Applied Materials gets jump start on rivals

Applied Materials on Monday announced plans to extend its chipmaking equipment product line to allow chip manufacturers to create smaller, faster processors.

Applied Materials on Monday announced plans to extend its chipmaking equipment product line to allow chip manufacturers to create smaller, faster processors.

The company, which sells chipmaking equipment, said it will introduce products that can manufacture processors at 100 nanometers or smaller--roughly three chip manufacturing generations into the future--by the end of the year.

Processors such as Intel's Pentium 4 and Advanced Micro Devices' Athlon are manufactured using 180-nanometer or 0.18-micron processes. Manufacturing process "shrinks", made possible by new chip equipment--such as announced by Applied Materials on Monday--will allow chips such as Pentium or Athlon to increase in clock speed while reducing their physical size and power consumption.

Companies like Intel and chip foundry Taiwan Semiconductor Manufacturing Co update manufacturing processes roughly every 24 months. The companies have just begun the move from 180-nanometer to 130-nanometer manufacturing processes.

Intel has begun shipping 130-nanometer or 0.13-micron Pentium III "Tualatin" chips. However, chipmakers must place orders for equipment and begin developing and testing the new manufacturing processes years in advance.

By introducing its new products before the end of the year, Applied Materials hopes to get a jump on its competition at a time when a slow market for semiconductors has caused chipmakers to cut capital spending and cancel or delay equipment orders, biting into revenue.

During its second-quarter earnings report, Applied Materials said it expected orders to be down 44 percent from the first quarter, but to pick up in the second half of the year.

A new report from market researcher Dataquest predicts that spending on semiconductor equipment will decline 30 percent this year from the last year, with a pick-up unlikely until the second half of 2002.

"Manufacturing overcapacity is rampant now, putting increasing pressure on all levels in the semiconductor supply chain," analyst Klaus-Dieter Rinnen wrote in the report. "It is important to remember that cycles are the nature of this industry…As the industry approaches bottom, drastic measures are taken."

Applied Materials CEO James Morgan said the company has essentially written off the current year and instead is working to position itself for a recovery.

"Since about February, our whole focus has been working on the future," Morgan said during a press briefing in San Francisco on Monday as part of the Semicon West trade show. "We don't know when it's going to happen. But everything tells us that at some point, companies are going to need to start spending on technology again."

Morgan said the Asian technology slump a few years ago showed that when a recovery does start, it's likely to be quick, benefiting suppliers that can respond promptly.

"A lot of our upgrades allow them to implement very quickly," he said.

The transition to 100-nanometer chips should begin in roughly 18 months to 24 months. In the interim, the industry will begin another major transition: from 200-millimeter diameter wafers to 300-millimeter diameter wafers. This move, which increases the size of the wafer--the disc that chips are manufactured on--will increase the number of chips a factory can produce and lower costs by about 30 percent, manufacturers said.

The company also announced Monday a new system called Process Module that it said will help increase manufacturing yields by combining multiple steps used in the chipmaking process. The company will offer modules for copper wiring, among other chipmaking steps. Process Module will be introduced along with the 100-nanometer equipment.

Applied Materials also said it has signed a deal to grant its Total Parts Management service for managing spare parts for Applied Materials equipment used in a chip manufacturing plant to TSMC. The deal is worth US$80 million.

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