Leasing Strategies for the Semiconductor Industry

New and Maturing Markets

The end-of-year predictions for 2014 pointed to key product categories set for growth and that present the biggest opportunities for the semiconductor industry through 2015. WSTS predicts that all semiconductor product categories will grow steadily but moderately through 2018, under the assumption of a further macro-economic recovery throughout the entire period forecast along with maturing, historically strong markets.

Demand for semiconductors has been coming from new markets such as automotive, health care and manufacturing. Car companies have been becoming more proactive with technology such as smart phone and app integration. This presents a growing opportunity for the semiconductor industry. According to semiconductor executives surveyed by KPMG, among end markets, medical (66%), networking and communications (62%) will provide the strongest growth opportunities in 2015. WSTS predicts that the growth in global chip markets will be driven primarily by a double-digit increase in demand for memory chips and components used in automobiles, whereas consumer and computer demand are predicted to remain almost flat.

Strategic Refresh and State-of-the-Art Equipment

“Moore's Law is the observation that over the history of computing hardware, the number of transistors on integrated circuits doubles approximately every two years. The law is named after Intel co-founder Gordon E. Moore, who described the trend in his 1965 paper. His prediction has proven to be accurate.” ' Wikipedia

The principles of Moore's Law have provided the framework for the pace of change in technology since that seminal white paper in 1965 ' which is also one of the fundamental arguments in favor of leasing. That is, according to Intel executive David House, who predicted that chip performance would double every 18 months ' meaning what you buy today ' if you are on the very forefront of the technology trend ' becomes obsolete in that 18-month timeframe. Given that cycle, purchasing equipment outright dissuades the user from keeping pace with the newest technology trends if equipment is acquired as a capital purchase.

According to Gartner, Inc., the overall semiconductor industry will have purchased approximately $65 billion worth of capital equipment in 2014, and approximately 2% or $1.3 billion will be acquired under an alternative equipment acquisition strategy such as renting or leasing.

Compared with other industries, the semiconductor segment demonstrates one of the lowest percentages of alternative equipment acquisition strategies. There are many reasons why other industries have a greater percentage of assets acquired under alternative processes. These reasons include: 1) cash flow concerns; 2) maintaining equipment flexibility and overall asset efficiency; 3) the ROI of each individual asset; and 4) the risk of technological obsolescence.

The semiconductor industry operates in a very complicated manufacturing environment. Manufacturers are faced with product demand made up of mixed geometries and specifications requiring development and deployment of hundreds and in some cases thousands of different “Chip” recipes. The Fabrication Plant (FAB) runs 24 hours a day working to produce the right product mix to meet customer demand and achieve the corporate objectives.

The semiconductor industry's growth has been partly driven by consumer demand for smart phones and tablet PCs, which are being replaced every 12-18 months. The shorter product life cycles makes it costly to keep up with the latest manufacturing equipment and research and development. To meet changing demand, the majority of semiconductor manufacturers are using foundries for specific processes. Some semiconductor manufacturers are expanding their business offerings to include foundry services to attempt to recapture investment from underutilized equipment.

If you are a FAB-less or FAB-lite company and decide to use a foundry for production, the consideration of leasing specific tools to manufacture your product can provide a strategic and very flexible advantage on costly capital expenditures.

A company should evaluate the ownership of this tool, as it would for a specific device or a contract, both incorporating a defined period less than five years. The leasing of this tool(s) for use on this project would give a company a flexible solution where the capital expenditure would be spread over the term of the contract or life span of the specific device.

When you're operating a foundry and you require specific tools to attract new customers' requirements, you need a process to evaluate the purchase of these tools in conjunction with the overall FAB roadmap tool set. When a tool(s) does not meet fit into your FAB tool set, going forward with a lease would be a valid strategy.

Today in the semiconductor industry, both IDMs and OEMs have labs and testing facilities, the majority of which are full of older equipment and in need of upgrades or replacement. These corporations have purchased these assets through the Capital Budget Approval process and, therefore, these tools are tied to the standard five-year depreciation cycle.

The tools found in these facilities should be replaced or upgraded depending on application; on average the technological useful life of these assets is somewhere between two to four years. It would seem logical to employ a process that would mirror the actual technology period of the assets to allow for upgrades and replacements.

