Applied expresses 'disappointment' over tool loan rejection

SAN JOSE, Calif. — Applied Materials Inc. expressed its "disappointment" after being rejected for a loan guarantee that would help provide fab equipment for Chinese foundry startup Semiconductor Manufacturing International Corp. (SMIC).

Applied (Santa Clara, Calif.) hopes that a loan guarantee organization will reconsider its decision, although some believe that the U.S. government has "no business" funding foreign semiconductor manufacturing operations with taxpayer dollars.

As reported, the Export-Import Bank (EXIM) of the United States has effectively rejected a request from SMIC for a $769 million loan guarantee that would have been used to buy chip-making equipment from Applied, according to a Hong Kong Standard report. EXIM is a government agency and provides financing to foreign companies seeking to purchase U.S. goods and services.

Applied had argued that the loan would be in keeping with the bank's mission of supporting U.S. exports, and would keep Shanghai-based SMIC, from using chip-making equipment suppliers in Japan, South Korea or Europe, the report said. But the report also quoted David Parker, a spokesman from U.S. memory maker Micron Technology Inc., saying the U.S. government should not use US taxpayers' money to export semiconductor jobs to China (see Feb. 11 story).

During a conference call to discuss its financial results on Tuesday (Feb. 15), Applied expressed its "disappointment" about the news, saying that it hopes the loan organization would reconsider its decision.

"We are disappointed that (EXIM) has failed to act on our order," said Nancy Handel, senior vice president and chief financial officer of Applied, during the call.

"We are hoping that they are re-looking (at the loan guarantee)," Handel said. "We hope it's a delay."

The Applied executive indicated that the decision to reject — or delay — the loan had nothing to do with SMIC's ongoing push towards making chips at 0.25-micron and below. It is widely believed that both foreign and domestic chip makers in China are prohibited from processing chips below 0.25-micron, due to fab-tool and technology export restrictions.

SMIC, however, has been processing wafers at linewidth geometries of both 130- and 110-nm. The Chinese company plans to devise 90-nm designs for Texas Instruments Inc. and perhaps other customers by early 2005.

Applied could be crying foul for other reasons. Last year, the banking organization approved a $652 million loan guarantee to support the export of chip equipment to rival Singaporean silicon foundry provider Chartered Semiconductor Manufacturing Pte. Ltd. The loan guarantee is a big boost for Chartered, which will use the equipment for its first 300-mm plant, dubbed Fab 7.

U.S. equipment suppliers on the export sale to Chartered include Applied Materials, Novellus, Lam, KLA-Tencor, Axcelis, Varian, Mattson, Thermawave, FSI International, Asyst, SCP Global, and FEI (see Nov. 15, 2004 story).

One industry observer was critical of such practices in the first place, however. "We have no business funding foreign semiconductor manufacturing with U.S. taxpayers dollars," said one industry observer. "The import-export bank had no business funding Charter's 300-mm fab either."

Applied, according to the observer, should take another course of action. "Applied has a big cash balance and so does a lot of their competitors," the observer said. "If projects have merit and Applied's management believes in them, then they should vote with their balance sheets and provide the guarantees themselves. Their customers then become partners. They will never do it so why should the American taxpayer take the risk?"

Applied and other chip-equipment makers, however, are seeking the loans and for good reason: the current IC-equipment market is in a down cycle.

On Tuesday, Applied posted sales of $1.78 billion for its first fiscal quarter, down 19 percent from $2.20 billion sequentially but up 14 percent from $1.56 billion a year ago. Net income was $289 million, or $0.17 per share, down from net income of $455 million, or $0.27 per share, sequentially and up from net income of $82 million, or $0.05 per share, for the first fiscal quarter of 2004.

New orders of $1.68 billion for the first fiscal quarter of 2005 decreased 36 percent from $2.62 billion for the fourth fiscal quarter of 2004, and decreased less than 1 percent from $1.68 billion for the first fiscal quarter of 2004 (see Feb. 15 story).

The company blamed the results on the ongoing slowdown in the semiconductor industry, which started in the second half of 2004.