On July 21, AMAT announced that it would ‘restructure’ its SunFab business. 

Last week’s Part 1 of Sunset for AMAT’s SunFab considered the broader industry context in counterpoint to the official reasons provided for the closing of the SunFab business.  

AMAT blamed competitive pressures from crystalline silicon, government policy uncertainty, capital availability constraints and the speed of utility-scale adoption. What wasn’t observed was that the PV market was blossoming. Ongoing cost reduction and performance improvement are de rigueur in the PV marketplace. Entering the PV market with a new technology and then not keeping pace with these decades-long trends is not a fault of the market.

In Part 2 of Sunset for AMAT’s SunFab, strategic issues are examined that may have been the biggest contributor to the ultimate demise of SunFab thin film solar business.

AMAT’s high equipment price tag and low product conversion efficiency issues arguably served to expose the underlying weaknesses of the SunFab business proposition. Cost and efficiency, though, were not necessarily the causal agents themselves. Rather, there are four core factors that appear to have conspired together against SunFab:

  1. Corporate diversification during semiconductor downturn
  2. High quality equipment legacy
  3. Big Iron marketing
  4. Customer selection
  5. Explicitly attempting to modify user behavior

Carrying the Corporate Flag through a Downturn

With a downturn in the semiconductor industry, then exacerbated by the challenges of the global financial crisis, the SunFab acquisition came just in time for some positive corporate news at AMAT. From 2007 through 2009, overall AMAT net Sales and Orders halved and Income dropped precipitously into the red. Considering that the SunFab a-Si thin film and other Energy businesses added over $1 B in 2009 sales (25% of the total), the drop in sales in the other AMAT business units was even more dramatic during this period. In so doing, however, this business unit also contributed to more than tripling the loss in 2009. Having risen to the top of the organization’s public image, the SunFab business now represented the biggest cost problem. 

AMAT Financial Results
Fiscal Year 2007 2008 2009
  (In millions)
New Orders $9,677 $9,155 $4,097
Net Sales 9,735 8,129 5,014
Net Income

$1,710

$961 $(305)

Even with the contribution to the loss, SunFab was the most positive revenue news in the 2009 AMAT Form 10-K Annual Report

New orders decreased from fiscal 2007 due to lower demand for semiconductor equipment from memory, foundry and logic chip manufacturers, partially offset by increased demand by LCD customers and, beginning in the first quarter of fiscal 2008, the recognition of orders for Applied’s SunFabtm Thin Film Line for manufacturing solar panels.

 SunFab had little choice but to move to front row center at AMAT and look, act and feel like the rest of AMAT’s business units. If a different strategy for SunFab was required, or an incubation period needed to develop that strategy, the optics on SunFab gave it very little flexibility.

 At a time when the Semiconductor industry was in a severe downturn, AMAT featured its solar strategy. SunFab faced high external visibility. Press Releases assured the new customers and the analysts by proclaiming “Solar module and semiconductor manufacturing are closely related”. Even if that statement were true, however, certainly the markets are dramatically different. SunFab needed to act just like a semiconductor equipment business at AMAT as it shouldered the corporate Investor Relations burden, and had little room to conduct itself like a nimble start-up in its dynamic new market.

AMAT Equipment Legacy

How could a successful legacy of high quality equipment earned through decades of experience of innovation be a causal agent for demise? As Clayton Christensen observed in Disruptive Technologies: Catching the Wave:

“The research shows that most well-managed, established companies are consistently ahead of their industries in developing and commercializing new technologies … as long as those technologies address the next-generation performance needs of their customers. However, these same companies are rarely in the forefront of commercializing new technologies that … appeal only to small or emerging markets.”

AMAT is a well-managed, well-established and highly competent manufacturer of processing equipment. AMAT’s core customers are the biggest names in the well-established semiconductor and flat panel display industries. The AMAT solar strategy was promoted to the investment community as a core corporate endeavor. From a business perspective, however, virtually everything about this solar situation was new to AMAT – and was also new to AMAT’s customers.

The key success factor for SunFab wasn’t about processing technology. Rather, the key success factor was to develop demand for end customer solutions and build an entire market infrastructure to supply that demand which, in turn, could utilize equipment that AMAT could supply. The actual strategy was arguably backwards and all about technology push and not market pull.

Big Iron Marketing

Headlines once read “Applied Materials bags another $1 billion SunFab customer.

AMAT leveraged and was bound by its high visibility corporate commitment in its sales approach – buy from the big and proven equipment manufacturer.  The AMAT customers didn’t need an equipment solution, however, they needed a customer solution complete with a vibrant market for their customers’ products.

Unlike its other business units, AMAT was not selling a new processing technology to existing customers in existing markets. Rather, AMAT was promoting a new technology in a rapidly developing market arena that was new to the corporation. AMAT was promoting this new technology to customers that were new to AMAT and were themselves new market entrants that hoped to introduce a new product to a market unfamiliar with the proposed solution.

