Applied Materials
| Applied Materials, Inc. | |
|---|---|
| Type | Public company |
| Traded as | Nasdaq: AMAT |
| Industry | Semiconductor equipment, display equipment |
| Founded | 10 November 1967 |
| Founder | Michael A. McNeilly |
| Headquarters | Santa Clara, California, United States |
| Key people | Gary Dickerson (President and Chief Executive Officer) |
| Products | Deposition, etch, ion implantation, planarisation, inspection and display manufacturing systems |
Applied Materials, Inc. is an American company that supplies equipment, services and software used to manufacture semiconductors and flat panel displays. Headquartered in Santa Clara, California, it is the largest semiconductor equipment company in the world by revenue and one of the small number of firms whose products are indispensable to the manufacture of integrated circuits anywhere.
The company's tools are used at most stages of chip fabrication. Its position is closest to universal in deposition, the processes that lay down the successive thin films from which a chip is built, and it also supplies etching, ion implantation, planarisation, thermal processing, inspection and metrology equipment, together with the software that controls and optimises them.
History
Founding and early years
Applied Materials was founded on 10 November 1967 by Michael A. McNeilly and a small group of colleagues in Mountain View, California. It listed publicly in 1972.
The early business supplied chemical vapour deposition equipment to the semiconductor industry then forming in what became Silicon Valley. The company expanded and diversified rapidly during the 1970s, moving into unrelated ventures including silicon wafer production and solar energy, and by the mid-1970s was in serious financial difficulty.
James C. Morgan
James C. Morgan became chief executive in 1977 and led the company for twenty-six years, one of the longest tenures in the industry. The recovery he directed involved abandoning the diversifications, returning to the core equipment business, and reducing the company to a size it could sustain.
The strategically decisive decision was to enter Japan seriously. Japanese semiconductor manufacturers dominated memory production in the 1980s and were served almost exclusively by Japanese equipment suppliers; the market was regarded as effectively closed to foreign companies. Morgan established a Japanese subsidiary with Japanese management, built a technology centre there, and invested over years to earn the acceptance of Japanese customers. Applied Materials became the first American semiconductor equipment company to succeed in Japan at scale, and the position it built there sustained it through subsequent cycles.
Morgan also positioned the company as a broad supplier across many process steps rather than a specialist in one, which distinguished it from most competitors and which gave customers the option of dealing with a single vendor across a large part of a fabrication line.
Splinter and Dickerson
Mike Splinter, previously of Intel, served as chief executive from 2003 to 2013, a period covering the expansion into display manufacturing equipment and a substantial and ultimately unsuccessful investment in solar manufacturing equipment, which the company largely withdrew from after the collapse in solar module prices driven by Chinese overcapacity.
Gary Dickerson became chief executive in 2013, having previously led Varian Semiconductor Equipment Associates, which Applied Materials acquired in 2011 for about US$4.9 billion, bringing ion implantation into the portfolio.
The Tokyo Electron merger
In 2013 Applied Materials and Tokyo Electron, the largest Japanese equipment supplier, announced an agreement to merge in a transaction valued at roughly US$29 billion, which would have created a company with a very substantial share of the equipment market.
The United States Department of Justice objected, concluding that the combination would reduce competition in several categories of equipment and that the remedies offered were inadequate. The companies abandoned the merger in April 2015.
Kokusai Electric
Applied Materials agreed in 2019 to acquire Kokusai Electric, a Japanese supplier of batch deposition systems, from Kohlberg Kravis Roberts for about US$2.2 billion. The transaction required clearance from Chinese regulators, which was not obtained, and it was abandoned in March 2021. The episode was among the earlier clear instances of competition review being used as an instrument of technology policy.
Export controls and investigations
From October 2022 the United States imposed extensive controls on the export of advanced semiconductor manufacturing equipment to China, restricting the sale of tools capable of producing advanced logic and memory devices and restricting the provision of service and support by American persons to affected facilities.
The controls affected Applied Materials directly and substantially, since China had become its largest single market by revenue, accounting at times for more than a third of sales. Much of that revenue concerned equipment for older process nodes not covered by the restrictions, and the company has argued that distinction consistently.
The company disclosed from 2023 that it had received subpoenas from the United States Department of Justice and the Securities and Exchange Commission concerning shipments to Chinese customers, and investigations have continued.
Products and processes
Semiconductor manufacturing proceeds by building a device in layers, and Applied Materials supplies equipment for most of the steps involved other than lithography, which is dominated by ASML.