Moore's Law

Within the framework of Moore's Law, “Economic Useful Life” is defined as the estimated period of time over which it is anticipated an asset may be profitably used for the purpose intended. Semiconductor manufacturers need to view their tools from this perspective, as it is not how many tools you own, it is the population of tools you have in your facility that consistently achieves your targeted required margins.

Tools that are sitting in a FAB facility take up expensive floor space, require calibration, insurance and, therefore, need to be producing revenue or otherwise are costing the company money. Semiconductor tools are not like fine wine: They do not get better with age; as tools get older the value goes down.

Some of the factors semiconductor manufacturers should consider when they are deciding on how they should acquire a major tool are:

• What are the technology limits of this tool (can it be upgraded or will it need to be replaced in less than the deprecation period which is typically five years)?
• Will this tool be run at a high-capacity level through the depreciation period, or is there a better tool to meet this requirement? (The overall cost could be more; however utilization period justifies the cost.)
• Do you need to own this tool or just acquire the asset, as it is the use of state of the art tools that increases your margins not the ownership of equipment?
• Do we have like tools on the floor that we could sell/leaseback and recoup sunk cash ' and in the process upgrade the entire equipment segment to the current technology?
• Leasing/renting gives a company a built-in exit strategy on equipment as it is known this equipment will need to be replaced in less than the company's depreciation period.
• The use of these tools on a properly structured lease or rental is an expense item, which can be deducted from the expense budget not the capital budget.

Have a Strong Leasing Partner

If your company opts to lease, the choice of a leasing partner is crucial. A leasing company owned by an equipment manufacturer may not be flexible with semiconductor manufacturers who want to replace that vendor's equipment with a competitor's. A leasing company that is vendor agnostic will give you more flexibility to change out equipment manufacturers and select the cutting-edge technology that is best suited to meet your manufacturing needs, not just the needs of your equipment manufacturer's leasing company.

Also, when selecting a leasing partner, review its expertise in the semiconductor vertical, and make sure the lessor is not a fly-by-night in this growing market. Leasing can be an excellent strategic advantage in this fast paced segment, but be aware that not all master lease agreements (MLAs) are created equal; inquire with your peers as to the reputation for transparency and fairness of the lessor's leasing documents. Leasing is a long term relationship. Make sure your lessor has a reputation for transparency, flexibility and custom solutions. Terms and conditions buried in lease contracts can end up costing you much more than originally anticipated.

Outlook for 2015

It has been reported that most top executives in the semiconductor industry are optimistic about 2015 and the economic forecast for the industry certainly supports this confidence.

WSTS predicts 3.4% growth globally for 2015 ($344.5 billion in total sales) and 3.1% growth for 2016 (to $355.3 billion). A survey of top executives by Semiconductor Engineering points to a solid year for 2015, along with some significant changes as the industry tackles business and technology issues. Similarly, a KPMG Survey shows that semiconductor industry business leaders remain cautiously optimistic about 2015, with greater than 80% of respondents expecting an increase in business.

Semiconductor Equipment and Materials International (SEMI) expects the chip market to increase 3.4% in 2015 to $345 billion and 3.1% to $355 billion in 2016. Semiconductor Engineering predicts that based on the last 12 months, in 2015 the semiconductor industry looks bright. This comes from positive factors in large markets such as the smartphone and automotive industry. Generally there is optimism for the semiconductor industry for 2015.

There is a wide variety of semiconductor device manufacturers in the world today; some are on the cutting edge of technology and others are on the trailing edge ' but all of these companies have constantly changing equipment needs. The use of a comprehensive asset evaluation process will help ensure that these companies have the right equipment at the right time.

Gary Atkins is VP of Diversified Technologies at CoreTech Leasing, Inc., an independent equipment and technology lessor (www.coretechleasing.com). Previously, he was a founding member in the launch and implementation of Comdisco Electronics Group. Mr. Atkins manages CoreTech Leasing's relationships with the OEMs (Original Equipment Manufacturers) and IDMs (Integrated Device Manufacturers) on both front-end manufacturing and back-end test and lab equipment.

To begin, the semiconductor industry is, of course, enormous. The World Semiconductor Trade Statistics (WSTS) released its end-of-year market indicators, showing a solid growth of 9% to over US $333 billion in sales for 2014 over 2013, driven mainly by double-digit growth in the memory products category.

While the semiconductor industry delivers tremendous value to consumers, most chip makers capture only a small percentage of the value they help create. If semiconductor players are to meet market pressures, they must lead on both technology innovation and operational fronts.

