INDUSTRY NEWS

Service, spares management deals extend Applied’s global fab reach

The 800-pound gorilla of the semiconductor equipment industry has bulked up even more. Applied Materials recently signed two new vendor agreements that further expand the company’s reach into the world’s fabs.

TOOLING UP: Applied Materials has signed separate service and spares agreements with Brooks Automation and Praxair. PHOTO COURTESY OF APPLIED MATERIALS

The separate agreements with Brooks Automation and Praxair Electronics call for Applied to offer on-site service and spare-parts management for both vendors’ wares. The goal of the expanded offerings is to help customers “improve their fab productivity and profitability,” says Mike Splinter, Applied’s president and CEO.

The Brooks deal covers certain types of the supplier’s factory automation hardware. Praxair Electronics, which insists that its agreement be called an “alliance,” says its new Commodity Consumables Services initiative will offer fabs one-stop shopping for generic commodities such as O-rings, seals, and filters. The Connecticut-based unit of Praxair specializes in gases, materials, sputtering targets, slurries, and other process consumables.

The pact with Brooks extends Applied’s business dealings with the automation gear manufacturer. The process tool manufacturer is, in fact, one of his company’s biggest customers, notes Mark Chung, director of corporate relations for Brooks. “We were looking at ways of increasing our business with Applied across the board.” The idea for the service agreement arose out of discussions between the companies. The discussion followed “best-in-class” benchmarking that Brooks conducted with customers. “In the course of that whole evaluation we started some dialogue with Applied, and we came to this agreement,” Chung says.

Praxair’s alliance with Applied evolved as the OEM began to explore ways of expanding its fab services, says Rick Andersen, general manager of Praxair Electronics Logistics. “Everybody knows Applied’s huge presence in the market space, as well as its sales and marketing capabilities,” Andersen says.

David Fried, vice president of new business development for Applied Global Services, says Praxair “essentially outsourced elements of their service to us.” He notes that the Silicon Valley– based equipment behemoth “is really determined to move into the fabwide business. We have by far the largest service business in the industry, and it was all focused on Applied equipment.” Fried estimates that if 20% of installed equipment carries the Applied label, “you figure there’s a five-time opportunity outside of Applied. What we want to do is leverage our infrastructure.”

Applied has “been watching Praxair for a long time. We’ve known of their commodity consumable capability.” Rather than try to recreate the supplier’s commodities expertise, Applied asked, “Why don’t we work together and leverage both of our strengths?” Praxair “has developed a unique capability to understand and cross-reference commodity consumables across all of the OEMs in a fab.”

The attraction to Brooks came about because “number one, they’re one of the largest OEMs out there, and, two, their products touch a lot of the tools in the fab,” Fried says. The agreements also offer potential yield benefits. “When people are second-sourcing with Brand-X suppliers a lot of these critical parts in the chamber, and even the maintenance techniques—those things will affect yield.”

The purported cost advantage should be a powerful lure for fabs, Fried maintains. “Absolutely. In the end, this is a very tough industry from the point of view of costs, and customers are not going to buy just because we’re Applied Materials or Praxair. They’re going to buy because it’s more convenient, it lowers costs; and they get the delivery and quality that they want.”

A “typical fab will deal with anywhere from 10 to 15 suppliers” for commodity consumables, according to Praxair’s Andersen, who believes that consolidating this activity makes sense. “The key here is that this [activity] is at the tail end of the supply chain. There are a lot of transactional costs for the lower end of the ‘spend.’ There’s a lot of energy to managing suppliers at this end of the supply chain.” Very few of the consumables “are high-dollar parts,” but they take up a disproportionate share of fab expenses. Despite the nickel-and-dime nature of these consumables, he insists that an out-of-stock screw or O-ring can take down a fab line just as easily as lacking “a $25,000 susceptor or an electrode.”

Andersen’s operation always tries to ensure tool availability for customers, “because that’s the king. It’s not up to us whether the customer has that tool loaded with wafers to run. It’s our job to make sure tools are in the factory that engineers can access in real time. That’s why our programs are integrated into the cleanroom. It’s all about how fast you can get a tool back up when it goes down.”

Fried says these new agreements differ from previous alliances because of the size of the companies involved. Characterizing the pacts as a “big change” in the semiconductor industry, he claims there’s no other example of two OEMs as large as Applied and Brooks teaming in this way. Typically, the companies involved in such alliances have been “very, very small,” particularly in the service segment.

Since the Praxair announcement in late May, at least five different customers have inquired about the consumables service, Fried notes. “The Praxair alliance has really struck a chord,” adding that unsolicited calls have come from fabs in Europe and the United States.

The new agreements are part of an evolution in the process and service segment of the industry over the past 10 years, explains Dean Freeman, a principal analyst with Gartner Research. In the early to mid-1990s, vendors sold their own spares and service plans, making enough money to see decent margins. As time went on, more and more firms began to outsource their spare parts to depots in order to reduce their costs by minimizing the number of spares they kept in the warehouse. “Now, to a certain extent, it sounds like Applied is trying to become that third party, first with Praxair and now with Brooks Automation.”

Because Applied is one of Brooks’ biggest customers the agreement between the two makes sense to a certain extent, Freeman says. He sees a potential snag, however. “It will be interesting to see how that type of agreement plays out with other vendors.” He cites Novellus Systems and Lam Research, companies that use Brooks central handlers in their process systems.

Freeman sees Applied becoming “for lack of a better term, the Wal-Mart or Home Depot of service.” As a result of the volume pricing, parts and consumables will cost less than those offered by other suppliers, and a semiconductor manufacturer will be able to increase its margins and “hammer” the competitors’ margins.

“Will the vendors of the world still get the service they need? I can see that this may actually be a benefit for a small company that is not a $100 million company and not well positioned internationally.” With Applied Materials handling the service contracts, an Intel, for instance, may be more willing to take a risk on a smaller firm because Applied’s got its back, and so Intel would be “not as worried as much about spares.”

There’s “huge rumbling” among consumables suppliers that are very nervous about Applied’s move into the consumables business, says Freeman. “It’s an interesting move for them. Their customers are going to provide a lot of pushback… [and] are going to challenge them on this.”

The analyst wonders whether Applied may find itself working on subsystems used in, say, Novellus tools. “I know what the response is going to be: ‘You’re out of your mind if you think I’m going to let Applied service my equipment.’ ” In extreme cases, he foresees the potential for Applied to have “open access to other companies’ IP.”

This IP-threatening scenario, Chung insists, is not possible under the terms of the agreement. Brooks, he notes, has two sets of customers—semiconductor manufacturers and equipment makers, such as Applied. “We want to make sure there’s no confusion. The scope of this agreement covers only the factory automation hardware pieces sold directly to the fab. It does not cover the robotics and other automation products that we sell to what we call our OEMs.”

After the pact was announced “there was some confusion,” the Brooks director points out, with some financial analysts “saying this could potentially hurt our OEMs business.”

In a follow-up interview, Chung was asked directly whether Applied could conceivably work on competing suppliers’ tools. He said no. The agreement’s scope covers “things like automated wafer-handling systems, wafer sorters, and lithography storage systems that Brooks makes. In theory, [service personnel] should not be touching or working on equipment from another company. All of the OEM products are not in the scope of this agreement.”—JC