TEL: the power behind the MAGIC – The Worldfolio
Tokyo Electron’s long-established commitment to technological innovation, creativity and dreaming big means the future is as bright as ever as the company continues to support the rise of the MAGIC (Metaverse, Autonomous mobility, Green energy, IoT/information, and Communications) market.
Thank you for joining us once again. Last year, during our interview, you provided us with valuable insights into the semiconductor industry and the advancement being made in the sector. Could you share with us some of the key milestones and accomplishments the company has achieved since then, and how these advancements have influenced the market and your global presence?
As you are likely aware, neural network concepts based on deep learning have been demonstrating remarkable progress in semiconductor technology. In the provided image which was demonstrated in 2012, the Cat node stands out prominently, showcasing the ability to consolidate vast layers and volumes of data instantaneously and process it at incredible speeds.
Offered by Tokyo Electron
This rapid advancement in semiconductor technology is driving various applications, including the rising popularity of generative AI, and the development of virtual reality and autonomous driving systems. Such innovations would not be possible without continuous improvements in the semiconductor industry, making it the driving force behind numerous technological breakthroughs. The following summary highlights the historical and future significance of the ICT industry's growth.
From the invention of transistors in 1947, the semiconductor industry has seen the emergence of PCs in the 90s, mobile communication in the 2000s, and now significant growth in AI-centric and virtual reality applications. The semiconductor market reached USD 574 billion in the 2022 fiscal year, and it is projected to skyrocket to over USD 1 trillion by 2030 (Source: 2022 (WSTS)/ 2030 (IBS, August 2023)), nearly doubling its size and creating a market equivalent to two markets from 2022. Global data traffic is expected to have an average Compound Annual Growth Rate (CAGR) of 26% (Source: Omdia (1990-2030)), making it tenfold in a decade. The future also holds an increase in bit-based computing, alongside quantum computing, and neural network-based computer processing is anticipated.
At Tokyo Electron, we foresee a sustained CAGR of 26% even beyond 2030, leading to a 100-fold increase in global data traffic by 2040. While some argue that we have entered the Big Data era, we believe we are only on the cusp and yet to fully immerse in it. Consequently, there will be a rising demand for advanced semiconductor technologies. Currently, Tokyo Electron holds about 22,000 patents for semiconductor production equipment, making us the industry leader.
To strengthen our position further, we continue to invest significantly in R&D, having already invested JPY 600 billion between FY2018 and FY2022, with plans to invest over JPY 1 trillion between FY2023 and FY2027. These investments have resulted in groundbreaking achievements, such as etching process equipment capable of reaching a depth of 10 microns two and a half times faster than previous capabilities while consuming over 40% less power. This achievement translates into over 80% reduction in carbon emissions and a significant positive environmental impact in the 3D NAND flash memory channel hole etching, which is one of the most critical etching processes and requires the largest number of etching equipment.
In addition to high-end processing, we foresee growth in what we call the MAGIC market; encompassing Metaverse, Autonomous mobility, Green energy, IoT/Information, and Communications (MAGIC). This MAGIC market offers steadier growth compared to the high volatility of the high-end market. The demand for semiconductor production equipment in this market is expected to double, reaching USD 60 billion by 2032 from the current USD 30 billion (Tokyo Electron estimates). Tokyo Electron aims to cater to this market and provide solutions through our Diversity Systems and Solutions (DSS) Business Unit, launched in April 2023, which emphasizes safety and environmental specifications adopted in our products.
As we celebrate the 60th anniversary of our founding this year, we have formulated a new vision: 'A company filled with dreams and vitality that contributes to technological innovation in semiconductors'. The driving force behind this vision is our dedicated staff, and I am committed to fostering a culture of dreams and vitality within the company. TEL will support the development of a dream-inspiring society by contributing to technological innovation in semiconductors. In other words, TEL (Tokyo Electron) is Technology Enabling Life.
Our vision aligns with the ideas of Dr. Michael Porter, an esteemed academic from Harvard Business School known for his competitive strategic theories. At Tokyo Electron, we embrace the concept of creating shared value, leveraging our corporate expertise to address various social issues and contribute to society. By doing so, we enhance both our corporate value and society's sustainable growth. Concretely, we leverage our expertise in semiconductor production equipment to contribute to the world's digitalization efforts and support environmental sustainability, promoting the realization of a more carbon-neutral society.
