A Changing Competitive Environment
Chart 1 shows market shares for Metrology/Inspection companies for 2017 and 2018. KLA-Tencor (KLAC) led the market with a 72.3% share in 2018, up from a 71.4% share in 2017. Market share based on revenues is for metrology/inspection equipment systems only, and does not include service, spare parts, or equipment sold for other processes.
Large companies such as KLA and Hitachi High Technologies (OTC:HICTF) are facing competition from smaller and emerging semiconductor equipment companies, which (1) address specialized markets and (2) utilize innovative technology to gain customers.
There are several startups gearing to compete against market leader KLAC. FemtoMetrix (Irvine, CA), uses Optical Second Harmonic Generation (SHG), a non-destructive, contactless, optical characterization method to characterize surfaces, interfaces, thin-films, as well as bulk properties of materials. Already, FemtoMetrix has completed its first round of equity financing in a deal led by Samsung's (OTC:SSNLF) Venture Division and SK Hynix Ventures (OTC:HXSCL), and announced a license agreement with Boeing (BA). This type of new technology will eventually compete against KLAC.
Historically, sales of process control tools have not mirrored sales of the entire front-end equipment market. Chart 2 is a graph of the change in revenues for the year as a comparison between the total equipment market and total process control market. Over the eight years of this chart the cyclicality in capacity-oriented capital spending by logic and memory chip manufacturers is obvious.
For CY 2018, wafer front end equipment revenues increased 9.7% compared to 24.5% for metrology/inspection companies, according to our report "Metrology, Inspection, and Process Control in VLSI Manufacturing."
A Paradigm Shift in Metrology/Inspection Demand
Semiconductor companies in the past attempted to ensure quality and reliability by using statistical analysis and data analytics capabilities of semiconductor yield-management systems or software. Statistical Process Control for semiconductor manufacturing enables a company to maximize yield and quality by merely sampling a small number of wafers out of thousands processed daily. Thus, the revenue growth in metrology/inspection systems often lags the growth in overall equipment, shown in Chart 2.
However, as semiconductor design rules decrease, yield becomes more sensitive to the size and density of defects. In addition, new manufacturing techniques and device architectures in production, which include 3D finFET transistors, 3D NAND, advanced self-aligned multiple patterning, and EUV lithography are creating a paradigm shift in metrology/inspection demand.
Semiconductor manufacturers decide to purchase metrology/inspection systems based on a number of factors, which when compiled become its “best of breed.” These factors include technological innovation, cost of ownership, price product performance, throughput, reliability, quality, and customer support.
As uncertainties mount about the near-term semiconductor industry from companies in Apple’s (AAPL) supply chain and the significant drop in memory chip prices, the semiconductor industry has consistently grown each year since the great recession of 2009. As shown in Chart 3, semiconductor revenues have consistently outpaced semiconductor equipment revenues.
Advanced metrology/inspection equipment will spot defects during wafer processing, providing the means to monitor and control the quality of individual steps in the manufacturing sequence.
Metrology/inspection equipment companies will benefit from the growth of the semiconductors in general and from the need to increase chip quality and reliability as the industry moves to 3D logic and memory chips, and more advanced technologies such as EUV lithography become more commonplace.
Despite capex cutbacks by DRAM and NAND manufacturers for deposition and etch processing equipment from companies such as Applied Materials (AMAT) and Lam Research (LRCX), the move to advanced technologies with smaller dimensions will drive the need for more metrology/inspection in memory fabs in 2019.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.