Applied Materials (Israel) joint general manager Gilad Almogi does not know in which direction the market will go, but he thinks the company's field will eventually recover, and that the company must be ready to exploit the opportunity.
US parent company Applied Materials (Nasdaq: AMAT) is known to few people. It may be recognized by followers of Wall Street surveys, especially in the wake of its profit warnings of the past year. However, the company still had $1.3 billion in sales in the last quarter. Applied Materials is a gorilla by any measure, even during a slump.
Applied Materials is the world's largest equipment manufacturer for the electronics components industry. The company has 19,000 employees worldwide, including 1,000 in Israel. It is almost superfluous to note that the company's customers includes most of the world's leading chip manufacturers, such as Intel (Nasdaq: INTC), Motorola (NYSE: MOT), and IBM (NYSE: IBM).
Applied Materials does not lack for competitors, although they trail far in its wake in terms of sales. The second largest company in the field, Tokyo Electron, had $5 billion in sales in 2000, half of Applied Material’s $10 billion. The company's second largest competitor is Nikon, which had $2.4 billion in sales last year.
Applied Materials' dominant position in its sector is one of the reasons the global electronics slump has not passed it by. When electronic components companies start cutting costs and reducing production, and get stuck with mountains of inventory, they will obviously dramatically reduce purchases of manufacturing equipment.
Because of this turn of events, the company's sales dived from $2.9 billion in the third quarter of 2000 (Applied Materials's fourth quarter) to $1.3 billion in the second quarter of 2001 (the company's third fiscal quarter) – a 55% plunge. Despite this, Applied Materials exceeded analysts' forecasts by one cent, posting a net profit of $0.05 a share ($41 million). It should be noted that the company's record quarterly profit was $663 million, and the company posted a profit of $2 billion in fiscal year 2000 (ending in the third quarter of last year), on revenue of $10 billion.
The view from Tel Aviv naturally focuses more on Applied Materials (Israel) than on the parent company, however interesting it is. Applied Materials (Israel) is actually more than just an Israeli company. Most of the Process Diagnostics and Control (PDC) division, which makes quality control and testing systems for the semiconductor industry, is located here. However, 20% of the PDC division, managed simultaneously from both the US and Israel, is based in the US, so Applied Materials Israel is something of a misnomer.
In 1992, Orbotech (Nasdaq: ORBK ) was created by the merger of Orbot and Optrotech. Orbot Instruments was spun off from Orbot concurrently with the Orbotech merger, and acquired by Applied Materials in 1996 for $110 million. Orbot Instruments, like Orbotech, developed testing and monitoring systems, but its products were used to test semiconductors, instead of printed circuits and flat panel screens. Applied Materials later acquired Opal, a public company, for $175 million. Both transactions were in cash. The result of all this wheeling and dealing was Applied Materials (Israel).
In Applied Materials (Israel)'s most recent deal, the company exercised an option to acquire Yokne'am-based Oramir Semiconductor Equipment for $24 million. Oramir develops laser-based cleaning equipment for the semiconductor industry. This was a relatively small transaction for Applied Materials.
Applied Materials (Israel)'s offices and plant are located in the Rehovot Science Park. The company recently announced plans to invest $15 million to expand its operations in Israel. Part of the plans call for Applied Materials (Israel) to expand its Rehovot HQ to 11,000 sq.m., at an $11 million investment, and the company will also spend $4 million to expand the production facility.
Almogi, 36, is a graduate of the Israel Air Force Talpiyot Project and has a Ph.D. in physics. He has been at Applied Materials for six years, and has been joint general manager for one. He attributes his rapid promotion to the complexity of Applied Materials (Israel)'s products. "The products we develop and manufacture are so complex that the people who develop them must manage the company," explains Almogi. "I led the development of the "Compass" product, which was a great success. Applied Materials benefits from accomplishments, not intentions. The company believes in two things: experience and achievement. There are many youngsters in the company. Those who quickly absorb the work ethic, are quickly promoted."
"Globes": What does Compass do?
Almogi: "Compass is a patterned wafer inspection system for detecting critical defects in devices. Compass is a product that has been winning market share even in these times, so it's a success. Other products are SEMVision, a very high-speed scanning electronic microscope that inspects and characterizes every defect Compass discovers. It differentiates between scratches and particles, for example. There's also naturally a program that can identify the specific problem, based on the defects discovered, and offer appropriate remedies, thereby improving production processes."