Deposition lays down thin films of conducting, insulating and semiconducting material. Chemical vapour deposition, physical vapour deposition, atomic layer deposition and epitaxy are each used for different materials and thicknesses, and Applied Materials holds leading positions across them. This is the company's core and the source of its scale.
Etch removes material selectively to create the structures defined by lithography. Applied Materials competes here principally with Lam Research and Tokyo Electron.
Ion implantation introduces dopant atoms into silicon to alter its electrical properties. The Varian acquisition gave the company a dominant position.
Chemical mechanical planarisation polishes a wafer flat between layers, which is necessary because subsequent lithography requires an extremely level surface.
Inspection and metrology measure what has been produced and detect defects. The principal competitor is KLA.
Display equipment manufactures the thin film transistor arrays used in flat panel screens, a substantial business serving Korean, Chinese and Japanese panel makers.
Why the industry is structured as it is
The semiconductor equipment industry is among the most concentrated in the world economy, with five companies, Applied Materials, ASML, Lam Research, Tokyo Electron and KLA, supplying the great majority of what is required to build a modern chip fabrication plant.
The concentration arises from the cost and difficulty of development. Each generation of process technology requires equipment capable of operating at smaller dimensions and tighter tolerances, developed over years in close collaboration with the handful of manufacturers who will use it, at a cost only a company with very large revenue can fund. Once a tool is qualified into a customer's process, it is extremely difficult to displace, because changing a tool means requalifying the process, which risks yield on a production line worth tens of billions of dollars.
The consequence is that the equipment suppliers have become instruments of national policy. A country cannot build advanced semiconductors without tools from a small number of American, Dutch and Japanese companies, which is why export controls on those tools have become the principal mechanism of technology policy towards China, and why the companies concerned have found themselves at the centre of a geopolitical dispute they did not seek.
Operations and finances
Applied Materials operates research, development and manufacturing facilities in California, Texas, Montana, Israel, Singapore, Taiwan and elsewhere, and maintains large service organisations close to its customers' fabrication plants, since the equipment requires continuous maintenance and the cost of an idle tool on a production line is very high.
The service business has become strategically important for reasons beyond its own profitability. It generates recurring revenue from the installed base of equipment already sold, which smooths the extreme cyclicality of new tool orders, and it places the company's engineers inside customers' factories continuously, which informs the development of the next generation of tools. Subscription-based service agreements now cover a substantial proportion of the installed base.
Research and development spending has run at several billion dollars annually, among the highest in the industry as a proportion of revenue, and is concentrated in collaborative programmes with the small number of customers who will use each new generation of technology. The company operates development facilities where customers can run their own processes on new equipment before committing to it, an arrangement that is expensive to maintain and that is one of the barriers a new entrant would face.
The company has announced substantial investment in new research facilities in the United States, supported in part by the incentives created under American legislation intended to expand domestic semiconductor capability.
Leadership
- Michael A. McNeilly founded the company in 1967 and led it through its early expansion and the difficulties that followed.
- James C. Morgan (1977 to 2003) rescued the company, established its position in Japan, and built the broad multi-process portfolio that remains its distinguishing feature. He is among the longest-serving chief executives in the technology industry and wrote on management and on doing business in Japan.
- Mike Splinter (2003 to 2013), previously of Intel, expanded the display business and pursued the solar venture that was subsequently curtailed.
- Gary Dickerson (2013 to present) came with the Varian acquisition and has led the company through the Tokyo Electron and Kokusai episodes, the artificial intelligence-driven expansion and the imposition of export controls.
Assessment
Applied Materials occupies a position that is both extremely strong and unusually exposed.
The strength is breadth. No competitor supplies as many different process steps, and the ability to offer integrated solutions spanning several of them, particularly as chip structures have become three-dimensional and the interactions between deposition, etch and planarisation have become more consequential, is a genuine advantage that has grown rather than diminished.
The exposure is threefold. The industry is cyclical, and equipment orders swing far more violently than chip demand because manufacturers add capacity in large discrete increments. A substantial share of revenue has come from a small number of customers, principally TSMC, Samsung, Intel and the large memory makers, whose capital decisions determine the company's results. And a large share has come from China, where policy rather than commerce now determines what may be sold.
The artificial intelligence build-out has been favourable, since advanced logic and high-bandwidth memory both require more process steps per wafer than previous generations, and more steps means more equipment. Whether that persists depends on whether the current rate of investment in computing capacity continues, which is the same uncertainty facing every company in the chain.