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THIRD AVENUE FUNDS'
MARTY WHITMAN ET AL.
(continued from preceding page)
OID: It certainly doesn't sound like my idea of fun.
Jensen: Nor mine. I think the capital intensity of the semiconductor manufacturing business alone was enough to steer me clear of it. I don't like the idea of being in a business where you have to spend lots and lots of money fairly regularly.
OID: The notion of selling tools sure sounds better (other things being equal) than having to buy 'em. But why wouldn't semiconductor equipment companies have to spend lots and lots of money regularly, too?
Whitman: They do - for R&D.
OID: Why not for capital spending, too?
Jensen: They don't need a lot of bricks and mortar. What they need are little clean rooms where they create and assemble expensive tools. And they buy their components. So the business just doesn't require a whole lot of bricks and mortar or a whole lot of outlays on expensive tooling.
Lie: By contrast, a fab (fabrication plant for the production of semiconductors] typically costs $1 -2 billion. By no means are they cheap. Thus, chip makers clearly face very significant capital expenditure requirements, whereas semiconductor equipment makers don't.
Jensen: And not only are capital expenditure requirements much lower for semiconductor equipment companies than they are for the chip makers, they're probably lower than those of most businesses.
Lie: Also, there are approximately 20 different steps in the chip manufacturing process. And some equipment can be used in more than one step. The 800-pound gorilla in semiconductor equipment is Applied Materials. And it isn't specialized. It has exposure across most of the process areas on the front end.
(Of course, front end processes refer to those in which the chip is made, whereas back end processes refer to those in which they're tested and packaged.)
And most of those 20 steps are relatively discrete with different factors being most important at each. Thus, it's much easier for semiconductor equipment suppliers to occupy and defend a niche.
OID: Interesting.
Jensen: That's right. It's much harder to assess whether companies will keep buying their chips from National Semiconductor. However, one thing that we think we do know is that National Semiconductor is going to have to keep buying tools to run its factories. We believe that we can pretty well winnow down the list of suppliers in each equipment niche to the two or three who have a good shot at being successful. And those are the ones we've bought.
OID: Qualitative and quantitative factors considered.
Jensen:That's right.
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