Overview Of The Semiconductor Capital Equipment Industry

There are three primary aspects to manufacturing chips at the front end. These are depositionlithography, and etch and clean. All three of these aspects require process control. At a very high level, this is how it works:

  • Layers of insulating or conducting materials (chemicals) are sprayed or deposited onto a silicon wafer during deposition.The most commonly used deposition solutions used are (1) atomic layer deposition ("ALD"), (2) epitaxy, and (3) variations of vapor deposition.

  • Inside a Step-and-Scan system (or stepper), special lights (similar to lasers or x-rays) are shined through a photomask to transfer designs developed by engineers unto the wafer during lithography.

  • Some of the material on the wafer is etched away to create desired patterns during the etching and the unwanted materials are removed during the clean process.

These processes are repeated to create the chips on the wafers before elements are finally added to form transistors. Throughout these processes, process control equipment is used for inspection and metrology (measurement) to remove defects and increase yields (i.e., increase the number of usable chips). 

Deposition, lithography, etch and clean, and process control are the primary component categories of wafer fabrication that the semi-cap companies specialize in making equipment for. Roughly 85% of the capital expenditures (CAPEX) made by chip manufacturers for semiconductor equipment goes towards wafer fabrication equipment (WFE).Thus, most of the semi-cap industry conversation revolves around the main producers of wafer fab equipment.

The WFE market is now primarily concentrated into the hands of just a few companies: Applied Materials (AMAT), ASML (ASML), KLA-Tencor (KLAC), Lam Research (LRCX), Tokyo Electron (TOELF; TOELY), Screen Semiconductor (DINRF; DINRY), and Hitachi High Tech (HICTF).

  • In deposition, Applied Materials has the leading share (~50%), followed by Lam Research and Tokyo Electron.

  • In lithography, ASML focuses on the high end and has a dominant share (~75%+), followed by Nikon (NINOF; NINOY) and Canon (CAJ). These three companies control almost the entire lithography market.

  • In etch, Lam Research has the leading share (~57%), followed by Tokyo Electron and Applied Materials.

  • In process control, KLA-Tencor is the dominant player (~55% share).

In 2017, WFE CAPEX crossed the $50 billion threshold for the first time, as shown on the left-hand side of the following slide: 

source: KLA-Tencor NASDAQ 39th Investor Conference presentation, Gartner;    click to enlarge

source: KLA-Tencor NASDAQ 39th Investor Conference presentation, Gartner; click to enlarge

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Disclosure: KLA-Tencor is a holding in client portfolios. I have an economic interest in the performance of the stock. The above True Vine Letter is an excerpt from a recent more

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Barry Hochhauser 10 months ago Member's comment

This is great. I've often asked "what are these guys talking about?!"

Joshua Hall 10 months ago Author's comment

Barry,

I knew I wasn't the only one!

Susan Miller 10 months ago Member's comment

You aren't!

Harry Goldstein 10 months ago Member's comment

Impressive stuff.

Joshua Hall 10 months ago Author's comment

Harry,

Thanks for the kind word.