Oh man what a year it has been 2020. If it could go wrong, it has gone wrong. That being said our industry, we are we're very lucky. As Gary Dickerson, our CEO said, “We're very blessed to be in part of an industry that has been very robust throughout the entire year. Wafer fab equipment, the acronym is WFE, is the place that we play. It has been extremely strong and we actually are seeing that the future is quite bright for our industry. I'm sure as we continue the conversation you'll ask me some questions we'll talk a little bit about some of the challenges but a very difficult year very rewarding year and applied materials our industry is set up for a very bright future.
Taking it back to January 2020, did you think COVID would roll out to the US? (1:47)
First of all I would tell you that no, we never dreamed that we would experience what we what we saw. It was an interesting year in the way it rolled out. We were having a supplier conference at Applied Materials in Austin and we had multiple suppliers. Many suppliers had landed and were in the Austin facility when word had started coming out early that morning that China was shutting down significant parts of their country due to the coronavirus. It all began on a Tuesday. It all began on that day and it really cascaded throughout the world. We've seen it in the news but when it comes to industry we saw the exact same thing. We saw it started in China, moved on into Europe, saw it in the United States then we see it in South America, Australia and it was really a roving virus and we saw the impact on a rolling basis throughout industry. The pattern was very similar across the board what we saw play out in china and what their reactions were. What has been really interesting to see is how dynamic and how agile industry especially our industry is in our supply base. Extremely agile to deal with something that they had never dealt with before and to see the creativity not just at Applied Materials but in our supply base on how they reacted to it and how they responded to it in order to keep industry moving.
What does that mean if you don’t speak supply chain? (3:45)
I think the best way to say it is that we had to respond. At first it was about reaction and responding when it went down in China and it started spreading, we had to respond very quickly. Just overnight our suppliers shut down. They were unable to go into their factories primarily in China and so we immediately had to set up war rooms and set up the right people.
Then Applied and the suppliers having constant communications with our suppliers even though they weren't able to go into the factory and we began immediately making plans with the suppliers on how quickly they could start onboarding their resources and every supplier was in certain provinces, certain states, certain countries and certain locations that had different rules and regulations. Every supplier responded differently. What we saw at the beginning was what I would call inventory evacuation. With each of the suppliers, the first thing they did is they would just evacuate any inventory they had that Applied and other people in the industry needed. They began evacuating that industry just get the back docs cleared and get it to the point of consumption and then at that point while that was happening they were beginning to onboard their direct labor and on board their indirect labor. Then we really saw the creativity at each supplier as they had to start developing ways to social distance and they had to start ways and create ways to start doing tests as people came onsite whether it's taking temperature or other things like that. So, you see so many suppliers every supplier has been impacted, Applied has been impacted in the way that we bring people onsite each and every day: How do we social distance? What is the personal protective equipment that they wear? How do we do contact tracing? All of that now is part of everyday life and probably will be for the foreseeable future.
Well, it depends on what news channel that you're looking at right? I definitely don't believe that it is fully behind us. I mean the virus is not behind us yet, but the readiness, the preparedness of our supply base I think is going to be able to absorb any of the impacts that are coming. We're still going to struggle getting airplanes. There are fewer planes flying which means there's less availability of freight. That will be an issue we'll deal with for the next year to year and a half or so. Beyond that, I think that industry is ready to go. Industry is very resilient. Capitalism creates creativity and I think we're seeing that.
Will industry look for a more diverse supplier base that isn’t tied to one geographic location? (6:59)
Well sure I mean that's a great question. Clearly over the last few years the geopolitical issues around the world have gotten to be more significant and they have a bigger and bigger impact on the decisions that people make. In a company like Applied Materials, we're already quite diverse and we have suppliers all over the world. We have manufacturing facilities all over the world and so we are used to living in a world where our supply base is highly diversified. We're not dependent solely on one location. We've done a lot of dual sourcing and things like that in order to ensure that we have supply continuity. I think for Applied Materials there are new things for us to think about, new dynamics and it continues changing depending on which political party is in power in the US or Australia or the UK or wherever it may be. The geopolitical issues are becoming more and more important in how people do business. I don't think there's any end in sight for a while and we just need to get used to that, we need to be resilient and we need to be prepared for anything that can happen.
