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ARTHUR DEL PRADO OF ASM INTERNATIONAL: Full faith in the semi market

A semiconductor equipment veteran foresees a wave of as-yet-unheralded breakthroughs dispelling the high-tech doldrums.

While the semiconductor sector takes the brunt of the technology market's battering, Arthur del Prado sits calmly in the eye of that storm. He has seen it all before.

Del Prado, 70, is one of the deans of semiconductor technology. In 1968 he founded Advanced Semiconductor Materials - he later added "International" to the moniker - the first major European supplier of computer-chipmaking equipment for the likes of Intel Corp., Motorola and other chip manufacturers.

Del Prado didn't stop there. He went on to start ASM Lithography, an equipment company that is no longer related to ASMI except that it licenses its name; BE Semiconductor Industries, an unaffiliated packaging company; and ASM Pacific Technology, which is 55 percent owned by ASMI and trades on the Hong Kong Stock Exchange.

Born in Java, Dutch East Indies (now Indonesia), Del Prado earned degrees in physics, economics and business administration in the Netherlands. He worked for a now-defunct silicon wafer manufacturer before starting ASMI.

The business of Bilthoven, Netherlands-based ASMI is hurting along with the rest of the semiconductor industry. But in managing his far-flung workforce of 7,500 - 4,000 at a plant in Shenzhen, China, and smaller numbers in other Asian countries, Europe and the U.S. - del Prado, still president and CEO of the company he founded, is philosophical: As prolonged and painful as the current downturn is, it is a natural, cyclical occurrence. "Nothing I can say will change that," he says.

Del Prado stakes ASMI's future on innovation, and his optimism is boundless. "For years our industry has been squeezing the same lemon. It got drier and drier, to the point where nothing was left. We reached the physical limits [of what can be loaded onto pieces of silicon]," he says. New technologies promise to "expand the limits of chip design far beyond what we previously thought possible."

Unfortunately, such promises aren't moving product just yet. UBS Warburg is projecting a 40 percent decline in semiconductor capital expenditures this year. Semiconductor equipment analyst Mitali Prasad of David L. Babson & Co. says that demand for chips from the telecommunications and wireless industries should fuel a turnaround, but that may still be a few months away.

Although it has warned that it will report a loss for this quarter, ASMI hasn't suffered as badly as most. Net sales fell 16 percent in the first half, to E353.8 million ($311 million), and net earnings were down 20 percent, to E26.1 million. But ASMI's share price, about $22, was just 20 percent below its 52-week high.

ASMI's backlog shrank 27 percent between March 31 and June 30, to E170 million. At the same time, however, net new orders increased 4 percent, to E90 million. In a recent interview with Institutional Investor Assistant Managing Editor Jeffrey Kutler, del Prado discussed ASMI's prospects.

Institutional Investor: How would you describe investor psychology in the semiconductor sector?

Del Prado: Volatility is a big headache. Either people are in love with semiconductors, or there is a tremendous fear factor. They enjoy the ride up and then bail out, and this happens over and over.

How do you respond as a manager?

I try to tell people to think long term and to understand that this is an excellent time to invest. But all we can really do is manage through the cycles as we always have. We made a decision early on that ASMI would have a presence not only in the front end of the manufacturing chain [silicon wafer production], but also in the back end [wafer assemblies and packaging]. We didn't want to be limited to one or the other. Because of the way capital investment cycles work, being involved at both ends dampens volatility to some extent.

Has that balance helped at all?

There is no question that we are going through a difficult time. This year everything is suffering. But it's important to realize that with new materials and manufacturing techniques, the industry is gradually moving onto a different playing field. Engineering and R&D groups are taking time to focus on advances that the multimedia industry is waiting for. A window is opening up not only because of an expansion in manufacturing capacity, which is available to us as we switch from 200 millimeter to 300 millimeter wafers, but also because of entirely new technologies moving forward.

What are some of those advances?

One is atomic layer chemical vapor deposition, or ALCVD [enabling construction of complex "systems on a chip" one atom at a time]. It overcomes physical limitations and allows for a tremendous amount of experimentation in recipe structures [material composition]. Another area, where we are the No. 1 supplier, is silicon germanium equipment. This is extremely important because it is the driver for many of the high-speed devices for multimedia communications over broadband networks. And we have pioneered the floating wafer concept; the wafer sits on a cushion of gas, which offers significant cost advantages in terms of managing the temperatures and controlling the implantation of materials.

How far along are you in getting these technologies accepted?

They are all being seriously looked at by the big industry players. We expect to see significant moves into production over the next eight to 12 quarters. It doesn't show up on our books yet, but we are part of customers' factory planning for next year. Although the orders haven't come in yet, we know that we have to commit to delivery.

You may be able to visualize unbooked orders, but how do investors do so?

Some of these changes are visible. You can read about ALCVD or silicon germanium. What you don't see yet is how the market will be shifting - how the equipment will be used. That will become visible over the next two years, and we just have to wait. We can definitely tell that new gateways are opening, and that is very exciting.

Where do you stand in market share?

We are in first, second or third position in all of our front-end activities, including the technical segments I just mentioned, against competitors such as [Santa Clara, California-based] Applied Materials and Novellus Systems [of San Jose, California]. As for the back end, when we started investing in Asia in the 1970s, the semiconductor industry was lowering its costs by moving labor-intensive assembly and bonding processes out of the U.S. Now all of those assembly lines have been automated, and we were there to educate and guide the market. We believe that in late 2000 we took the lead over our principal competitor in that part of the back-end market, [Willow Grove, Pennsylvania-based] Kulicke & Soffa Industries. This year is a disaster for the back end, but we expect to be a leader for a long time because engineering in the Far East is very advanced and is being applied there, which was not the case historically. It's a competitive edge that we've developed in-house.

How does all this translate into financial performance?

We missed the $1 billion [revenue] mark by about $80 million last year. For the third straight year, we outperformed the industry; our growth was 125 percent, versus the industry's 80 to 85 percent. This year I see the industry falling at least 35 percent. But between 1999 and 2002 we'll still have growth. That's part of the volatility that we as industry participants have gotten used to.

From your three-continent perspective, how does the U.S. rate as a semiconductor power center?

It's very big, and it still drives a significant part of the advances that this industry needs. The companies I call the biggies - you know who they are - push toolmakers like us very hard to support their developments. Take ALCVD. It needs a major commitment not only from us, but also from the users, with whom we work very intimately. We're only at the beginning. In the laboratory we are producing very high-performance chips for broadband digital communications. The question is, Can they be made economically? Not yet, but they will in years to come because we have the tools to make that possible.

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