Wall Street wary of equipment stocks, but there are some bright spots

Read this insightful analysis of the woes of the semicon industry and surviving in a period of “profitless prosperity” by Steve Newberry, president and CEO of Lam Research, as reported by Bob Haavind, Editorial Director, Solid State Technology.

I summarize his main points here:

  • The current period is marked by accelerating IC growth at a time of declining profitability. However, companies “can’t be prosperous if prices are declining faster than costs.”
  • 15 of the top 40 companies are losing money and 23 are making less profit than needed to stay in the business.
  • The trouble is overinvesting to create excess capacity, trying to force-feed a much larger industry than exists. Too many vendors are trying to capture the same market share through rapid supply line ramps that don’t allow much differentiation.
  • The only sectors found to be financially healthy were analog and fabless, which have low capital investment requirements.
  • In the logic sector, no integrated device manufacturer (IDM) can achieve enough volume to effectively compete with the economy of scale of the foundries. Even Texas Instruments, the only IDM with profit over 10%, is moving from a fab-lite to fab-liter strategy.
  • Even in the foundry sector, all the profits in the past five years were made by TSMC, while UMC, Chartered, and SMIC are not generating sufficient operating profits to sustain growth. An important factor here is that TSMC is able to command a price/wafer premium by offering superior value to its customers in terms of libraries, extra services, design aid, etc.
  • The major effort of most chipmakers was to solve the profitability problem through cutting costs — but a quick analysis showed that even if toolmakers cut their costs enough so that the entire process tool industry made zero profit, it would only offer chipmakers savings of perhaps $5.7 billion, when they need about $11.2 billion to close the profit gap, he believes.
  • Thus, Newberry suggested that chipmakers must focus on better value creation for customers, differentiating themselves while also becoming leaders in efficiency.



Leave a Reply