Who knew what the new market needed?

Selling a new fab to new market entrants into a market that has not yet accepted the end product may have been an overwhelming challenge. Predictably, this situation produced high levels of start-up expenses and intense R&D pressure at SunFab. Like static electricity seeking ground, any anxiety at industry newcomer SunFab customers would be directed at the largest ground around – AMAT – and pressure to perfect the product accelerated. An approach to sell big iron must avoid the dangers that are seen all too often in the cyclical auto industry.

According to the 2009 Annual Report:

The (AMAT Energy and Environmental Solutions Segment) operating loss of $242 million in fiscal 2009 increased from $183 million in fiscal 2008 due to an increase in RD&E expenses and unfavorable gross margins associated with initial SunFab line start-ups, offset in part by cost control initiatives

Customer Selection

Based upon their actual customer successes for SunFab equipment, the AMAT sales pitch appealed to PV market newcomers with deep pockets. A typical sales announcement included the statement

“Applied Materials is very pleased to have the opportunity to work with (The Latest Newcomer) on its first solar venture…”

 In a new product introduction or a new technology introduction, isn’t there an advantage to working with experienced customers?

Wasn’t SunFab taking on massive risk with this customer selection and the orientation that it provided to these customers? What is the risk of appealing to a customer group with deep pockets and little or no market experience? Will they be more or less anxious once they start spending a lot of money and wait for market returns? What is the risk when you are pursuing inexperienced customers in a fast-moving market with a new and unfamiliar technology?

Modifying User (and Industry) Behavior

Add to this risk of dealing with novice customers the AMAT vision of the biggest ever modules. Arguably a classic case of ‘the product doesn’t fit’, every step in the chain needed to adapt. “Applied’s 5.7 m2 modules are four times bigger than anything we’ve ever tested,” said Feridoon Sergizzarea, president/CEO of TÜV InterCert. Of course, most SunFab owners ended up selling largely 1/4 panels that were the same size as typical solar panels.

Rather than fit in, newcomer AMAT challenged the industry to be “rethinking the business model for solar installations.” Business plans that rely upon changes to user behavior, however, take time to be accepted. If the product doesn’t fit the market, should you try and change the product or the market?

AMAT trumpeted its 5.7 m2 panel to a commoditizing industry that had long been standardizing on a form factor that was one-eighth the size. Given its dark color, this was a black elephant that attempted to change the behavior of an entire industry. Industry logistics and crews that were trained to handle, install and maintain industry standard module geometries were not equipped to handle the massive AMAT panels. The larger modules also faced new production issues within SunFab customers. Failures in larger package can also dramatically increase scrap costs.

Piling Business Risk upon Business Risk

AMAT is an equipment supplier whose core revenue growth comes from selling more equipment. With SunFab, they were caught in multiple binds. The faster its initial customers could find success, the faster new orders would be placed for SunFab. Anything which delayed that success was magnified within the SunFab business unit. As long as the customers were not successful, they also consumed more and more attention. With resources and attention turned increasingly inward to assist initial customers, they could not be focused on driving new business.

AMAT ended up trying to sell a Cadillac – with giant modules rather than giant fins – to an increasingly small community of Cadillac customers that were starving for fuel.

Cadillacs with fins need lots of fuel.

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3 Responses to “Sunset for AMAT’s SunFab Part 2: Strategic Challenge”

  1. Some interesting and valid comments in both articles, but I think you’re over-complicating a relatively simple issue, while paying too little attention to AMAT’s overall PV strategy.

    The biggest issues with SunFab (and indeed most PECVD-TF deposition tools) are capital cost and, arguably more importantly, operating cost.

    Specifically, the high cost of Silanes and certain reactor cleaning gases, and the inefficiency of their usage have always been major headaches for PECVD players.

    The dirty and not-so-little secret of PECVD has always been the enormous quantities of SiO2 ending up downstream of the reactor, clogging up the pumping lines and the scrubber systems. That’s where most of the money spent on feed-gas goes, and precious little of it (a few percent at absolute best) actually ends up on the PV panel.

    On a gram of Si/Watt basis, TF has only ever been marginally better than bulk; in most cases less than a factor of 2, and nowhere near the factor of 50 or 100 touted by those simply comparing silicon thicknesses of the finished devices.

    The 5.7m² substrate size is something of a red herring. Well, if not bright red, at least a fetching shade of pink; the FPD industry has low-cost, standard tools for dealing with these (and bigger) substrates, so AMAT were not in fact imposing any new format on anybody. The advantages are quite clear however: Fewer vacuum make/break operations per m² of cell, better throughput at lower dep. rate, less handling etc.

