The Semiconductor Market Takes Its Toll on Instrument Companies.

The current worldwide economic decline has weakened a number of industries, but perhaps no industry has felt the impact more than the semiconductor market. The mood of the attendees at this year's SEMICON West conference, held July 16-20 in San Jose and San Francisco, California, certainly reflected the anxiety and gloom surrounding the market. Even at the conference itself, 2001 industry estimates were being revised downward. Following last year's stunning growth rate of 37%, semiconductor sales are forecasted to decline by 14% in 2001 to $175 billion, according to the Semiconductor industry Association (SIA). Semiconductor equipment manufacturers will feel this decline as much as any other industry sector. Semiconductor Equipment and Material International (SEMI) predicts a 35% decline in sales of semiconductor equipment in 2001 to $31 billion, following sales growth of 87% in 2000.

The analytical instrument industry has not been immune from this sharp and sudden drop in semiconductor equipment sales. Of all the end-user markets analytical instrument companies serve, one of the hardest hit has been the semiconductor industry. In 2000, over $575 million worth of analytical instruments were sold worldwide for semiconductor industry applications. Several major analytical instrument companies participate in the semiconductor equipment market, as well as a number of specialized vendors. For techniques such as ICP-MS, scanning electron microscopes (SEM), atomic force microscopes (AFM), and surface analyzers, for which the semiconductor market accounts for over 20% of annual revenues, the downturn's effect is especially pronounced. The sudden decline of the semiconductor market spells a slowdown in sales for these techniques, as well as a difficult and uncertain business environment for some companies that rely on semiconductor equipment sales for growth.

The history of the semiconductor industry is one of boom and bust cycles. As the demand for chips surges, overproduction leads to over capacity and excess inventory, resulting in price declines and a market contraction. Semiconductor equipment sales' growth tends to follow the annual patterns of the semiconductor market. In 2000, both markets experienced one of their strongest years ever, driven by the demand for chips for telecomm, Internet and wireless applications. However, the US economic downturn, combined with over production and a decrease in demand have crippled the industry.

For semiconductor equipment manufacturers, the annual rates of revenue growth and decline parallel those of semiconductor sales. However, for semiconductor equipment sales, the rates of growth and decline are much steeper. In 1998, semiconductor sales fell by 8%, but semiconductor equipment sales fell by 21%. When semiconductor sales are strong, the industry invests in new factories and equipment upgrades, which are then trimmed dramatically in down times. While semiconductor equipment manufacturers can adjust their businesses to prepare for such up-and-down periods, the latest down cycle has grown more severe than expected. Mid-year reports from companies such as Infineon Technologies AG, Philips Electronics and Hitachi have further dampened forecasts for a quick recovery and raised doubts as to just how long the slump will continue. Similarly, equipment makers KLA-Tencor, Applied Materials and Novellus have noted the lack of conclusive signs about when the downturn will end.

At the Wafer Processing portion of SEMICON West, held July 16-18 at San Francisco's Moscone Cnter, the show was as crowded as last year but few people seemed to be visiting the exhibitor booths and serious buyers were in short supply. Dieter Jahn, Intel global account manager at Inficon, noted that attendees were shopping but not really in a buying mood. But he also noted that, fortunately, Intel is still making capital investments, although not at last year's level.

At the show, SEMI Director of Industry Research and Statistics, Elizabeth Schumann, presented a talk on the outlook for semiconductor capital equipment. She pointed to technological changes, manufacturing efficiency, market consolidation and China's emerging semiconductor market as some of the trends driving the semiconductor equipment industry. Noting the downturn in book-to-bill ratios since December 2000 for US-based semiconductor equipment manufacturers, she forecasted growth for the semiconductor equipment sales through 2004. However, only in 2004, would annual sales surpass those of 2000.

In his presentation, George Burns of Strategic Market Associates discussed the business climate, suggesting that chip sale may have entered a new era of more mature growth, showing that from 1980 to 1995, the combined average growth rate for chip sales was 17.5% but from 1980 to 2001, it was 13.3%. Mr. Burns also discussed manufacturing plant, or "fab," activity. He noted that over $50 billion was spent on new fab construction in 2000, but that in 2001 such spending has slowed considerably. However, while fab activity is down, China's growing market, new foundries, contract manufacturing facilities, and 300 mm wafer manufacturing are all sources for future growth. According to Strategic Market Associates' World Fab Watch, "by the end of 2001, the capacity of 300 mm coming on line will equal that of 200 mm."

It is this move to 300 mm in combination with an ongoing pursuit of higher productivity and greater efficiency in semiconductor manufacturing that is benefiting equipment manufacturers, and hinting at positive developments in the midst of downturn. Besides the purchase of new equipment 300 mm production also demands higher quality instruments for more exacting measurements and quality control. Instrument manufacturers' new products for 300 mm also cost more, and in 2000 some such sales helped fuel companies' rapid growth.