"Another device is 'VeraSEM', which originated in Opal. This is a 3D scanning electronic microscope that magnifies the sidewall profile of devices' features to check that they don't deviate from the specifications."
Shouldn't we expect equipment that improves production to be less vulnerable during a recession?
"The field is less vulnerable to the slowdown in the sector than other sectors. The machines manufactured by Applied Materials (Israel) improve production. For example, our equipment can improve production in a plant that produces 80 good components for every 100 to 90%, i.e. we improve production by over 10%. The components industry has huge inventories now, and companies' manufacturing equipment is working only part-time. Our customers aren't buying equipment to increase current production, but in order to increase production of next generation products."
How have you been able to maintain profits despite a 50% plunge in sales?
"Applied Material's approach is that profits must be maintained even when sales plummet. The profits are mainly maintained by good inventory control, keeping a short supply line, and cutting 5-15% in salaries, depending on the position."
Have there been salary cuts in Israel?
"Yes. The thinking behind the cuts is that, while our operations are falling sharply now, we want to avoid laying off employees as much as possible. When you fire employees, beside hurting the company now, it means you have to train new workers when activity picks up again."
Do the Israeli employees object to the pay cuts?
"The pay cuts have been accepted with full understanding. It should be remembered that a part of the salaries is in the form of bonuses. We also shut down the company for several days. We're thus able to significantly cut costs without firing employees or changing our strategic plans."
How do you explain the fact that Israeli companies like Orbotech, Camtek (Nasdaq: CAMT), and Applied Materials (Israel) have become global leaders in inspection systems?
"Inspection equipment for semiconductors is extremely complex. Israel has a mass of people capable of developing and manufacturing such machines. The entry threshold for inspection systems is very high. Israel has the critical mass of capable people to enable Israeli companies to enter the field."
Do you see signs that the slowdown has bottomed out?
"At the moment, we seem to have halted at a particular level. The fall in new orders has halted, i.e. we will have the same number of orders next quarter as in the present quarter. The general assessment is that we're already close to the bottom, but no-one knows when the turnaround will start."
Forecasts state that the turnaround in inspection equipment will lag behind the general recovery.
"That's quite reasonable. As far as manufacturing equipment is concerned, you either buy or don't buy. There's no ambiguity. Inspection equipment can be purchased in the midst of the process. However, it should be noted that the percentage of new generations of inspection equipment in manufacturing plants is rising."
You took your time to purchase Oramir.
"Applied Materials invested in the company earlier, and directed its development. Two months ago, Applied Materials exercised its option to acquire Oramir, and it's now a part of Applied Materials (Israel).
Does Oramir have sales?
“They don't have sales yet, but they're very close. As far as we're concerned, it was important to have their technology. The technology complements our future plans and we're definitely building on it."
Are you considering acquiring more Israeli companies?
"Applied Materials makes investments all the time, and Israel is definitely an interesting place. However, Applied Materials isn't a company that makes ten acquisitions a month. We're not on a shopping spree. We buy the companies we need,according to what they can contribute to the company's core business."
As a manager of a large company like Applied Materials, what's your perspective on the rise and fall of Chromatis Networks?
"Chromatis's acquisition created a real crisis among people in large companies. Without gloating, I think Chromatis's closure symbolizes a return to sanity. There must be a clear relationship between work and results. People work and make profits, and consequently, money. The atmosphere is better now, because everyone understands that money is made by selling products."
In terms of sales, how much does Applied Materials (Israel) contribute to Applied Materials?
"Applied Materials doesn't usually publish a breakdown of its results, but Israel contributes a small, but not miniscule, part of all of the company's sales."
Tens of millions or hundreds of millions a year?
"Hundreds of millions."
You've reached a respectable position in Applied Materials (Israel) at a young age. Do you want to continue rising within the company?
"As far as my ambitions are concerned, Applied Materials (Israel) is a relatively large organization, but small compared to its potential. We want Applied Materials (Israel) to have $1 billion in sales a year. Making Applied Materials (Israel) into a company of this size is a sufficiently respectable goal for me, I think. Everyone knows Israel has few companies with a billion dollars in sales. There are many companies unable to grow past a certain point."
How long do you think it will take to achieve the $1 billion target?
"That mostly depends on what we do in the future, but also on industry developments. I estimate it will take only a few years."
Published by Israel's Business Arena on 13 September 2001