 300mm wafer processing at reasonable costs, sub-micron line widths, lower energy consumption

• Low cost of ownership (consumables, maintenance and repair)

• Subsystem and component (laser, power, gas handling, chemical handling, automation) design (R&D)

• Subsystem and component manufacturing and testing• Electronic, electrical and mechanical component

manufacturing• Component assembly

Source: “Semiconductor Equipment Industry Surveys,” S&P, February 2002; Interviews with Lam Research, Axcelis Technologies, Mattson, Novellus Systems, Varian Semiconductor Equipment Association, MKS Instruments, Veeco, Brooks-PRI Automation; Innovent analysis.

• Subsystem (laser, power, gas handling, chemical handling, automation) design (R&D)

• Subsystem manufacturing and testing

• Intellectual property driven (IP)

• Electronic, electrical and mechanical component manufacturing

• Component and assembly integration

• Build to spec driven

Technology Outsourcing

Manufacturing Outsourcing

Technology outsourcing and manufacturing outsourcing are the two main avenues that toolmakers are taking to focus on their core.

• Design (R&D) of wafer processing core module (CMP, PECVD, Lithography, Cleaning, Etching, Inspection/repair, etc.)

• Integration of a complete machine• Testing complete machines


Process Challenges

18


Value chain evolution shows equipment companies relying more on outsourcing to leverage R&D costs in specific systems and to migrate to a variable cost model as a way to manage the industry’s cyclicality.

End user

IDMs

Equipment (Tools)

Components Contractors

Raw materials

End user

IDMs

Equipment (Tools)

Components

Manufacturing outsourcing

Raw materials


1960’s to 1980’s 1990’s through today

End user

IDMs

Equipment (Tools)

Components

Raw materials

Multi-specialtyTechnology outsourcing

2002 and beyond

Tie

r 1

Tie

r 2



Note: arrow width represents the strength of the relationship.

19


Technology outsourcing companies are expected to help toolmakers develop key subsystems, while manufacturing outsourcing firms are expected to be the source of fixed cost reductions in manufacturing.

Tie

r 1

Tie

r 2

Highlights• Five main tool subsystems are being outsourced: 1) gas delivery

systems, 2) chemical delivery systems, 3) laser sources, 4) power management and 5) wafer handling systems.

• R&D efforts of outsourcing companies help toolmakers develop products faster.

• Toolmakers are requiring delivery of configurable subsystems, specification and design expertise, and management of supply chain logistics from outsourcing companies to lower cycle times.

• Global manufacturing and customer support become critical for outsourcing and contractors due to global footprint of toolmakers.

• Consolidation of outsourcing companies in order to reach critical mass and provide the breadth of skill required is happening.

• Manufacturing outsourcing providers posed with challenge of managing working capital and asset intensity as materials management becomes critical due to the high mix, low volume nature of operations.

• Early involvement in tool design for manufacturing efficiency will increase

•Further specialization with focused R&D expenditures

End user

IDMs

Equipment (Tools)

Components

Raw materials

Multi-specialtyTechnology outsourcing

2002 and beyond



20


In 2001, the worldwide market for outsourcing services was approximately $12 billion, and is expected to grow faster than the industry’s average as toolmakers increase the amount of activities outsourced.

AssumptionsAssumptions

• WFE represents 76% of the equipment market in 2000 and 2001

• Gross margins for equipment companies are 45%

• Proportion of equipment COGs dedicated to outsourcing is 60%

• Of this, 75% is manufacturing and 25% technology outsourcing

• WFE represents 76% of the equipment market in 2000 and 2001

• Gross margins for equipment companies are 45%

• Proportion of equipment COGs dedicated to outsourcing is 60%

• Of this, 75% is manufacturing and 25% technology outsourcing

COGs Composition for Toolmakers

$3.6

$8.4

$4.9

$4.7$8.0$2.1

$-

$5.00

$10.00

$15.00

$20.00

$25.00

($b

illi

on

s)

