Applied Materials, Inc. - Company Profile, Information, Business Description, History, Background Information on Applied Materials, Inc.

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History of Applied Materials, Inc.

Applied Materials, Inc. is the leading manufacturer of wafer fabrication systems and services to the worldwide semiconductor industry. Applied Materials is also the first company within the industry to surpass $1 billion in sales of semiconductor equipment. With 44 sales and service offices in 13 countries and with manufacturing centers in the United States, Europe, Japan, and Israel, the company is poised to take advantage of forecasts which project that the $60 billion semiconductor equipment market in 1993 will grow to more than $110 billion by the beginning of the twenty-first century.

Applied Materials was founded in 1967 to manufacture chemical vapor deposition systems for semiconductor wafer fabrication. The semiconductor industry itself, however, which makes the microcircuitry used in all electronics products, dates back to the invention of the first transistor during the early 1950s by scientists working at Bell Telephone Laboratories. With the advent of the transistor, it was possible to make electronic circuitry smaller and this, in turn, led to the manufacture of products which were lighter weight, more compact, and more energy efficient. During the late 1950s, semiconductor chip makers who initially both designed and built their own production equipment began to contract with vendors that supplied the equipment used to make their miniaturized devices. This trend helped to develop the semiconductor equipment industry. In the modern world, semiconductor manufacturing technology has revolutionized the industrialized nations, providing the basis for all electronic products ranging from advanced fighter aircraft instrumentation to consumer goods such as radios and digital clocks. Indeed, it is not an overstatement to say that economies and national cultures have been dramatically affected by the semiconductor industry.

Within this historical context, Applied Materials' place in the development of the semiconductor manufacturing industry is unique. From 1967 to 1973, company revenues grew at a pace of more than 40 percent annually, and its total market share of the semiconductor equipment industry reached 6.5 percent. With such rapid market expansion and such enviable financial success, in 1972 the company decided to go public. In 1974, management decided to acquire Galamar Industries, a manufacturer of silicon wafers. During the mid 1970s, however, a severe recession had a very negative effect on the entire semiconductor industry. Applied Materials was hit especially hard, suffering a 45 percent drop in sales in 1975. Despite the drop in sales, management pursued prospects for growth, entering into a joint venture with Fairchild Camera and Instrument Corporation to construct a silicon production site in the same year.

Persistent financial problems related to non-semiconductor areas throughout 1976 and 1977 necessitated both organizational and management changes. James C. Morgan, formerly a partner in a private venture capital firm and with extensive experience in management at Textron's high-technology divisions, became president and chief executive officer. Morgan immediately shut down the unprofitable Galamar Industries, sold its share in the silicon manufacturing center, and concentrated on improving its area of expertise in the semiconductor industry. In 1978, Applied Materials reported an increase in sales of approximately 17 percent. And in 1979, sales grew by a phenomenal 51 percent over the previous year.

Applied Materials, under the guidance of Morgan, continued its expansion strategy and acquired the ion implantation division of British-based Lintott Engineering, Ltd. in 1979. The company also formed Applied Materials Japan, Inc., a joint venture created to increase the company's share of the growing Japanese semiconductor equipment market. Sales reached $69.3 million in 1980, but by 1982 the company was once again hit hard by a worldwide recession in the semiconductor industry. At the end of that year, Applied Materials reported a loss of $9.4 million on total sales of $88.2 million.

The company's commitment to research and development, however, helped it weather the recession much better than many other vendors. The introduction of the AME 8100 Series Plasma Etch Systems revolutionized the dry etching of semiconductors. The quick market acceptance of this product and an agreement reached with the General Electric Venture Capital Corporation (GEVENCO) supplying a $20 million investment helped the company ride out the remainder of the recession. By 1983, the company was financially healthy once again; sales broke the $100 million mark. With 30 percent of its total sales originating from Japan, management steered a course to increase participation in the Japanese semiconductor market and started construction of a technology facility which would not only include a state-of-the-art research and development laboratory but also incorporate the most advanced technology for processing semiconductor wafers.

In 1984, increased demand for semiconductors pushed worldwide sales up a record 45 percent to approximately $26 billion, and Applied Materials benefitted from this strong upturn to report sales of $168.4 million, a 60 percent surge over 1983. Yet in 1985, the cyclical nature of the semiconductor industry was again apparent when worldwide sales decreased by almost 20 percent. This downturn led to the worst recession ever for the semiconductor equipment industry and, as the recession deepened in 1986, many of the company's major customers began to reduce their equipment budgets. As a result, revenues continued to decline although Applied Materials was still performing better than most other companies in the semiconductor equipment market.

