ASM Pacific Technology Annual Report 2001
a) Excerpt from Chairman's Statement
In spite of the ongoing harsh business environment in the semiconductor industry, ASM, alone among the leading players in its space, remained profitable in 2001 although with a reduced turnover of US$XXXX million. Return on capital employed and on sales were XXX% and XXX% respectively. This was largely due to the solid foundation laid over the years by the diversification of our product and application markets, an efficient cost structure and successful introductions of new product lines. In 2001 sales attributable to our five largest customers combined were less than 30% of our total, evidence of our successful “diversified market” strategy.
Still, 2001 was a difficult year for the electronics industry. Every sector of its supply chain was deeply affected. Started by the correction of excessive inventories amassed in year 2000, accelerated by the slowing world economy and the events on 11th September, the slowdown has become the fastest and steepest downturn in the history of the semiconductor industry. Analysts estimate there was a 20% decline in IC unit volume and around 32% drop in revenue (SIA, IC Insights, VLSI Research and WSTS). Capital investment, especially for IC assembly equipment, came to a screeching halt in the first quarter. According to data published by our leading bonder competitors and SEAJ, their assembly equipment turnover dropped by more than 70% as compared with the previous year.
Naturally ASM was not immune to such a major industry fluctuation. In 2001 we outperformed the assembly equipment industry leader in revenue change and surpassed their sales during the first quarter, but our equipment revenue which ranks 2nd in the world was still down by XX% as compared with the previous year. On hand order backlog, which stood at US$120 million at the beginning of the year, was reduced to just over US$XX million as of 31st December 2001, due to weak inflows and some cancellations during the year.
However, an industry slowdown represents the best window of opportunity to broaden our customer base and expand sales to existing customers with our new products. As happened during the 1998 slowdown, the soft period is giving ASM the chance to cultivate new customers and gain market share. After many months of extensive field evaluations based on our AB339 Eagle demonstration machines, we received initial orders from four new customers during the 4th quarter, based in Taiwan, Singapore and Indonesia. The machines’ superior process capabilities, throughput and stability, as well as ASM’s technical support, enabled us to capture these customers who use the AB339 Eagle wire bonders for state-of-the-art 50-60 microns pad pitch bonding.
Indeed, reflecting customer satisfaction and market acceptance, our AB339 Eagle gold wire bonder received the Semiconductor International Editors’ Choice Best Products Award in 2001 for the second time in its successive generation. We also received plaudits from other sources in addition to recognition by our industry and customers: the Singapore Government acknowledged ASM’s past achievements and long term commitment to Singapore by awarding us the prestigious Manufacturing Headquarter (MHQ) status and its associated incentives.
During the last year new products and new generation machines were launched according to schedule. We have delivered a number of machines to customers for performance evaluations, including the high speed, innovative IC die bonders capable of handling 300 mm. and 200 mm. wafers and the high precision, eutectic solder process bonders for ‘flip chip in package’ applications. Our unique small footprint integrated ball placement, reflow and cleaning system and a multi-site test handler were also shipped for customer benchmarking. Furthermore, the new generation IDEALine, based on the twin Eagle and some advanced concepts, was sent for beta site testing. These exciting new products are expected to start generating revenue in 2002.
While we made every effort to cut our operating costs last year – including fixed costs like salary, fringes, rental and production headcount – we made no compromise on our technology and product developments or our efforts at market penetration. R&D expenses, net of a HK$3.5 million Singapore Government research grant subsidy, amounted to HK$166.5 million, representing 13.4% of our equipment sales. Capital investments, which cover R&D analytical tools and equipment, information systems and some prudent machinery purchases to enhance production capabilities, amounted to HK$153 million (20% below our previous plan). Capital investment planned for 2002 is HK$150million.
With the major change in our gold wire bonder production run rate from late year 2000 and for most of 2001, inventory turnover based on current year sales was less than desirable. Fortunately this abrupt schedule change coincided with our transition to the new Eagle wire bonder planned for the 4th quarter of 2000. With no obsolescence risk, these Eagle related raw materials and work-in-process are expected to clear during 2002. Even though we had to prepare materials for the pilot production of our new flip chip bonder, 300 mm IC die bonder and our integrated ball placement, reflow and cleaning system during the latter part of the year, our total inventory was reduced by 12% to HK$607 million at year-end. The enterprise resource planning (ERP) software, which has been widely implemented within ASM worldwide, has proved a valuable tool in streamlining our logistics and management information systems.