ManufacturingOS

Technology OS

RM, Lab, OH

ManufacturingOS $8.36 $4.91

Technology OS $3.58 $2.11

RM, Lab, OH $7.96 $4.68

2000 2001

COGs Composition for Toolmakers

$3.6

$8.4

$4.9

$4.7$8.0$2.1

$-

$5.00

$10.00

$15.00

$20.00

$25.00

($b

illi

on

s)

ManufacturingOS

Technology OS

RM, Lab, OH

ManufacturingOS $8.36 $4.91

Technology OS $3.58 $2.11

RM, Lab, OH $7.96 $4.68

2000 2001


Source: Interviews with leading toolmakers, Innovent analysis.

21


Currently, there are many companies that provide outsourcing services to toolmakers, but there are niche markets, such as electromechanical assembly, that have low competitive intensity.

ContinuumManufacturing outsourcing partners

Technology outsourcing partners

•Highly fragmented, many companies

•Examples: –Machine shops–PCB manufacturers–Cable harnesses–Frames–Sheet metal

•Fragmented, heading towards consolidation as critical mass is becoming more important

•Examples: –Electronic integrators such as

Solectron, Jabil, Sanmina, Suntron

–Electromechanical integrators such as Coorstek, Suntron, Gem City Engineering, Wolfe Engineering, etc.

•Concentrated, clear market leaders are identified and have concentration of the market

•Examples: –Specialists with focused

R&D: MKS, Cymer, Advanced Energy, Brooks-Pri, Helix, Inficon, Varian Vacuum, etc.

Barriers to entry:•Asset base•Manufacturing engineering skills (materials, electronics, etc.)

•Customer service•Client relationships

Barriers to entry:•R&D capability •Customer service and fab operations support

•Client relationships•Reputation•Technological diffusion

Simple components Component and assembly integration


22


Competitive intensity for the manufacturing outsourcing industry is in the low to mid ranges, leaving the door open for companies with the required skill set to enter the industry and succeed.

Thrust Industry Facts Conclusion

Clients

• Toolmakers are consolidating, this also consolidates the structure of their supplier base

• Also, they are increasing the levels of manufacturing outsourcing to reduce exposure to industry’s cyclical nature

• Are increasing the bar regarding outsourcing supplier’s selection criteria

• Are willing to develop long-term partnerships with exceptional suppliers

There is significant potential for contribution to toolmakers manufacturing operations if suppliers begin to assemble key tool subsystems. Toolmakers need to lower their operating leverage and shift to a variable cost model, which is not possible without manufacturing outsourcing companies. The bargaining power of customers is relatively low in terms of the technological demand needed vs. available in the market, thus an OS firm that meets toolmaker’s selection criteria, has high probabilities of getting and keeping a contract.

Competitors

• Fragmented industry, major player do not have more than 10% of the $5 billion market

• Outsourcing capabilities depend heavily on mechanical, electrical, electronic and value chain management expertise

• The number of competitors is growing• Some companies are forming alliances or are

growing through acquisitions to combine various skill sets that would be very difficult to grow internally (I.e. merger EFTC with K*Tec in 2002 , Saint-Gobain and Holz machining in 2000, Ontario Corp and CDS systems)

• Capital intensity is determined by the company’s business model (pure assembly vs. vertically integrated)

There is opportunity for incumbents to increase market share as the outsourcing industry expands, however they need to develop the right mix of skills (clean assembly and welding, logistics, manufacturing engineering, ERP and materials management, etc.) in order to get an entrance at the toolmaker’s door.


23


Competitive intensity for the manufacturing outsourcing industry is in the low to mid ranges, leaving the door open for companies with the required skill set to enter the industry and succeed (continuation).

