Silicon Insider: Semiconductor Sense

Hey, let's talk about the most boring technology subject I know: semiconductor equipment manufacturing.

Wait … don't go away. Because semiconductor equipment is also the most important tech industry, especially if you want to see, and especially invest in, the future.

Semiconductor equipment manufacturing (henceforth SEM) has always been not only the most ignored part of the electronics world -- and the least understood -- but also the most benighted. It sits at the absolute beginning of the digital food chain, as the companies that make the equipment that makes the chips that make the devices that make the hardware that runs the software and games and makes the phone calls for the world.

Unfortunately, rather than giving SEM companies priority over the rest of the digital universe, they more closely resemble a position equivalent to the poor guy at the end of a crack-the-whip game. SEMs have always been the tail of the tech dog, lashed back and forth, the last into good times and first into bad.

Amazingly enough, it used to be even worse. For the first 25 years of the industry, up until about 1980, SEM companies not only suffered all of these systemic problems, but they also had a nasty habit of either growing to a certain size and dying; or having one great product, then messing up the follow-up product … and dying. It was an industry composed mostly of little companies, struggling to get through the next downturn, and perpetually at the mercy of their semiconductor industry customers -- the nastiest and most demanding clients imaginable (how would you like to have been a supplier to Andy Grove and Intel?)

All of this changed with the arrival of Jim Morgan as CEO of Applied Materials. Unlike most of the other great executives in high-tech history, Morgan's genius was for consistency: he turned Applied Materials into the most reliable of companies, always putting out solid products generation after generation, never taking great risks, but perpetually pushing forward the state of the art.

In the process, Morgan, who just retired, not only built Applied into a multibillion-dollar company, in the process stabilizing both the SEM industry and increasing the reliability of every chip built in the world, but he also turned Applied Materials into best corporate citizen in Silicon Valley. And he did it in the most mercurial and unforgiving of industries -- for which he deserves to be in the pantheon of great business executives of the 20th century.

SEMs Are Tech Industry Indicators

Morgan managed to solve the internal puzzles of the semiconductor equipment world, but no one can cure the larger forces that whipsaw the SEM. It goes with the business. Too bad for them, but good news for the rest of us. That's because, for anyone watching closely, SEMs are canaries in the coal mine, the ultimate early indicator of good times or bad times ahead in high tech.

Unfortunately, few people ever do watch closely -- despite the advantages that vigilance can confer. And there's a good reason for that: the fabrication of semiconductor chips is unbelievably complicated, closer to processing chemicals or cracking petroleum than, say, assembling automobiles. And the equipment that does this work is even more arcane than that. In other words, unless you happen to have the letters MSEE or MSME after your name, just thinking about this stuff will make your head explode.

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