Novellus Systems Key Characteristics PR

Novellus Systems

Key characteristics

PR Newswire calls Novellus Systems, Inc., "the productivity and technology leader in advanced deposition, surface preparation and chemical-mechanical planarization processes for the global semiconductor industry," (PRNewswire, 2005), a title the company might very well claim for itself. In its field, Novellus enjoys longevity, having been founded in 1984 "to delivery high-productivity deposition products and processes to the semiconductor industry" (Novellus Web site, 2003).

By 1987, the company had introduced the Concept One dielectric deposition system; the significance of this introduction was that it provided with makers of silicon chips with "unprecedented productivity, reliability and cost-of-ownership advantages" (Novellus Web site, 2003). In 1991, the company followed that with a "modular, integrated production system capable of depositing both dielectric and conductive metal layers by combining one or more processing chambers with a common, automated robotic wafer handler" (Novellus Web site, 2003). Naturally, Concept Three followed, building in superior throughput in 300mm wafer-manufacturing applications (Novellus Web site, 2003).

Novellus claims to have been a leader in the industry's transition to copper and low-k dielectric manufacturing since at least the late 1990s. They note that:

In 1998 we entered the electrochemical deposition (ECD) market with the introduction of our breakthrough SABRE ® copper Electrofill ® system, the most reliable and technologically advanced copper ECD system available on the market today, as well as the manufacturing production leader (Novellus Web site, 2003).

Novellus is not alone in its business approach. It is a maker of high-end, built-to-last products in its field; these are sold to the largest possible customers. It has had significant success in carrying out that strategy, as its current largest chip customers are Samsung Electronics, Intel, Taiwan Semiconductor and IBM.

While it remains the leader in its field according to Hoover's database, that is not because it is literally the one with the largest production or highest sales. In fact, Applied Materials exceeds Novellus Systems in sales, income and employee growth. Please see the tables below to view the substantial magnitude of difference in the numbers among the top three in the field:

Table 1:

Sales of top makers of high-productivity deposition products and processes

Company

2004 sales (in mil.)

Novellus

Applied Materials

Semitool

Source: Hoovers online

Table 2:

Net income of top makers of high-productivity deposition products and processes

Company

2004 net income (in mil.)

Novellus

Applied Materials

Semitool

Source: Hoovers online

Table 3:

Employee growth of top makers of high-productivity deposition products and processes

Company

2004 employees

1-year employee growth

Novellus

Applied Material

Semitool

Source: Hoovers online

In analyzing these figures, it would first appear that Novellus is experiencing less robust health than its two competitors. Applied Materials has infinitely more employees, although of the three, Applied had the smallest growth in staff; it has the greatest sales and greatest net income, however. There is also a wide gulf between those two and Semitool, although with its 36.7% employee growth in 2004, it would be fair to suggest that Semitool has poised itself for a launch into more serious competition with Novellus and Applied Materials.

Competitive Position

Despite the very healthy position of Applied Material and the apparent significant growth of Semitool, Novellus has maintained a good market position. Part of the evidence of this comes from analyst recommendations. A recent chart of investor recommendations for Novellus shows that the company has gotten marginally stronger 'sell' analyses lately.

Table 4:

Analyst recommendations regarding Novellus for three recent months

Source: Business.com

Table 5:

Novellus Price History, Three Recent Months

Source: Business.com

In 2004, Novellus' market share was 25%, which allowed it to trail Applied Materials. Novellus' market share was predicted by one of the company's won vice presidents, to rise to about 40% in 2005 (Auchard, 2005).

Key competitive position

In order to understand why analysts consider Novellus to be the market leaders, despite the larger size of its competitor, Applied Materials, it is necessary to understand the growth of the semiconductor industry. The industry has been driven, for the past twenty years, by the expanding demand for personal computers, in turn driven in part by the expansion of the Internet and the telecommunications industry; in addition, the advent of ever more 'smart' electronics has also pushed the semiconductor market (Novellus Web site, 2003).

One might say that "a need for speed" added one more aspect to the task of semi-conductors, and it is that need that Novellus seems to have addressed better than others are. "While unit demand for semiconductor devices continues to rise, the average selling prices of chips continue to decline. There is growing pressure on chipmakers to reduce manufacturing costs while simultaneously increasing the value of their products. The semiconductor industry has also been historically cyclical, with periods of rapid expansion followed by periods of over-capacity" (Novellus Web site). Looking at this factor, and assessing in relation to it the strengths of Novellus and Applied Materials, it is possible to infer that because it is not of gargantuan size, like Applied Materials, Novellus can weather the over-capacity periods in better condition, having less overhead (fewer employees, a small physical plant and so on) to support during downturns. In addition, Novellus has taken care to have customers who are building chips for their own production (IBM, for example) or are offering IC manufacturing to other third-party businesses (Novellus Web site, 2003).

In addition, Novellus is not only cognizant of Moore's Law, actually a prediction made more than 40 years ago that the density of circuitry on a semiconductor chip would double every 18 months; Novellus takes it seriously enough to quote it on its own Web site. It is, by implication guaranteeing to produce products and processes capable of accommodating line widths as small as 90 nanometers and up to 10 layers of interconnect circuitry. While this is not a mission statement per se, nor a guarantee, simply posting this information on its own Web site indicates something of its strategy. That is, Novellus identifies the cutting edge of the market, and then meets it.

Novellus does the same thing regarding its own manufacturing competencies. For example, Novellus identified the trend in the industry toward larger wafer sizes, with chipmakers migrating to 300mm wafers "because of the potential manufacturing cost advantages of these larger wafers compared to 200mm. The 300mm wafers provide up to 2.25 times the number of chips per wafer, and hence may provide significant economies of scale in the manufacturing process" (Novellus Web site, 2003). Novellus would not have mentioned it unless the company expected to be a leader in this trend as well. Also aware that repeatability is the key to profitability in manufacturing, Novellus also dedicated itself to that idea, and to creating repeatability while keeping the quality at the top of the market.

Novellus has identified the fact that chipmakers must have innovative technologies, but must also "optimize" each unit process during manufacturing. "This transition -- and the opportunities that accompany it -- are at the heart" of the company's strategy to "build on its productivity advantage while offering cutting edge technology to the world's leading semiconductor device manufacturers" (Novellus Web site, 2003).

Key strategic issues

Earlier, a Novellus vice president was cited for his remarks about increasing Novellus' market share to 40% in 2005. It is planning to gain that ground by making strides in the two biggest markets for semiconductor production gear, as well as building on the strength it already has in many smaller market segments (Auchard, 2005). The two key semiconductor production areas are physical vapor depositions (PVD) and chemical vapor deposition (CVD). In planning on expansion into these markets, it is intending to compete head-on with Applied Materials, the company that currently dominates those markets (Auchard, 2005). The fact that customers have been asking for a "credible second source" is, in all likelihood, a very strong position for Novellus to use in entering the market in search of market share.

At the same time that Novellus was articulating this strategy, it was keeping mum on its quarterly earnings report; in many recent markets, Novellus had produced disappointing results for shareholders, as little as three cents per share in 2003.