Thrust Industry Facts Conclusion

Potential competitors

• IP component companies are integrating forwards as technology or manufacturing outsourcing companies (I.e. a leading component company is planning to build custom gas delivery systems)

• Global electronic assembly manufacturers are targeting the semiconductor equipment market (Jabil, Sanmina, Suntron, etc.)

The window of opportunity is open for manufacturing outsourcing companies, but is closing as new companies are poring in the market. The first company to develop a sustainable model that serves the industry through its ups and downs will have the clear first mover advantage.

Suppliers

• Comprised mainly of raw materials, components and machining services suppliers

• Fragmented, but for some key components (I.e. mass flow controllers) there can be a limited number of suppliers (MKS, Celerity)

Is unlikely that the supplier base for manufacturing outsourcing companies is going to change much, however managing these suppliers (lead-times, supplier development, monitoring, long term commitments, etc.) is increasing in importance as the complexity of the outsourced equipment increases and client requirements become tougher.

Technology

• Currently, toolmakers are averse to outsource the manufacture of IP assemblies as some are protected as trade secrets

• Equipment complexity is increasing due to technological demands (more demands on lower power consumption, new sources of energy, more automation requirements, etc.)

Manufacturing outsourcing companies must be updated about their clients technology roadmaps. These outsourcing firms will have an increasing role in design to manufacture engineering as IP protection issues are resolved via contract clauses and/or strategic alliances.


24


Manufacturing outsourcing companies are facing tougher selection criteria, due to rationalization of their customer’s supplier base.

Criteria Value Importance Rationale

Diversification within SEMI

Less than 30% of revenues from single customer (rough average, depends on specific toolmaker)

HighIncreasing the probability that a supplier will survive a downturn in the client’s business

Diversification in other industries

Less than 25% of revenues in semi (rough average, depends on specific toolmaker)

Very highPromote suppliers ability to withstand semi equipment industry cycles, thus ensure reliable future customer support

Material handing capabilities

Extensive use ERP systems (BOM, product follow-up, e-connectivity, etc.)

Supplier base development and management

Very high Increase likelihood of positive respond to sudden increases in equipment demand

Manufacturing engineering skills

Threshold: high number of manufacturing engineers/employee

Ability to improve new product designs (mechanical, electronic, materials, chemical, assembly and testing functionality)

High

Suppliers are given non-core items to manufacture, thus it is critical that a supplier is able to propose modifications of new designs and to manufacture Build-To-Print (BTP) items very efficiently

Quality standards compliance

Semiconductor industry standards compliance

ISO 9001, orbital welding, etc.Average Need of compliance with toolmaker’s

customers’ (Fabs) quality standards

Source: Interviews with Lam Research, Axcelis Technologies, Mattson, Novellus Systems, Varian Semiconductor Equipment Association, Innovent analysis.


25


Manufacturing outsourcing companies are facing tougher selection criteria, due to rationalization of their customer’s supplier base (continuation).

Criteria Value Importance Rationale

LocationOne day’s driving distance from supplier, on a global basis!

high

Need to support JIT (kanban) manufacturing methods in each of the customer’s locations. There exists an industry directive to reduce inventories in the value chain.

Financial solvencyCashflow positive, no risk of financial distress due to excessive debt

high

Supplier capacity to cope with high levels of working capital, mainly inventory, when manufacturing complex mechanical assemblies and of fixed assets (PP&E: machining tools, clean-rooms, plant facilites, etc.)

Source: Interviews with Lam Research, Axcelis Technologies, Mattson, Novellus Systems, Varian Semiconductor Equipment Association, Innovent analysis.


26


Competitors in the manufacturing outsourcing industry for semiconductor equipment are fragmented.

Source: Dun & Bradstreet company reports, Innovent analysis.

2001

Estimated U.S. Outsourcing manufacturing Market $5,000 million

Revenue (1)

(n=25)*

Average = $46 million

Max = $195 million

Min = $4 million

Range = $191 million

1) When possible, revenues from semiconductor related operations were selected, thus these numbers represent conservative revenue estimates. * Excludes companies such as Solectron, Sanmina, Jabil, Suntron, etc, who are mainly focused on the electric/electronic manufacturing outsourcing market; also includes sales figures presented in Duns Database for which 2001 period was assumed.


