Disco CEO Sees Chip Recovery Taking Root Ahead of Forecasts
Disco CEO Sees Chip Recovery Taking Root Ahead of Forecasts
(Bloomberg) -- There is growing optimism that the semiconductor industry’s cyclical slump is coming to an end. One Japanese machinery manufacturer is already seeing evidence that a recovery is taking root.
Disco Corp. Chief Executive Officer Kazuma Sekiya said the maker of machines that slice and grind silicon wafers is likely to beat its earnings outlook for the current quarter. Taiwanese chipmakers are showing signs of shaking off the cyclical doldrums, while in South Korea and China government policies are helping boost investment for political reasons, Sekiya said in an interview. He declined to give further details ahead of the results announcement on Jan. 23. Shares rose 2.4% in Tokyo trading to the highest level in almost two years, while the Nikkei 225 index slipped.
The fortunes of suppliers like Disco are a harbinger for the future of semiconductor manufacturing: the orders they receive from the likes of Samsung Electronics Co. and Intel Corp. provide insight into those chipmakers’ future plans. The company in October forecast operating income will drop 34% to 5.1 billion yen ($47 million) in the three months ending Dec. 31 with sales projected to decline 13% to 29.6 billion yen. Analysts expect a 7.3 billion yen profit on 32.6 billion yen of revenue, and the CEO is coming closer to agreeing with them.
“The numbers are looking up,” said Sekiya. “We are seeing signs of a spring.”
Semiconductor stocks have defied conventional wisdom this year with a rally that ran well ahead of the evidence of chip demand recovery. Equipment manufacturers led the gains, with Disco’s shares more than doubling this year while the stocks of Tokyo Electron Ltd. and Advantest Corp. have risen 95% and 160%, respectively through Wednesday’s close. Memory chip makers Micron Technology Inc. and Western Digital Corp. have added 67% and 55%. The Philadelphia Stock Exchange Semiconductor Index is up 58%, headed for the biggest annual gain in a decade.
Worldwide chip sales reached $36.6 billion in October, a 13% decline from a year ago, but 2.9% higher than the September results, the Semiconductor Industry Association said earlier this month. All major markets reported month-on-month gains, it said. Another industry body, the World Semiconductor Trade Statistics, predicted the chip market will rebound from its decline this year to 6% growth in 2020.
The semiconductor industry tends to go through cycles of exuberant demand that drives investment in manufacturing, followed by a buildup of inventories, leading to price declines and a corresponding drop in capital spending. But this has been among the mildest down-periods on record, Sekiya said. While the company is set to report its second year of revenue declines, it remains profitable. That’s a far cry from the 42% plunge in revenue during the 2008 financial crisis or the losses it recorded in fiscal 2001 after its sales dropped almost 60%.
One of the differences now is the diversity of new devices, beside the traditional personal computers and mobile phones, that create demand for semiconductors -- from connected cars to smart speakers and cloud infrastructure. The geopolitical tensions between China and the U.S. along with a trade spat between South Korea and Japan have also worked to Disco’s advantage, Sekiya said.
Capital investment in China went against the cyclical grain as Beijing sought to reduce its reliance on American technology. The U.S. companies have also begun responding in kind, increasingly looking to reduce their dependence on China for the production of the most sensitive tech. The threat by Japan earlier this year to cut off supply of key chip components to South Korea has prompted its neighbor to push for more domestic investment.
“This kind of geographic dispersion means more money is spent on capital equipment than when you just make everything in Taiwan,” Sekiya said. “More concentration also means more buying power for the customer.”
Disco was founded by Sekiya’s grandfather in 1937 as a maker of grinding wheels. A decade ago, at the age of 43, Sekiya took over the company from his father. Since then, the share price has risen more than ninefold as sales and profits set new records. His challenge now is to keep the company growing. Disco already controls about 80% of the market for grinders and dicing machines. While demand for the gear will continue to expand, Sekiya conceded that there is little chance of dramatic spurts.
Sekiya is counting on the company’s unique management style to produce a new lineup of products. At Disco, everything has a price, from office desks and PCs to a spot for your wet umbrella. Teams bill each other for their work, while individuals operate as one-person startups, with daily auctions of work assignments and battles for the best ideas in the aptly named “Colosseum.” Payments are settled in a virtual currency called “Will,” with balances paid in yen at the end of each quarter.
In the eight years since the approach was adopted, Disco’s operating margin has risen to 26% from 16% and its profitability is the envy of the industry. It has also resulted in considerable improvement of the user interfaces on the software running Disco’s machines, exactly the kind of thing customers appreciate but traditional manufacturers tend to treat as a low priority, Sekiya said.
“Organizations tend to put a cap on human ingenuity and intelligence,” he said. “We take it off.”
It may still be a few years before these new products are unveiled and Sekiya declined to give specific details for fear of losing competitive advantage. One thing the CEO made clear is that they will still fall within the scope of the company’s core competency -- machines that cut, grind and polish things.
To contact the reporters on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net;Yuki Furukawa in Tokyo at yfurukawa13@bloomberg.net
To contact the editors responsible for this story: Peter Elstrom at pelstrom@bloomberg.net, Vlad Savov
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