In almost all cases, analytical instrumentation is used in the semiconductor industry for quality control and research and development. As wafer feature sizes shrink, the demand for instruments with higher sensitivity, greater accuracy and the output of more analytical data has shaped equipment design and requirements. In addition, new materials such as copper and low-k dielectrics, are also changing requirements and processes. Although the transition to 300 mm fabs and new materials has been a slow process, major companies such as Intel, TSMC and Infineon, are bulding 300 mm fabs, which will put pressure on other companies to do so. Intel, Infineon and Micro Technology, three of the world's largest chip companies, have increased capital equipment spending this year. According to World Fab Watch, seven 300 mm fabs are currently in operation and 20 are under construction.

Nearly all analytical instruments used in the production of semiconductors come from two categories of instruments: atomic spectroscopy and surface science techniques. Spectroscopy instruments for the semiconductor market include atomic absorption, ICP, ICPMS, arc-spark optical emission, x-ray fluorescence (XRF), x-ray diffraction and elemental analysis instruments. In the surface science segment, electron microscopes, confocal microscopes, scanning probe microscopes and surface analyzers are used in the semiconductor industry. In particular, semiconductor applications have accounted for much of the recent market growth of total reflection XRF, x-ray single crystal diffraction, SEMs, AFMs, and secondary ion mass spectroscopy (SIMS). However, the instruments for which the semiconductor industry is a key end-user are ICP-MS, SEMs, AFMs and surface analyzers. Just as the semiconductor market stimulated growth in these market, especially for higher-priced, application-specific systems, the downturn has hurt this market as well.

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ICP-MS is used in semiconductor manufacturing for quality control of high purity water, chemicals, gases and special materials. It is also used to analyze wafers, clean rooms and processes. Agilent's Chemical Analysis Group leads the market in ICP-MS for semiconductor applications, largely due to its Yokogawa joint venture in Japan. Other key players in the ICP-MS market are PerkinElmer and Thermo Electron's Thermo Elemental division. Agilent is the company most likely to experience the greatest impact, although, all three companies introduced new products this year (see IBO 4/15/01). At SEMICON West, Rob Henry, an ICPMS specialist with ThermoElemental, was quite bullish about the prospects for ICP-MS, but acknowledged a slow down in semiconductor industry demand. He suggested that this market only represents 10%-15% of ThermoElemental's business, which is heavily oriented to environmental analysis.

SEMs are used in semiconductor products for wafer inspection and evaluation, while TEMs are primarily used for research. Both market leaders, JEOL and Hitachi, are closely aligned with the semi conductor market. However, both techniques have benefited from the demand for higher resolutions related to 300 mm wafers. New approaches have also focused on integrating laboratory TEM analyses into production. While this market will see some slowdown in sales related to the market's downturn, the advanced technologies of the top companies will always be in demand. In the second quarter ending July 1, 2001, FEI posted revenue growth of 31% over the previous quarter.

Sales of AFMs grew at a double-digit rate last year. AFMs are used for a variety of semiconductor-related applications, from surface profiles to failure analysis to defect detection. AFM sales to the semiconductor market have been dominated by Veeco Instruments in recent years (see IBO 6/30/01). As with SEMs/TEMs, the slowdown in the semiconductor market will impact this market as orders are delayed but any long-term impact is unlikely as the technique is a staple of semiconductor manufacturing. As Veeco stated in its results for the second quarter ending June 30, 2001, "Veeco's sales success in atomic force microscopy provided sequential order growth this quarter associated with technology purchases for 0.10 micron features size, 300 mm wafers, CMP and advanced etch applications." At SEMICON West, Debra Wasser, vice president corporate communications and investor relations at Veeco, commented that Veeco sees its acquisition of Thermo Microscopes (see page 2) as an opportunity to develop more business in the research and academic lab markets. But ThermoMicroscopes does bring them SPM probe technology which could help other businesses.

Surface analyzers consist of dynamic SIMS (D-SIMS), time-of-flight SIMS (TOF-SIMS), Auger Electron Spectroscopy (AES) and electron spectroscopy for chemical analysis (ESCA). In the semiconductor industry, these techniques are used to detect, analyze and identify surface contamination, with TOF-SIMS providing the highest sensitivity. Cameca, JEOL, Physical Electronics (a division of Phymetrics), and Thermo Electron's Thermo VG Scientific all participate in this market. At SEMICON West, various customers suggested that TR-XRF was losing favor due to the requirements for increased sensitivity. Lanny Brown, vice president of Atomika, a leading D-SIMS vendor, suggested that sales of big-ticket instrument like D-SIMS and TR-XRF are impacted early in market cycles, and are often the last to rebound.

The slowdown in the semiconductor industry has impacted all capital equipment segments, from metrology and process to lithography and automation. Analytical instruments make up a smaller portion of the equipment market compared to these other sectors, thus the impact on it will not be as severe. In addition, for the move to 300 mm fabs, new materials, smaller feature sizes, more complex structures and process efficiencies, newer generations of analytical equipment for semiconductors will be required. However, the volatility of the market will impact analytical instrument sales this year.