27


There are more companies capable of manufacturing components than any other type of product.

Source: Dun & Bradstreet company reports, company WebPages and Innovent analysis.

Manufactu-ring service

Sample 30 companies Highlights

Simple Components 93% (28)

•Component manufacturing outsourcing companies are mainly diversified into medical, flat panel displays, aerospace, military and front- and back- end semi equipment markets

•Component manufacturing is basic for the industry, many companies that can manufacture assemblies, modules and subsystems can machine individual components on a production basis

•The companies that did not choose to have component manufacturing capabilities are those that focus on delivering whole modules of subsystems to customers (I.e. Celerity systems has IP components, but does not manufacture custom machined components on an outsourcing basis)

Assemblies 90% (27)

•Companies chose not to do assemblies either because it is not their core focus (I.e. a machining company dedicated to components) or because it is pursuing bigger projects (modules and subsystems)

•It is relatively simple to manufacture assemblies parting from a component manufacturing operation, and depending on the type of assembly, facilities Cap Ex might be needed I.e. clean room construction

Tool Modules 60% (18)

•Companies tend to have a specific expertise in the semiconductor equipment market I.e. Isys manufacturing (laser welding), FM industries (subsidiary of NGK insulators), Jade Corporation (experts in assembly), etc.

•Operational challenge to be successful in integrating a complex module is far greater than that of a assembly of component manufacturer; thus these companies tend to be vertically integrated from the raw material level

Subsystems 30% (9)

On average, companies tend to have IP in one or more specialties of the semiconductor industry. This is particularly true for companies that specialize in Gas Box design. I.e. Wolfe Engineering, Celerity, MKS, Dakota Systems. Marler Enterprises and CDS Leopold are companies that also have semi expertise in other areas such as ion implantation tools

Complete tools 10% (3) Companies like Coorstek, Gem City Engineering and Maine Machine have dared to assemble

complete tools; there is not indication that they are doing this profitably


28


There is consensus among many of the companies interviewed for this study about the need to outsource manufacturing operations, but still there is no outsourcing company that has honed the Key Success Factors.

Man

ufa

ctu

rin

g O

uts

ou

rcin

g

Buying Criteria Key Success Factors

Diversification within SEMI

• Solid strategic planning process

• Excellent brand recognition

Diversification in other industries

• SBU management philosophy

• Aligned organizational structure

• Service related industries (based on technological content)

Material handing capabilities

• Efficient and effective utilization of ERP systems linked with supplier base and inbound logistic function

• Project based organization

Manufacturing engineering skills

• Development of unique manufacturing techniques

• Fast prototyping

Quality standards compliance

• SPC in place, intelligent quality systems, effective preventative quality systems

• Quality certifications in all of the relevant manufacturing processes (orbital welding, brazing, plating, clean room operations, etc.)

Location• Effective capacity rationalization and planning processes

• World class inbound and outbound logistics function

Financial solvency

• Working capital management

• Focus on return on assets (operating margins X asset turns)

• Ability to withstand cycles


29


Contents Appendix

Appendix

30


• Raw materials• generic

components

Components suppliers

Subsystems suppliers

Toolmakers(Tools & Process)

FabsEnd

Markets

Components Assembliessub-

systemsComplete

tools


Manufacturing Outsourcing*

Modules

Manufacture to Print“High-mix, low-volume”

Non-proprietary design (may include proprietary technology)

•Mechanical (fluids, heat transfer) engineering

•Electrical/Electronic E.•Design for manufacturing E.•Materials E.•Semiconductor process knowledge

•Materials handling•Lean manufacturing•Quality certification•Clean room manufacturing

