When Yoshimichi Kawai became Nikon Corp's head of stepper production a little over a year ago, a recovery for these multi-million-dollar machines that make microchips was far from assured.
But the industry has since turned the corner and looks poised for at least two strong years.
"We hit bottom in the middle of last year and have slowly but surely been boosting production," said Kawai, speaking at Nikon's main stepper factory in the small industrial city of Kumagaya about an hour north of Tokyo.
"This upswing looks set to continue for some time."
Steppers are complex machines that use a combination of lasers and lenses to etch circuitry on to semiconductors. The latest model made at Kumagaya lists for more than $20 million and is about the size of a one-car garage.
Given their price, steppers are hardly an impulse buy for chip makers. But sales are recovering nicely as demand for chips rises and semiconductor firms boost capital spending.
Research group Gartner Dataquest estimates that global spending on chip equipment will jump 42 percent to $42 billion this year. Of that, $4.74 billion will go to semiconductor steppers, 47 percent more than the $3.2 billion spent in 2003.
It sees stepper spending reaching $5.96 billion next year.
"That's a very nice, healthy expansion," said Klaus-Dieter Rinnen, vice president of Gartner's semiconductor manufacturing and design research group. "It means very clearly that steppers are needed and there is some money to be made."
The stepper industry is an oligopoly of three players - Nikon, Dutch-based ASML and Japan's Canon Inc. Nikon was the world's largest player based on units sold in 2003, while ASML had the top position in value terms.
On both accounts, Canon came a distant third.
Morgan Stanley expects the triumvirate to sell about 500 new chip steppers combined in 2004, up strongly from 383 last year. Sales will then expand to about 530 units in 2005, the brokerage estimated in a recent report.
That would still be well below the previous cycle's peak in 2000, when more than 1,000 units were sold. In the wake of the bursting of the IT bubble, units fell to 789 in 2001 and crashed to 389 in 2002, pushing the stepper industry deep into the red.
But there are reasons to believe that profitability will return even if the current cycle doesn't produce the unit levels seen four years ago. One is that stepper makers have restructured and are more efficient this time around.
Nikon says it has cut lead times - defined as from when it has procured all the materials to installation - to six months from about 10 months in the past year. It has also hired more temporary staff, keeping labour costs low.
Another positive for the sector is that average selling prices should rise as more chip factories using 300-mm wafers come on line. Semiconductor makers are expected to choose the industry's more advanced steppers to outfit those plants.
That should boost demand for argon-flourine (ArF) steppers, which use 193-nanometre-wavelength ArF lasers. ArF steppers are considerably more expensive than the traditional i-line steppers and mid-level krypton fluoride (KrF) machines.
"(Industry-wide) profitability will increase in 2004 and 2005," said Gartner's Rinnen, forecasting 100 ArF units would be sold in 2004, up about 67 percent year-on-year. "I see 50 percent acceleration in 2005 and another 50 percent in 2006."
Rinnen sees another reason for optimism in the industry's decision to promote "immersion technology", which uses a layer of water between the lens and the silicon to improve depth of focus and resolution, allowing for thinner circuitry and smaller chips. The development of immersion will extend the lifespan of the current generation of ArF steppers for a few more years. Because the light source and other basic components don't have to be changed, research and development (R&D) costs are relatively low.
Analysts say this will boost profit margins at stepper firms.
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