LIQUIDITY AND FINANCIAL RESOURCES
Although HK$459.5 million was paid as dividend and HK$153 million spent in capital investment during the twelve-month period, due to strong positive cash flow, cash on hand at 31st December 2001 was slightly reduced to HK$XXXXXXX (2000: HK$648,804,000). In fact, the majority of capital investments were funded by the current year depreciation of HK$151.8 million.
Except for a JPY479 million loan raised in July 2001 to hedge against our yen-based assets’ exposure to currency fluctuation, with no other bank borrowing, this resulted in an all bank debt to equity ratio of only 1.6%. Current ratio significantly improved to 4.39. Receivables were tightly monitored during the year, resulting in 65 days sales outstanding (2000: 65 days).
The Group has minimal currency exposure as the majority of all sales were denominated in US dollars. On the other hand, its disbursements were mainly in US dollar, Hong Kong dollar, Singapore dollar and Renminbi. The limited yen-based receivables were covered by some accounts payables in yen to Japanese vendors and the hedging loan as stated above.
As at 31st December 2001, the total headcount of the Group worldwide was approximately 5,000 people.
The assembly equipment market usually lags behind customers’ activities but leads the other semiconductor equipment sectors like wafer processing equipment by a few months. VLSI Research forecasts it will experience a marginal gain of 1% in 2002, followed by a strong year in 2003 with 50% growth. Most industry participants expect a slow first half and an increased uptake in business activities starting mid-2002.
Although we began the year with an eroded order backlog, ASM’s management believes industry will continue to make investments related to enhanced technology such as finer pad pitch wire bonders to meet ever increasing die shrink requirements. In addition to technology buys, customers also need to invest in equipment to cope with new package types like QFN and flip chip. While the first few months should prove challenging times, with our diversified products, improved market position and a strong balance sheet, we believe ASM will weather the long winter and come out of the slowdown better than our competitors.
In addition to having our customers testing our completely rejuvenated product portfolio, to maintain our leadership in fine pitch wire bonders we will introduce our enhanced version of the Eagle wire bonder – the Eagle 60 – by the end of the first quarter. Featuring 15-20% productivity gain over current generation machine, the Eagle 60 is expected to further ease looping control, off-line programming and portability demands. Further development to achieve even better output per given floor space is in our roadmap, to ensure ASM is well-positioned for the market upturn.
Having participated in the photonics industry during the last three years with our laser diode die and wire bonders, ASM has also made a commitment to develop an optical fibre alignment and welding machine capable of sub-micron accuracy. We anticipate the first prototype to be ready by end of this year, to further our penetration and support of this rising optical communication component industry.
Our strategy of providing packaging development support to customers has produced dividends in the chip scale package area. Apart from becoming the customers’ QFN leadframe supplier, this value-added service has enabled ASM to open some doors for our other assembly equipment. We intend to capitalize on this strategy and beef up our packaging development team, providing further solutions to customers in the flip chip arena.
Similarly, our factory automation solution helps to cement ASM’s working relationship with customers. Our closely integrated new product introductions also aid the forging of closer ties to strategic clients. To help customers make the best use of their capital investments, ASM has committed R&D resources to develop equipment management software – the IDEALnet – as a management tool for customers to track equipment performance, gain remote access to information and diagnostic, as well as providing them with a vehicle to improve their machine Overall Equipment Effectiveness (OEE).
With additional R&D projects like equipment management software, flip chip packaging development and the optical fibre alignment machine, our R&D spending is expected to rise moderately. Aside from leading edge products, ASM can truly differentiate itself from its competitors in its total solution approach to customers’ business needs, a strategy that rivals cannot imitate easily.
b) Excerpt from the Management Review
( Note how it expands and rephrases the more compressed information in the Chairman's Statment)
Initially a result of inventory correction but exacerbated by soft demand due to the slowing world economy, production run rates of many semiconductor factories were slashed to fractions of their past levels last year. However, after a long period of month-to-month decline in output, the semiconductor industry passed its trough and began a gradual recovery starting in the fourth quarter. Analysts estimated there was a 20% decline in IC unit volume and around 32% drop in revenue in 2001 – the most severe slowdown in the entire history of the semiconductor industry. Capital expenditure of many companies was cut, resulting in push-outs or cancellations of outstanding orders. Purchases of IC assembly and packaging equipment for capacity expansion vanished.