The growth of the semiconductor sector is undeniable at this point, however, right now the industry is experiencing a downturn. We saw interest rates rising, which drew liquidity out of the market, and increased inventories as well. Many analysts believe that the situation would have calmed down around now, but it hasn’t. This month we saw TSMC announce that they are expecting revenue to drop by 10% this year, and Samsung Semiconductor Division announced an expectation of a 96% drop in operating profit. There are some glimmers of hope however, such as the recovery in China, which is finally starting the demand for generative AI, and of course, NVIDIA’s GPUs saw a rise. From your point of view, when do you expect the market to rebound and what is your outlook for the next 12-16 months ahead?
In comparison to last year, we expect the WFE market to decline 25-30% this year. However, as I mentioned earlier, I am optimistic that the situation will improve starting next year. We are hopeful that 2025 will bring significant improvements, making it a pivotal year for us. As for the exact timing of this improvement, I cannot provide a definitive answer at the moment. I expect to see some progress by at least the middle of 2024, and the second half of 2024 leading into 2025 will be crucial for our company. Thus, thorough preparation during this period is essential.
The emergence of generative AI systems like ChatGPT or Midjourney is driving demand for powerful GPUs. Even modern smartphones now require around 1.6 billion transistors, while generative AI systems like ChatGPT demand 80 billion transistors on the required chip, leading to an increase in chip sizes. As a result, our tools will play a critical role in manufacturing all of these chips and devices. Considering these factors, I firmly believe that the second half of 2024 and the beginning of 2025 will prove to be prosperous years for Tokyo Electron and the semiconductor industry as a whole.
You mentioned how this is a transition period, and it is important to prepare for the future. When we first interviewed you 4 years ago we discussed the rise and fall of the Japanese semiconductor sector, and you said that the biggest downfall was not investing in R&D in times of bad market cycles. Tokyo Electron is doing the inverse of that this fiscal year, you’re projecting an R&D investment of JPY 200 billion and you have a JPY 1 trillion spend earmarked by fiscal 2027. On top of that, we saw that you’ve actually expanded your production capacity of Tokyo Electron Technology Solutions Ltd., a plant in Iwate, a JPY 22 billion investment. Where does this commitment to R&D come from, and why are you not scared to invest when the market is in such a downturn? What is your philosophy behind these aggressive investments?
As a semiconductor production equipment manufacturer, we recognize the expected continued growth in the semiconductor market, prompting the crucial question, "Where can we add value?" Considering our equipment as our lifeline, we observe that technological advancements are becoming increasingly complex while the market continues to expand. Consequently, in order to effectively respond to these developments, lead the market, and grasp opportunities, sustainable investment in R&D becomes indispensable.
Having joined Tokyo Electron in 1986, I witnessed the Japanese semiconductor industry hold a global market share of 50% at that time. It is important to note that Tokyo Electron's expertise primarily lies in semiconductor production equipment rather than semiconductors per se. Following the burst of the economic bubble, many Japanese firms halted their capital investments. In contrast, our Taiwanese and Korean clients persisted in their investments. Given the rapid developments and growth in the semiconductor industry, we must keep these insights at the forefront of our minds to ensure survival and prosperity.
To that end, here at Tokyo Electron, we remain deeply committed to sustainable and ongoing R&D investment, with a focus on creating high-value-added innovations in the field. While it is prudent to control expenses during economic downturns, we firmly believe that our staff and employees are the driving force behind our activities. Our turnover ratio for Japanese fabs and operations is less than 1%. This low turnover ensures continuity in R&D investments and allows our employees to derive long-term value.
To foster a culture of innovation and to retain skilled personnel, we have implemented a performance-based salary system. Also, Tokyo Electron continues to invest in research and development over the long term, allowing our employees to continue to contribute their expertise and add value to our endeavors.
TSMC this month said that they would delay their opening of the new Arizona fabrication plant because they have not been able to secure the right engineers to operate the fab in the North American market. As your company is also expanding production with this new facility in Iwate, what is your recruitment strategy looking like for the future? Are you looking to expand your workforce in the years to come?
Yes, I am actively working towards increasing the number of employees, as outlined in our mid-term business plan. Our target is to achieve more than JPY 3 trillion in net sales with over a 35% operating margin and over a 30% return on investment (ROE) by fiscal 2027. To attain this goal, recruitment becomes imperative. However, merely increasing headcount is not enough; we recognize the need for further improvements.
