‘Just-in-Time’ Chip Supply Chain Strategy No Longer 'Effective': Applied CEO

Current chip-capacity shortfalls show “the highly efficient just-in-time supply chains that have served the semiconductor industry well for the past two decades may not be the most effective strategy going forward,” said Applied CEO Gary Dickerson on a fiscal Q2 earnings call Thursday. The company supplies semiconductor production equipment to chipmakers and OLED vapor-deposition products and services to Chinese panel makers, offering a bellwether of conditions in the semiconductor and display industries.

Semiconductor demand continues to grow “as the world starts to transition to the post-pandemic economy,” said Dickerson. “The pandemic accelerated key technology trends that make semiconductors more pervasive and indispensable in people's lives.” Applied’s fiscal second quarter ended May 2.

There’s a “clear desire for the chip industry to build more resilient and flexible supply, including more regionally distributed capacity as the strategic importance of the semiconductor supply chain is increasingly acknowledged at a national level,” said Dickerson. “We're still in the early innings of major secular trends that will play out over the next decade,” driving demand for semiconductors and semiconductor factory equipment “structurally higher,” he said.

Applied believes the “strong and strengthening demand” for wafer fab equipment “is sustainable well beyond 2021,” said Dickerson. “For the first time, customers are providing capital spending guidance for multiple years into the future, which is a new leading indicator for demand sustainability.” Foundry logic is expected to be the fastest-growing wafer fab equipment market this year “with strong investments” in leading-edge and specialty devices, said Dickerson. Dynamic random access memory is the next fastest-growing, “with all major DRAM manufacturers investing in new technology and capacity,” he said. Applied expects NAND will grow “at a more modest rate this year on the back of about 30% growth in calendar 2020,” he said.

Since Applied is “well penetrated” in the display segments it participates in, "we've got a good read on the market,” said Chief Financial Officer Dan Durn. The combination of “older-generation capacity coming out of the LCD market,” plus higher consumer demand, “is leading to increased panel pricing,” he said. “Spot pricing in the panel market is going up and that's leading to increased profitability.”

Panel shipments by average area size are on the upswing, said Durn. “OLED screens are continuing to penetrate 5G handsets and OLED penetration of handsets in general is on an upward trajectory.” The “next leg” of OLED growth and consumer adoption in laptops, TVs and foldable phones -- “all of that is intact,” he said.