Disruption was the word for 2019: trade disruption, tariffs and conflict between countries. Did it prepare us for COVID? (8:18)
Yeah, to some extent, absolutely. I think the U.S. industry in particular, maybe industry throughout the world, got lulled into a little bit of a sense of complacency during the 90s and the early part of the 2000s as well. It seemed like there was just no end in sight and no real interruption in doing international business. Then things began to change a little bit over the last few years. I think that will continue to be the case. I think in the last few years clearly geopolitical issues has created a higher and higher level of focus for not just Applied Materials but even smaller companies here in the Austin area that are trying to make decisions on where they should locate their next facility. Do they locate it here in Austin area? Do they go to Houston? Do they go to another state or another country? All of those things have to be taken into account.
What’s ahead for the semiconductor industry? (9:39)
Let me just start out by saying our CEO Gary Dickerson made a comment in a public forum, an investor forum, just maybe two months ago now. He said wafer fab equipment will hit $100 billion by the year 2030. We're only nine years away from that and right now when you look at consensus estimates this year will be somewhere around the $58 billion range. Last year was about $55 billion when you look at most of the experts that track this industry. So, if you look forward and you say we're going to be a $100 billion industry in 2030, that's nine years away. That means there is tremendous and very robust growth that's on the horizon.
When you see what has happened over the last year, there's some dynamics that have been very interesting. When you think about what happened, everyone suddenly started working from home, doing school from home. When that happened, people started getting more laptops, and started getting more computers. They need a higher level of broadband at their house. So work from home and school from home, it drove hardware. Yesterday I went to Best Buy to pick up a printer. There were no printers because everybody is buying printers for their kid at home to print their schoolwork out. There's been an extremely high level of demand for semiconductors over the last year and now there's an appetite for that, that will continue. I would assume at some point we'll all get back to work, but there will probably now always be more of a work from home content or flavor in the way we do business in the future than we have in the past.
That's just one example. When you look at autonomous cars, look at Tesla, look at the other companies that are out there trying to develop autonomous cars, the future is extremely bright. When you look at artificial intelligence, you look at all of the things that are happening every day in our homes and in our businesses. There's more and more silicon content showing up each and every day. There is no doubt wafer fab equipment, the semiconductor industry, is going to be extremely robust. It doesn't mean it's going to be quarter on quarter on quarter growth every quarter, there will be some ups and downs, but things look very bright for this industry.
Does every electronic chip in the world pass through a piece of equipment made by Applied Materials? (12:09)
I would encourage people who don't know Applied Materials very well, to go out and do your own research about Applied. But Applied Materials is the largest wafer fab equipment manufacturer in the world. One of the things that we bring to the table that our competition doesn't is just the diversity of products that we offer whether it's PVD or ALD or Epitaxial or Etch or CBD. That's a lot of acronyms I just threw out there, but we have multiple different business units and an extremely broad base of products that we offer the industry. Quite literally it would almost be impossible to see anything other than a one-off chipper there that did not pass through an Applied Materials piece of equipment especially as we get into the more and more advanced nodes that we're experiencing now. Applied Materials is the company that you've never really heard of, but it is impacting your life each and every day in ways you wouldn't even know of.
How does Applied Materials balance the importance of continuity and diverse supplier base? (13:28)
When we select a supplier and we onboard a supplier in our industry, our goal is to onboard them for a long-term relationship. It's very costly to bring on new suppliers and when we do bring them on, we need them to be around for a long time. We want them to be around. So, we're always balancing copy exact. We're also balancing the fact that we need to ensure we have dual continuity of supply coming from multiple suppliers. Those are two of the things that we deal with on a day-to-day basis and many of your listeners here today do business with Applied, so they understand copy exact. They've been through the training and they understand the implications of it.
Will there be pressure to return to lean out supply chains or do you think things are changed forever? (14:47)
Well, you know investors are investors and shareholders are shareholders. So, I don't think business has fundamentally changed in terms of the fact that those investors and shareholders demand a certain financial performance from whatever company that they are invested in. Part of that is cash flow, part of it is inventory management and asset allocations. I don't think that's going to change. Now has the entire world? You know the pendulum is always moving left and right. It never stops and so one could definitely make the argument that we, that all of industry, the entire world, became so reliant upon JIT and leaning out inventory and ensuring that materials showed up right when you need it, that there was very little opportunity for error. I feel that to some extent that pendulum has moved back to the right because we've seen interruptions that have taken place and we can see what those implications are to your customers. So without a doubt the pendulum is moving back in the other direction. How far does it go and how long does it keep going in the other direction before it swings back? I don't really know. But clearly for a time period here, we're moving a little bit further away from the JIT—the immediate consumption of inventory and decision. We'll see where industry drives us as the geopolitical issues maybe calm down. Maybe that becomes less of a concern and we start moving more towards the lean principles that have been so predominant in our industries, not just in our industry but in all industries around the world. But we'll see. It definitely is an interesting time.