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Monday, September 28, 2009

The Challenge of Diversification

I began my career in the semiconductor industry in the 1980’s with Omron Electronics, then and now the world’s largest manufacturer of controls and automation components. Omron made thousands of products used in advanced manufacturing including sensors, switches, controllers, vision and RFID systems and a whole lot more. Virtually every industry and every sophisticated machine used sensors and controls from companies like Omron.

For a marketer it was a wonderful learning experience, understanding how our products could be used in different applications by different industries. Trade show were a big part of marketing process. After SEMICONs, I would be off to a pharmaceutical, textile, food, packaging, plastics, or other industry event. We made a several specialized devices for the chip industry, but many of our standard products could be used any industry to sense and control.

Omron (one of the great companies in the world, by the way) is like many exhibitors at SEMICONs who serve many industries with mostly standardized products. Companies that sell motion control, pumps, process equipment, chemicals and many other products aren’t exclusively reliant on semiconductors for revenues. When fab spending declines, they look to other industries to compensate for the losses.

For the top OEMs in the semiconductor equipment industry, diversification is a much more difficult proposition. While their parts and subsystem suppliers are typically highly diversified across multiple industries, being successful at developing equipment for the next technology node requires enormous R&D and engineering resources. Many of these tools cost in excess of several million dollars. You can sell a multi-million machine tool to make aircraft, ships, cars or rocket ships, but you can only sell an advanced tool to a semiconductor manufacturer.

The chart at the bottom of this article illustrates the challenges to diversification for specialized semiconductor suppliers. The semiconductor industry is larger than the flat panel, PV, MEMS, printed electronics, and LED industries combined. Not only is it larger, it is significantly more capital intensive. Historically, semiconductors requires between 15-17% of sales on capital equipment. Advanced chips have well over 100 process steps while LEDs, PV and MEMs often made with integrated system that resemble a batch production operation. Even by 2013, most observers do not expect LED, MEMS and Printed Electronics to spend more than a billion on equipment.

Still many equipment and materials suppliers have had success in supplying to adjacent nano-manufacturing markets. Many top semiconductor equipment suppliers led by Applied Materials and Oerlikon, have successfully transitioned to PV. Veeco and Aixtron are building healthy businesses in LEDs. Many of these companies are looking not at the five-year projections, but betting on visions that extend 10-years and more. Many of them are trading low-share, low-profit positions in semiconductors for high-share, high-profit gambles in smaller markets.

Companies that succeed in leveraging their semiconductor process expertise to adjacent markets will win by:

Innovation- Emerging markets in PV, LEDs and MEMS are often characterized by their resemblance to semiconductors 10 to 20 years ago. They are often non-automated, open loop manufacturing systems that produce low yields and low throughput. As young industries, they have yet to fully benefit from the venture-fueled ingenuity that has characterized a generation of chip companies. Blockbuster innovations and breakthroughs are nearly certain.

Specialization- As many companies have realized in PV, you can’t sell a tool optimized for one application into a new market without significant modification. Winners in adjacent nano-manufacturing markets will take enormous risks to learn and adapt their chip expertise to new applications.

Patience- The emerging markets in LEDs, PV, MEMS and Printed/flexible are long-term plays. Many observers see PV as the beginning of a 30-year run; the high brightness LED market won’t explode until they reach parity in 5 years; and printed electronics may initiate a new era of ubiquitous electronics in retail, clothing, biomed, building materials and more.
Diversification is increasingly an important part of our industry. The economics, science, engineering, and vision that drove the semiconductor industry is transferring to many other microelectronics industries. While they may share the same origin in semiconductors, the solutions and supply chains that serve PV,MEMS, LEDs and other adjacent markets will be of those industries, distinct and unique, like children who leave home in search of their own separate lives and future.

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