* Excludes electronic outsourcing providers

Product line spectrum

31


Mai

n C

om

pan

ies


systemsComplete

tools


Modules

Adem LLC

A & D Precision Machining

Allied Devices

Brenner Tool & Die

C.D.S. Engineering

Celerity

Coorstek

D&H Manufacturing Co

Dakota Systems

Dff Corporation

GCE industries

Gem City Engineering

B&B Manufacturing

FM Industries

CMS Welding & Machining

Note: the list of companies showed here is not exhaustive. It is based on Interviews with leading toolmakers such as Axcelis, Brooks-Pri, FEI, Lam Research, Novellus, MKS, Varian, Veeco and Innovent research.

32


Mai

n C

om

pan

ies


systemsComplete

tools


Modules

Isys Manufacturing

Karlee Company

Knust-Sbo

Maine Machine

Marler Enterprises (M.E.I.)

Nor-Cal

Norwood Tool

Prattville Industries

Rentec

Saint-Gobain (Holz)

Synchrovac

Ultra Clean Technology

Wolfe Engineering

Jade Corporation

Note: the list of companies showed here is not exhaustive. It is based on Interviews with leading toolmakers such as Axcelis, Brooks-Pri, FEI, Lam Research, Novellus, MKS, Varian, Veeco and Innovent research.

33


Rev

enue

> $

50 m

illio

nR

even

ue >

$50

mill

ion

Rev

enue

< $

50 m

illio

nR

even

ue <

$50

mill

ion

Component manufacturerComponent manufacturer Higher electromechanical assembliesHigher electromechanical assemblies

A&D Precision Adem Llc

Allied Devices

Brenner Tool & Die

CDS Engineering

Coorstek

D&H Manufacturing

Dakota systemsDff

GCE Industries

Gem City Engineering

Isys Manufacturing

Jade Corporation

Karlee Company

Knust-Sbo

Main Machine

Marler Enterprises

Nor-cal

Norwood Tool

Prattville

Rentec

Saint-Gobain (Holz)

Syncrovac

U.C.T.

Wolfe Engineering

Innovent

B&B Manufacturing

FM Industries

CMS Weld. and Mach. (part of CDS)

34



•Valves•Fittings•Cables•Materials

–Quartz–Silicone carbide

•Gauges / meters•Controls•Switches

•Lithography•Etch & clean•Ion implantation•Deposition•CMP•Thermal processing•Inspection and measurement

–Reticle and mask inspection

–Metrology–Wafer defect inspection

•Vacuum pumps•Pressure systems •Power conversion and control systems

•Laser technologies•Tool automation•Gas and fluid control

Mai

n p

rod

uct

cat

ego

ries

Components OEMsSub-system

OEMsTools & Process

OEMs

35


Technology outsourcing: Components.

IP Driven

ComponentsWorld market

size ($Millions)

Price ranges ($)(for a typical

manufacturing process)

Main companies (% Share of Market SOM)

Total $1,000 million

Gas flow control Y2000: 400

1,000 - 9,500

(general purpose is around 2,500)

Aera, STEC, Unit Instruments (kinetics), Mykrolis, MKS Instruments, (first four comprise about 80% of the market. EMCO, a division of Advanced Energy, produces sonic systems for niche applications

Valves, fittings Y2000: 260 450 - 9,000 MKS Instruments (25%), Inficon, Helix, VAT and BOC Edwards (7%-8% each), others (45%)

Gauges (pressure

measurement)Y2000: 215

200 – 6,400

(general ASP 1,000 – 2,000)

•Capacitance based gauges: MKS (leader)

•Indirect measurement gauges: Granville Phillips, a division of Helix, (25%), MKS Instruments, Inficon, BOC Edwards

Gas analysis and other sensors

Y2000: 70 25,000

Inficon (35%), MKS Instruments-Spectra (20%), Ulvac, Stanford Research Systems and Anelva (less than 5% each), Variety Instruments, Luxtron and SC technology

Leak detection Y2000: 15 20,000 – 30,000Inficon and Alcatel Vacuum, (18% - 20% each), Varian, Ulvac (each with less than 10%), MKS is a new entrant with a portable leak detection device

Source: “Subsystem and Components, A Primer Report”, Lehman Brothers, July 9, 2001

36


Technology outsourcing: Subsystems.

