by Michael W. Wright and Walt Ferguson
It should be no secret that winning business for new fabs involves many marketplace issues beyond product specifications and product performance. To be sure, product technology establishes eligibility. It either qualifies or disqualifies a supplier, and each new generation of tool must demonstrate advanced technology over current tools. But product technology has become "table stakes" or the entrance fee just to remain in competition. The full award process requires suppliers to confront complex organizational issues and relationships that in themselves have become decisive conditions for award.
One complex organizational issue created by conditions in certain markets is that of a supplier's relationship with his technology. The stickiness relates to the degree that management is willing to transfer technology, both physically and intellectually, and how it can be protected after transfer. Many robust new fab entrants from Asia represent very important efforts by host countries to develop "pillar" industries. Asian officials view these fabs as scientific parks and not the building of a plant in the middle of nowhere. Building this pillar industry entails a patient but persistent qualification of suppliers and technicians from within the host country over a period of time. Their technology issue is straightforward. How does the country attract and strengthen the skills that form competencies to successfully compete in a global marketplace? Technology transfer from developed countries is such an important issue in China, for example, that the Chinese government actually forces transfer by imposing punitive tax and tariff policies. Consider that if a factory in China is wholly foreign-owned, it must export 70 percent of its output.
On a project level, we see Asian client-owners of fabs tending to want to administer new fab contracts themselves. In doing so, they are enabled to hand-pick indigenous suppliers who might not be the most qualified. Foreign suppliers, who may be more qualified, are obliged to partner with the host country supplier or be shut out from participation. Supply priority is ranked: local first, expatriate second, and import third. The desire for technology transfer in developing countries won't abate, and the choices are unilateral on the suppliers as to how they choose to relate.
There is little question that manufacturers in most industries are opting for fewer but more interactive supplier relationships. Xerox, facing copier costs 50 percent higher than its Japanese competitors, eliminated 90 percent of its suppliers over the last decade. A closer and partnered relationship with its slimmed-down supplier base produced results worthy of the effort. Product costs dropped 10 percent a year. New product development time and costs were halved. The rejection rate of incoming materials almost disappeared, and production lead times shrank by a factor of three. In semiconductors, partnering has been driven by the massive amount of fixed capital required to build a fab over a period of 12-18 months to first silicon.
Capital risk is measured against an historic backdrop of fluctuating chip demand and price instability. Increasingly, to mitigate capital risk, chipmakers have partnered the costs of a new fab with customers, competitors or even countries. The move to 300 mm wafers will only heighten the capital risks as next-generation fab costs approach $2 billion by 1998. In turn, suppliers will witness a relational marketplace far beyond product-vs.-product competition in an open market. With $2 billion at stake, the key feature of the market will no longer be ownership of the processes, but control of results.
In this environment, the relationship between suppliers and customers will become one of co-destiny. Certain suppliers will become equity partners and concurrently be awarded specific turnkey process responsibility. For instance, a global equipment supplier may be given a contract for designing and equipping a process line in the fab under predetermined throughput specifications. Correspondingly, the equipment maker may be offered or required to make an equity investment in the business itself. The equipment supplier thus becomes an equity-vested general contractor for the process line and all other line suppliers become subcontractors to him.
Similarly, competing intrabay and interbay wafer handling and automation systems providers could become subcontractors to a third-party engineering firm that takes on the responsibility of owning and operating the system by which wafers are automatically transported through the entire fab. Strangely, your company today may be competing against firms who, in the future, could be your target customer. They also could be partial owners in the business you are supplying.
The move toward vested third-party turnkey situations in new fabs is a growing reality. The advantages afforded to the owners of 1) focused responsibility, 2) unit price discounting, 3) risk sharing, and 4) incentive through ownership, are just too compelling to thwart. The overwhelming customer relations issue facing most suppliers in the future will be positioning for opportunity share. Market share will become moot. The question that most suppliers will have to face is, given our current relationships and business competencies, what share of future opportunities are we likely to capture?
This shared-commitment type of customer-supplier relationship challenges those industry suppliers whose practice of relating to customers is power-based or exploitive. The successful relationship is one of mutual trust, not mutual suspicion. It involves working within a framework for mutually beneficial ends with a minimum of wasted effort. It requires that suppliers be on the customer's product development team. Information is shared regarding costs, selling prices and profits for both supplier and customer. Ground rules for proprietary rights, quality, and ordering and delivery are set. There is agreement on a cost-reduction curve and a determination to lower selling prices over the life of the product. The product development team, which includes the supplier, establishes selling price. It then works backward, figuring how the customer's product can be made for the predetermined selling price while allowing and respecting a reasonable profit for both the supplier and customer. The process is market-price-minus rather than supplier-cost-plus.
If this sounds like the Japanese system of lean production, it is. The relational barriers to entry in the Japanese market are put in some perspective when the openness and common goals in the customer supplier relationship among Japanese companies are understood. Lean production dates to the 1960s and found its origins in the Japanese automobile industry. It is hard to realize today that Japanese cars in Western-world markets were once a joke.
A third relationship in which suppliers need to redefine their linkage is the one between the architectural and engineering (A&E) firm and the client. Beyond providing design and construction services for the fab, advanced technology A&E firms have become a key information source to the client in purchasing activities. It is not uncommon for the A&E scope of work to now include activities such as "technical recommendations," "optimization study," and "procurement." In addition, the A&E is often awarded contract extensions at the fab site for activities specific to operations training and startup assistance. The latter includes installation, hookup and certification of equipment. Equipment suppliers are often not invited to participate in this bidding.
The reasons are varied and include:
The equipment supplier does not have full understanding of the design of the building, thus the A&E offers the client a shorter construction schedule and more effective quality of service.
Equipment suppliers seem to have difficulty providing an adequate staff and support plan from the time the tool arrives on site. Their services are limited to the installation and qualification of their own tools which are conditions precedent to getting paid.
Delivery schedules are frequently difficult to fathom because of seemingly incredible lead times. Equipment suppliers need to have the same sense and priority of scheduling issues held by the client and A&E.
The A&E will continue to expand its already close relationship with the client. The relationship will grow in the direction from the building to the process and expand along the process line. Consider that 70 percent of total contract values awarded in new fab startups is equipment-related. Only 30 percent is building-related. Semiconductor manufacturing equipment becomes obsolete in three years. The building lives for 20 to 30 years. Japan and Germany allow first-year depreciation of semiconductor equipment in the 80 percent range. Buildings depreciate annually at a 3-5 percent rate. It is not hard to understand the economics attracting the A&E. The firm's design and engineering knowledge has become a core competency, and the relationship with the client is one of co-destiny which places it in a strong position for opportunity share.
Our industry's entrepreneurial heritage and its superior technical value system are very much in place. Yet, the typical SEMI member company needs to employ a far different mindset for growth or survival. The technical creativity and the entrepreneurial energy which gave rise to most of the 1,700 SEMI member companies must now create the broader business strategies and market approaches necessary in a market defined by relationships of shared commitment. The economic opportunity, risk and political importance of our industry have simply become too large for members not to design the strongest and most efficient positioning possible for their companies. This is where you want to place your "chips."
About the Authors. . .
Michael W. Wright was the co-founder of the cost-modeling and management consulting firm of Wright Williams & Kelly, Inc. Pleasanton, California. He can be reached by email at [email protected]
Walt Ferguson is a senior consultant with Wright Williams & Kelly, Inc. He can be reached by email at [email protected]