Even in these serious circumstances, ASM remained profitable, largely due to the solid business foundation laid over the years by our superlative products in diversified territorial and application markets. Still, Group turnover dropped to US$200 million, a reduction of 60.9% as compared with the previous year. With eroded order backlog, turnover during the second half of the year was only 57.3% as compared with the first half. While every sector of the electronics food chain was badly hit, due to the strong domestic economy in the first half of the year our sales to the China market declined much less than in other countries. In addition, with our equipment strengths in servicing the optoelectronics market, we made record sales into Japan, better than all previous years. Riding our strong market momentum, ASM clearly has been gaining market share in both good (years 1999, 2000) and bad (2001) years.
The operating leverage effect of the reduced turnover inevitably affected gross and net margins. Even though net profit was trimmed to HK$231 million, once again we outperformed our competitors in the rate of revenue change and distinguished ourselves as the only profitable company during this slowdown. The combined effect of our rising equity base and smaller profit resulted in return on capital employed and on sales ratios of 13.5% and 14.6% respectively. Together with a 33% rise in our share price and hefty dividends during the year, ASM represents a good investment for our shareholders during this poor economic environment.
ASM is committed to long term growth and success. While our competitors were forced to make expedient decisions to produce short-term results, we did not cut back in marketing and R & D. Instead, we used this slow period to aggressively launch renewed market assaults. Many new products and new models equipped with the more powerful motion controllers and linear motors were introduced to the market. New die, wire and flip chip bonders were sent for various field evaluations, and obtained very favourable responses from the customers. Our technical support for customers’ packaging development efforts also yielded good returns. This strategy enables ASM to foster strategic partnerships with our customers and open some doors for our leadframes and other assembly equipment.
While the first few months of this year may prove challenging times, due to a low order backlog and lack of customer capacity expansion until their overall loading further improves, we have seen rising demands for fine pitch wire bonders to meet the die shrink requirements. This capability upgrade, as well as the need to invest in new package types like QFN, CSP and flip chip, will lead the assembly equipment industry’s gradual recovery. We believe ASM is well positioned with its products and integrated customer solutions to take full advantage of the market upturn.
Market and Product Development
In spite of the extremely harsh business environment, ASM achieved a turnover of US$159.2 million in 2001, largely thanks to our diversified products addressing different application markets. With this turnover, ASM still ranks second among the world’s semiconductor assembly equipment manufacturers, although it represents a reduction of 63.5% compared to the previous year. Nevertheless, our sales were only 10% below that of our leading competitor, and we actually surpassed them during the first quarter. With our leading competitors reporting a revenue drop exceeding 70% in the calendar year 2001, once again ASM outperformed our peers and has clearly been gaining market share in the last few years.
Equipment sales represent 80% of the Group’s turnover. Due to the soft IC packaging market, especially the subcon segment, our weighting towards equipment addressing the optoelectronics, discretes and chip-on-board sectors was heavier than in the previous year.
During this slowdown, the AB339 Eagle wire bonder led our market offensive and successfully captured four new customers who did extensive field evaluations to verify our bonder’s superior fine pitch process capabilities, throughput and stability. Other demonstrations are currently on-going and several have already generated favourable responses from potential customers. We expect our wire bonder market share will be further enlarged when the market comes back for more technology and capacity buys.
Apart from supporting customers with process enhancements, we are continuing to push forward with our factory automation solution. We recently shipped our new generation IDEALine, featuring twin Eagles and some advanced concepts, to a customer for beta site testing. Concurrently, we are building a complete line for another customer, with ASM supplying all the critical process modules such as die attach, snap cure, wire bond, encapsulation, trim form, test handling, singulation, inspection, tape and reel. In addition to absolutely minimum work-in-progress (WIP), this line can go from wafer to fully tested and packaged IC in less than one hour manufacturing cycle time, a many-fold reduction as compared with the traditional approach.
Many exciting new products were launched during the year. Among them, our new AD900 flip chip bonder, which addresses the growing demands of flip chip in package (FCIP) with eutectic solder process, found its high placement accuracy and throughput well received by our customers. Our unique, small footprint solder ball placement line was shipped for customer benchmarking, complementing our factory automation solution for ball array packages. As an alternative to strip testing but achieving the same high productivity and standardized handler objectives, we delivered our first multi-site test handler capable of ambient and elevated temperatures. We expect these innovative new products will start generating revenue in 2002 and strengthen ASM’s product portfolio.