IP Driven

SubsystemsWorld market

size ($Millions)




Vacuum Pumps Y2000: 1,500 5,000 – 25,000

Alcatel vacuum products, Anelva, IGC-APD Cryogenics, A-Vac industries, BOC Edwards, Branston Engineering, CTI-Cryogenics, Ebara Technologies, Hy Vac products, Kashiyama, Leybold Vakuum, Osaka Vacuum, Pfeiffer Vacuum, Seiko Seiki, Ulvac Technologies, Varian Vacuum

Power conversion and control systems for

semiconductor applications

($580 million)

Direct Current

Mid-frequency

Radio-frequency

Matching networks

Microwave

Y2000: 4903,100 – 175,000

(ASP of 9,500)

•Top ten suppliers control almost all of the market

•Advance Energy (53%), ENI and MKS-ASTeX (second and third)

•Other suppliers: Comdel, Huettinger, Kyosan, Daihen, Muegge Electric, Adtec, CPI, Trazar and Shindingen

Other power sources: reactive

gasY2000: 90

10,000 – 20,000

(Integrated subsystem’s ASP 40,000 – high

value added)

MKS-ASTeX (Astro product is the defacto standard, they command 90% SOM), Advance Energy is a new entrant


37


Technology outsourcing: Subsystems.

IP Driven World market size ($Millions)

Price ranges ($)(for a typical manufacturing

process)


Laser technologies for semiconductor applications Y2000: 315

500,000

(Current generation 248nm KrF excimer lasers)

700,000

(Next-generation 193nm ArF)

Cymer Inc. (82% SOM of installed excimer lasers), Gigaphoton and Lambda-physik (second and third, but well behind Cymer)

Tool Automation for

semiconductor applications

($755 million)

Interface Y2000: 400 15,000 – 50,000

Asyst Technologies (80%), Brooks Automation* (16%), Adept Technology (third), 31 more supplier who are niche players

Atmospheric robots*** Y2000: 150

15,000 – 30,000 (includes hardware,

controller and pre-aligner)

PRI* (>60%), MECS**(5%), Rorze, Daihen, JEL, Brooks, Yasakawa (remaining)

Vacuum robots*** Y2000: 95 30,000

Brooks Automation (90%), remaining is split between Daihen (3%), JEL (3%), PRI (2%) and MECS and others (3%)

Vacuum cluster Y2000: 75500,000

(simple platforms can sell 150,000 – 175,000)

Brooks Automation (86%), Daikin (12%), PRI (2%)

Integrated front end (IFE)**** Y2000: 35

120,000 – 140,000

(Basic 70,000 – high end 200,000)

Asyst (50%), Brooks (29%), PRI (11%), Adept, Rorze

* Brooks Automation acquired PRI, a new entrant in the tool automation market, in 2001** Purchased by Asyst in 2000*** Excludes robots sold with IFEs and vacuum cluster tools and takes into account only merchant sales and not captive robot capacity. Captive robot capacity is comprised mainly of vacuum robots as these are highly customized for the process tool**** Merchant market in 2000 represents about 10%-15% of total market


38


Toolmakers.