A large part of Applied Materials' success during the recession was due to the development of leading-edge technology. In 1986, the company introduced the Precision Etch 8300A, featuring major improvements in contamination control and higher than previous levels of automation. In 1987, the company introduced the Precision 5000 CVD, a new system which meets the industry need for significant improvements in the low-temperature deposition of dielectric materials. Orders for this new technology helped Applied Materials improve its financial position, as did a public stock offering which brought in an additional $54.7 million. In the same year, James W. Bagley, Applied Materials senior vice-president of operations since 1981, with over 15 years of previous experience in engineering and project management at Texas Instruments, was appointed president and chief operating officer. Morgan, after serving 12 years as president, remained chief executive officer and chairman of the company's board of directors.

The combination of Applied Materials' commitment to new product introduction and a renewed demand in the worldwide semiconductor equipment market made 1988 a record year for the company. Net sales of $362.8 million more than doubled the previous year's sales figures. By continuing to introduce new products and by improving the technology and applications in its existing product lines, revenues jumped to $501.8 million in 1989. With the previous addition of a service center in Beijing, China, and a regional office in Seoul, Korea, during the mid-1980s, in 1989 the company continued to build upon its presence in the Pacific Rim with the construction of new facilities in Japan. After 10 years, over 40 percent of the company's revenues were coming from the Asia/Pacific market.

New product development was the cornerstone of management's strategy for improving the company's market position in the early 1990s. In 1990, the company introduced the Endura 5500 PVD in order to enter a new market, physical vapor deposition. In 1991, the firm announced its intention to enter the market for Thin Film Transistor Liquid Crystal Display manufacturing equipment. Shipments for systems which manufacture these flat panel displays started in 1993. In 1992, Applied Materials was beginning to reap the benefits of its strategy for product introduction and its expansion in Japan and the Pacific Rim. Total revenues were reported at $751.4 million, backlog orders at $254 million, and net income at $39.5 million. The geographical distribution of sales broke down as follows: 40 percent in the United States, 30 percent in Japan, 18 percent in Europe, and 12 percent in the Pacific Rim.

In 1993, Applied Materials entered into an agreement with Komatsu, Ltd., a Japanese firm, to form a new company named Applied Komatsu Technology, Inc. The company was created in order to develop, manufacture, and market systems that are employed in producing Flat Panel Displays. Operating with facilities in both the United States and Japan, it was agreed upon that company headquarters were to be established in Japan. In October 1993, the company announced its first product, the AKT 1600 PECVD, for chemical vapor deposition of thin films employed in manufacturing Thin Film Transistor structures in Flat Panel Displays. The development of this technology has broad applications ranging from desktop and laptop computers to any electronic products that use high quality, color displays.

The strategy of Applied Materials in establishing partnerships like the one with Komatsu has been extremely profitable for the firm. Joint ventures increase the company's market share in Japan because the new operation functions like a Japanese firm and relies on Japanese employees to provide the manufacturing base, marketing skills, and sales techniques required to do business in that country. In addition, the intimate relationships created with valued Japanese customers help sell Applied Materials' products when the customer decides to open a plant in the U.S. or somewhere overseas. The success of this strategy is the reason why nearly one-third of all Applied Materials sales involve Japanese semiconductor customers.

Not only will Applied Materials continue to focus on establishing long-term relationships with users of semiconductor equipment, but it also intends to take advantage of foreseeable trends in manufacturing technology. For example, as the semiconductor industry produces more and more circuits with smaller geometries, particulate contamination in what is called the 'cleanroom' will become a major concern requiring contaminant-free manufacturing environments. One solution to this problem of particulate contamination is the trend toward through-the-wall equipment design, where manufacturing equipment is com-pletely encased in an airtight shell (a 'cleanroom' environment) with only one access port which connects the equipment to the wafer fabrication facility. Applied Materials is developing new and highly reliable equipment for semiconductor customers to use within this 'cleanroom' manufacturing environment.

In 1993, Applied Materials reached one of its long-term goals: it became the first company within the semiconductor equipment industry to hit the $1 billion mark in revenues. Total sales in 1993 amounted to $1.08 billion. One critical element in the company's financial success is the 13 percent of total revenue, or $140.2 million in fiscal 1993, invested in research and development. The commitment of a significant portion of its revenue to developing new technology has provided stability and helped the company weather the cyclical periods of growth and recession in the semiconductor industry. A continued emphasis on developing new technology, along with a strategy of creating close working partnerships with customers by means of a global presence, makes Applied Materials the company to watch in the semiconductor manufacturing industry.

Additional Details

Further Reference

Pitta, Julia, 'The Realist,' Forbes, May 13, 1991, pp. 116-117.Cohen, Charles, 'Applied Materials Combines the Best of East and West,' Electronic Business, May 6, 1991, pp. 52-54.

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