One might say that the whole industry is at a crossroads: Breakthrough innovations are needed for it to advance. Costs for manufacturing equipment are rising, and growth is concentrated in select segments such as smart phones and mobile computing. All semiconductor companies must find ways to improve bottom-line results in the near term, as the combination of semiconductors' complexity and the pace of industry change make variability a huge challenge to profitability and something very difficult to manage.

New and Maturing Markets

The end-of-year predictions for 2014 pointed to key product categories set for growth and that present the biggest opportunities for the semiconductor industry through 2015. WSTS predicts that all semiconductor product categories will grow steadily but moderately through 2018, under the assumption of a further macro-economic recovery throughout the entire period forecast along with maturing, historically strong markets.

Demand for semiconductors has been coming from new markets such as automotive, health care and manufacturing. Car companies have been becoming more proactive with technology such as smart phone and app integration. This presents a growing opportunity for the semiconductor industry. According to semiconductor executives surveyed by KPMG, among end markets, medical (66%), networking and communications (62%) will provide the strongest growth opportunities in 2015. WSTS predicts that the growth in global chip markets will be driven primarily by a double-digit increase in demand for memory chips and components used in automobiles, whereas consumer and computer demand are predicted to remain almost flat.

Strategic Refresh and State-of-the-Art Equipment

“Moore's Law is the observation that over the history of computing hardware, the number of transistors on integrated circuits doubles approximately every two years. The law is named after Intel co-founder Gordon E. Moore, who described the trend in his 1965 paper. His prediction has proven to be accurate.” ' Wikipedia

The principles of Moore's Law have provided the framework for the pace of change in technology since that seminal white paper in 1965 ' which is also one of the fundamental arguments in favor of leasing. That is, according to Intel executive David House, who predicted that chip performance would double every 18 months ' meaning what you buy today ' if you are on the very forefront of the technology trend ' becomes obsolete in that 18-month timeframe. Given that cycle, purchasing equipment outright dissuades the user from keeping pace with the newest technology trends if equipment is acquired as a capital purchase.

According to Gartner, Inc., the overall semiconductor industry will have purchased approximately $65 billion worth of capital equipment in 2014, and approximately 2% or $1.3 billion will be acquired under an alternative equipment acquisition strategy such as renting or leasing.

Compared with other industries, the semiconductor segment demonstrates one of the lowest percentages of alternative equipment acquisition strategies. There are many reasons why other industries have a greater percentage of assets acquired under alternative processes. These reasons include: 1) cash flow concerns; 2) maintaining equipment flexibility and overall asset efficiency; 3) the ROI of each individual asset; and 4) the risk of technological obsolescence.

The semiconductor industry operates in a very complicated manufacturing environment. Manufacturers are faced with product demand made up of mixed geometries and specifications requiring development and deployment of hundreds and in some cases thousands of different “Chip” recipes. The Fabrication Plant (FAB) runs 24 hours a day working to produce the right product mix to meet customer demand and achieve the corporate objectives.

The semiconductor industry's growth has been partly driven by consumer demand for smart phones and tablet PCs, which are being replaced every 12-18 months. The shorter product life cycles makes it costly to keep up with the latest manufacturing equipment and research and development. To meet changing demand, the majority of semiconductor manufacturers are using foundries for specific processes. Some semiconductor manufacturers are expanding their business offerings to include foundry services to attempt to recapture investment from underutilized equipment.

If you are a FAB-less or FAB-lite company and decide to use a foundry for production, the consideration of leasing specific tools to manufacture your product can provide a strategic and very flexible advantage on costly capital expenditures.

A company should evaluate the ownership of this tool, as it would for a specific device or a contract, both incorporating a defined period less than five years. The leasing of this tool(s) for use on this project would give a company a flexible solution where the capital expenditure would be spread over the term of the contract or life span of the specific device.

When you're operating a foundry and you require specific tools to attract new customers' requirements, you need a process to evaluate the purchase of these tools in conjunction with the overall FAB roadmap tool set. When a tool(s) does not meet fit into your FAB tool set, going forward with a lease would be a valid strategy.

Today in the semiconductor industry, both IDMs and OEMs have labs and testing facilities, the majority of which are full of older equipment and in need of upgrades or replacement. These corporations have purchased these assets through the Capital Budget Approval process and, therefore, these tools are tied to the standard five-year depreciation cycle.