IP Driven

Tools

World market size ($Millions)




Process diagnostic

equipment -PDE

(Y2000: $5,120 million)

Wafer inspection

(includes defect inspection, CD* & Overlay, thin film, IPC*, and

others not shown) (Y2000: $4,352 million)

Defect Inspection Y2000: 1,480

SEMs: >$1 mill

Electron beam tools: $2-$3 mill

KLA-Tencor (60%-65%)

Applied Materials (10%), Hitachi (17%), Therma-wave (4%), Veeco Instruments (5%), Others (28%)

CD & Overlay Y2000: 1,131

CD: SEMs <$1 mill

Overlay: $350K-$500K

KLA-Tencor (35%-40%)

Thin film Y2000: 435 ~150,000 KLA-Tencor (35%)

Integrated process control (growing sub-segment) Y2000: ~100 <$100,000

Nova Measuring Instruments (>70% in CMP IPC market), Nanometrics (Integrated metrology for CVD), Rudolph Technologies, Therma-wave (agreement with AMAT), KLA-Tencor (CMP IPC market)

Reticle inspection/ repair Y2000: 500 $500,000-$1,000,000

KLA-Tencor (72%), Leica Microsystems (13%), Applied Materials (6%), Nikon (4%), Lasertech (3%), others (2%)

Source: “Perspectives”, SG Cowen, May 8, 2001

* CD = Critical Dimension; IPC = Integrated Process Control

39


Source: “Photolithography Outlook 2000”, Lehman Brothers, April 14, 2000; “Beam Me Up, Ion Implantation”, Lehman Brothers, October 23, 2000; “Semiconductor Capital Equipment”, Bear Stearns, May 2002; Dataquest, April 2002

IP Driven

Tools

World market size

($millions)

Price ranges ($million)(for a typical manufacturing

process)


Lithography Y2000E: 6,000 (~1,100 units) $5~$10 million Based on units: Nikon (35%), Canon (22%), ASM Lithography

(30%), Silicone Valley Group (9%), Others (4%)

Etch & clean Y2000A: 6,808 Not Available Applied Materials, Helix Technologies, Lam Research, Tegal, Tokyo Electron

Thermal Processing

(RTP)

Y2000: 613

Y2001: 368Not Available Y2001: Applied Materials (84%), Mattson (12%), Daippon

Screen (1.5%), Axcelis – SEN subsidiary (1.5%), others (1%)

Thermal Processing (Furnaces)

Y2000: 622

Y2001: 420Not Available

Y2001: Tokyo Electron (45%), Hitachi-Kokusai (25%), ASM International (13%), ASML (10%), Koyo Thermal (4%), Novellus (2%), Other (1%)

Ion implantation Y2000E: 1,500 (545 units)

High energy >$3.5

High current: $2.5-$3.5

Medium current: $2.5-$3.0

Y1999A: Axcelis (46%), Technologies, Varian Semiconductor (30%), Applied Materials (17%), others: Nissin and Ulvac (7%)

Deposition*: Y2000A: 9,010 Not Available Applied Materials, Genus, Helix, Lam Research, Novellus, Tokyo Electron, among others.

CMP Y2000A: 1,506 Not Available

Y2000A: Applied Materials (55% - gained to 60% in 2001), Ebara Technologies (22%), SpeedFam-IPEC (15% - fell below 10% in 2001), Lam Research (5%), Peter Wolters & Strasbaugh (3%)

*Includes CVD, metallization, deposition planarization and related.

Toolmakers.

40


Test, Assembly & Packaging (TAP)Test, Assembly & Packaging (TAP)

Wafer Fabrication (WFE)Wafer Fabrication (WFE)

Mask Mfg.Mask Mfg.

Wafer Mfg.Wafer Mfg. EpitaxiPhoto-

lithographyEtch Strip

Diffusion/ Metal

ImplantCMP

Wafer Test Dicing Die Bond Wire BondEn-

capsulationTest & Burn-in

Materials Management, Chemical Distribution, Automation

Inspection and Measurement

One cycle, additional deposition…

Materials Management, Chemical Distribution, Automation

IDMs

Source: www.infras.com

semi outsourcing industry overview

Documents

semiconductor companies

semiconductor manufacturers

semiconductor production

semiconductor markets

semiconductor industry

largets semiconductor

world market shares

equipment makers