    Also, and one area where AMAT *did* make a good marketing play; the potential installation and BoS savings that this size targeted were very credible, and for a while I was expecting AMAT’s next JV to be announced with Caterpillar, or Terex (or maybe even Komatsu…). Had AMAT’s play turned out differently, I think that the move to bigger substrates would have been hailed as a master-stroke, enabling significant system cost savings. The fact that they are now withdrawing doesn’t mean that this substrate choice was a fundamentally bad one; it means that the advantages it brought were not sufficiently compelling in the face of very tough competition from bulk.

    A couple of points relating to AMAT’s overall strategy: Firstly, they have been extraordinarily acquisitive over the past decade in the bulk Si PV arena, and their capabilities here are second-to-none. They have plays in the ‘standard’ MC process, and their huge internal resources, plus their acquisition of SMTL in late 2009 puts them right into the most advanced realm (at IMEC, FhG, etc.).

    Lastly, it’s nothing new for Applied to get into an area, be hyperactive for a while, and then abandon it. Ion implant and mask lithography spring immediately to mind.

    As a fairly diverse customer, I have never been all that enamoured of *any* equipment company, and I have had reason enough to feel frustrated with AMAT. Nevertheless, I still admire the way in which they fully explore a technology before pulling the plug and walking away.

    The reasons here are, as I said at the top, pretty straightforward: PECVD-TF is too expensive a technology and the mechanisms for serious cost-reduction are difficult to identify, and in any case do not lie with the toolmakers.

    They’ll get a far better return from their bulk operations, and will give the remaining TF players an even bigger headache.

    • Excellent insights. Thanks! Definitely presents a fuller picture.

      AMAT does have some excellent businesses in crystalline. Absolutely agree with you on that.

      If you can allow me the lattitude, can I suggest that technologies never fail – businesses and people do. If there were insurmountable technical challenges, then who was making the decisions to pursue them – how and why? Why were they adding even more complexity, and thus risk, to the business?

      Technically, the large substrate makes sense. Practically, it does not.

      Changing user behavior can be problematic. And can be really problematic in an industry that is moving to commoditization. Back to the Cadillac analogy, diesel engines had market acceptance issues in North America due to the glow plug 6-8 second delay before starting the car. (This has changed, of course). Even that small a change in user behavior can be catastrophic. On paper, diesel has advantages. But, people buying cars didn’t want to wait.

      And, still on the Cadillac analogy, there were all kinds of motive systems for vehicles at the turn of the last century. The internal combustion, spark ignition, piston engine won out. Innovation was focused on this ‘standard’. The Wankel didn’t get invented until the late 50s, and is still mostly a curiousity.

      Thin film panels are not FPD’s. Nobody installs a 5.7 m2 FPD – though I would love to have one. Handling sheets that size is non-trivial even in the factory – let alone outside of it. It is fun to watch the handling equipment on glass sheets that big, though.

      The bulk of AMAT customer production was quarter size panels. Yes, they could have pursued a strategy of partnering with Komatsu or Terex or Caterpillar (or all of them, or others, to provide a viable equipment supply industry that serviced all corners of the globe). Working with heavy equipment suppliers isn’t really the core business though, is it? Doesn’t that strategy cost more money and time? Why would Cat bother? If Cat bothered, would this be managed at Cat or at one of their distributors. If managed at a distributor, would AMAT have to pitch the idea to all of the other distributors? If Cat or their dealers were interested in solar, why would they not focus on the 95%+ portion of the market instead? Why would Cat or Komatsu or Terex want to take on the risk of supporting a new, non-standard module format? What about the installers? What is the payback on this equipment for the installers? Who is going to finance it? Who is going to invest time creating the financing packages?

      Perhaps all of those issues could be overcome. More time. More money. More delay in selling new SunFabs. More pressure from shareholders.

      How many of AMAT’s module competitors need to spend money, time and effort on creating all the specialized tooling – and guarantee a big enough market to get Cat’s attention? Would they work with Cat to provide special leasing terms or rental fleets to ease the financial burden on initial customers? Can they guarantee enough operations in one area to keep the expensive and specialized equipment busy? Again, this is more big iron. And, they were alone in pursuing this.

      Yes, I can pencil out the cost advantages of installing a larger panel all at once. I get it. But this is yet again another departure from industry standard. You could even see a strategic advantage IF you could create an entry barrier that changed the entire industry over to this new format. But AMAT was not in that driver’s seat. Strategically, they were actually creating another entry barrier for themselves by adding yet more market acceptance requirements on the downstream industry.

      Technically sound, strategically challenging.

      I appreciate your statement “PECVD-TF is too expensive a technology and the mechanisms for serious cost-reduction are difficult to identify, and in any case do not lie with the toolmakers”. But, why make the strategic decision to pursue this business? If you made that strategic decision, then why make the strategic customer selection decision to go with new market entrants? Doesn’t that put the fundamental business at risk?

  2. You have done a terrific job communicating your message. Keep up the great job. I have been to your posts before. The more I read, the more I keep coming back!

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