At Tokyo Electron, we currently ship around 6,000 units of equipment per year, and after shipment, installation and startup processes are required. By reducing the startup time drastically, we have great potential to significantly enhance our productivity. This endeavor necessitates a focus on support, education, and recruitment; areas I am keen to actively pursue.
Moreover, reducing startup time can also lead to a reduction in incidents in clean rooms. Given the collaboration between various companies and suppliers, we can establish our own procedures within factories. As a result, the reduction in startup time not only improves productivity but also contributes to fewer incidents in clean rooms.
You spoke earlier about how consumer electronics back in the 80s drove innovation, and now today it’s AI, VR, and autonomous driving. With these new entries into the field we are seeing firms like Apple designing their own chips, and 5 of the top 10 OEM carmakers are set to design their own chips by 2025. Can you explain to us how you cater to differing client needs and new entries into the field?
Our company boasts a diverse product lineup, leveraging various cutting-edge technologies. From coater/developers, etching and deposition to wet cleaning, we have a wide array of offerings. Crucially, thermal and temperature control, as well as pressure and plasma control, play a pivotal role in our operations, and extensive knowledge about chemicals underpins these control systems. Drawing from this rich expertise, we are capable of presenting our clients with a wide range of proposals and solutions.
Our clients are well aware of our technological strengths and impeccable performance record. To cater to their long-term needs, we align 10-year technology roadmap with our customers. Tokyo Electron has successfully integrated our products into customers’ clean rooms, and our current focus is on next-generation solutions. We take pride in continuously supporting our clients’ existing operations while staying at the forefront of developments. This enables us to anticipate the direction of R&D and offer solutions that cater to their future requirements. Our proactive approach sets us apart and positions Tokyo Electron as a preferred choice compared to some of our competitors.
While other top manufacturers in the industry are also developing similar solutions, I firmly believe that Tokyo Electron’s extensive range of products and largest numbers of patents make us the leading choice for semiconductor manufacturing solutions.
You’ve alluded to various business opportunities for Tokyo Electron in 2025, some of which include selective deposition with new materials in logic/foundries, coater/developer for EUV in DRAM, as well as wet cleaning and a new etching process in NAND. Could you pick one of these new technologies and explain to us why you are so excited about it? Could you give us a sample of the technological innovations you’re bringing to the industry?
If I should pick up one of those, I would like to highlight our etching process, allowing us to reach depths of 10 microns at 2.5 times the conventional etching rate. Constantly evaluating potential growth and expansion in future markets is a key aspect of our strategy. Etching stands out as one of the most substantial markets in the industry, presenting numerous opportunities for further development. While we are confident in our dominant global position in the etching sector, we recognize that there is room for advancement in the NAND segment, where we may be trailing behind some of our competitors.
Acknowledging the significance of this market, we are determined to make strides in the NAND domain. Our customers already appreciate the strength of Tokyo Electron’s expertise in etching. This realization fuels my excitement for the potential of our new etching technology to drive the company forward.
You mentioned earlier Tokyo Electron’s target of over JPY 3 trillion net sales with over a 35% operating profit margin and a 30% ROE. This would be a first among Nikkei 225 companies, or at least one of the first companies to ever achieve these kinds of results. It is interesting that the plan is established this year as the Nikkei 225 is at an all-time high. As a result, internationally acclaimed investors such as Warren Buffet are seeing big opportunities in Japan right now. Why do you think Japan is so appealing right now for investors? How much do you believe is due not only to these macro reasons but also to better governance?
Currently, Japanese firms are garnering significant attention due to their comparatively lower profit ratios in comparison to larger US and European companies. This situation presents a wealth of opportunities for growth and enhancement, making the Japanese market notably attractive to investors. The momentum is substantial, primarily driven by the potential for improvement, but the true measure of success lies beyond this initial phase.
While the company's profit is a focal point, there remains ample room for improvement. This compelling prospect is what captures the keen interest of numerous investors in Japan. It is essential to recognize that investors will swiftly shift their focus if companies fail to demonstrate tangible progress and growth. Hence, I place immense emphasis on continuous and sustainable growth, particularly concerning profitability. As a company president, I understand the significance of considering not only mid- to long-term objectives but also short-term goals. This perspective fuels my unwavering commitment to constant investment and the organic expansion of our company.
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