The tools found in these facilities should be replaced or upgraded depending on application; on average the technological useful life of these assets is somewhere between two to four years. It would seem logical to employ a process that would mirror the actual technology period of the assets to allow for upgrades and replacements.

Moore's Law

Within the framework of Moore's Law, “Economic Useful Life” is defined as the estimated period of time over which it is anticipated an asset may be profitably used for the purpose intended. Semiconductor manufacturers need to view their tools from this perspective, as it is not how many tools you own, it is the population of tools you have in your facility that consistently achieves your targeted required margins.

Tools that are sitting in a FAB facility take up expensive floor space, require calibration, insurance and, therefore, need to be producing revenue or otherwise are costing the company money. Semiconductor tools are not like fine wine: They do not get better with age; as tools get older the value goes down.

Some of the factors semiconductor manufacturers should consider when they are deciding on how they should acquire a major tool are:

• What are the technology limits of this tool (can it be upgraded or will it need to be replaced in less than the deprecation period which is typically five years)?
• Will this tool be run at a high-capacity level through the depreciation period, or is there a better tool to meet this requirement? (The overall cost could be more; however utilization period justifies the cost.)
• Do you need to own this tool or just acquire the asset, as it is the use of state of the art tools that increases your margins not the ownership of equipment?
• Do we have like tools on the floor that we could sell/leaseback and recoup sunk cash ' and in the process upgrade the entire equipment segment to the current technology?
• Leasing/renting gives a company a built-in exit strategy on equipment as it is known this equipment will need to be replaced in less than the company's depreciation period.
• The use of these tools on a properly structured lease or rental is an expense item, which can be deducted from the expense budget not the capital budget.

Have a Strong Leasing Partner

If your company opts to lease, the choice of a leasing partner is crucial. A leasing company owned by an equipment manufacturer may not be flexible with semiconductor manufacturers who want to replace that vendor's equipment with a competitor's. A leasing company that is vendor agnostic will give you more flexibility to change out equipment manufacturers and select the cutting-edge technology that is best suited to meet your manufacturing needs, not just the needs of your equipment manufacturer's leasing company.

Also, when selecting a leasing partner, review its expertise in the semiconductor vertical, and make sure the lessor is not a fly-by-night in this growing market. Leasing can be an excellent strategic advantage in this fast paced segment, but be aware that not all master lease agreements (MLAs) are created equal; inquire with your peers as to the reputation for transparency and fairness of the lessor's leasing documents. Leasing is a long term relationship. Make sure your lessor has a reputation for transparency, flexibility and custom solutions. Terms and conditions buried in lease contracts can end up costing you much more than originally anticipated.

Outlook for 2015

It has been reported that most top executives in the semiconductor industry are optimistic about 2015 and the economic forecast for the industry certainly supports this confidence.

WSTS predicts 3.4% growth globally for 2015 ($344.5 billion in total sales) and 3.1% growth for 2016 (to $355.3 billion). A survey of top executives by Semiconductor Engineering points to a solid year for 2015, along with some significant changes as the industry tackles business and technology issues. Similarly, a KPMG Survey shows that semiconductor industry business leaders remain cautiously optimistic about 2015, with greater than 80% of respondents expecting an increase in business.

Semiconductor Equipment and Materials International (SEMI) expects the chip market to increase 3.4% in 2015 to $345 billion and 3.1% to $355 billion in 2016. Semiconductor Engineering predicts that based on the last 12 months, in 2015 the semiconductor industry looks bright. This comes from positive factors in large markets such as the smartphone and automotive industry. Generally there is optimism for the semiconductor industry for 2015.

There is a wide variety of semiconductor device manufacturers in the world today; some are on the cutting edge of technology and others are on the trailing edge ' but all of these companies have constantly changing equipment needs. The use of a comprehensive asset evaluation process will help ensure that these companies have the right equipment at the right time.

Gary Atkins is VP of Diversified Technologies at CoreTech Leasing, Inc., an independent equipment and technology lessor (www.coretechleasing.com). Previously, he was a founding member in the launch and implementation of Comdisco Electronics Group. Mr. Atkins manages CoreTech Leasing's relationships with the OEMs (Original Equipment Manufacturers) and IDMs (Integrated Device Manufacturers) on both front-end manufacturing and back-end test and lab equipment.