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Photomask Market Outlook: Growth Returns Advanced Reticle Symposium 2003 San Jose, CA • 23 June 2003 Klaus-Dieter Rinnen Managing Vice President Manufacturing and Design Emerging Technologies and Semiconductors Gartner Dataquest Forecast Growth Scorecard Revenue Growth (%) 2002 Base 2003 Up Base Down World GDP U.S. GDP Electronic Equipment* +2.0 +2.4 -1.4 +2.2 +2.4 +4 Semiconductor +1.9 +12 +8 +1 -37 +15 +7 -1 -3 +5 +2 -1 Capital Spending Photomask *Production revenue 1 Global GDP Growth, 2000-2004 Real GDP Growth (Percent) 5 +3.4 3 +4.0 4 +1.2 1 +2.2 +2.0 2 0 2000 2001 2002 2003 2004 Source: Global Insight 2 Key Economic Issues Economic policy – United States gets high marks for very accommodative monetary and fiscal polices, but eurozone is failing badly and hurting global recovery Capital spending – Spending revival still key to a true, sustainable recovery; fundamentals are improving, but lingering uncertainty remains a strong inhibitor Consumer spending – U.S. consumers certainly have done their part but could fatigue any time; need stronger consumer spending in Europe and Japan Dollar depreciation – Dollar has dropped for temporary and more fundamental reasons; will likely continue depreciating going forward, hopefully at slow rate Global trade – Trade continues to languish with weak economy but should revive with recovery; depreciated dollar is shifting advantage to United States at expense of Europe and Japan. Wild cards – SARS, terrorism, Middle East turmoil and South Korea tensions all remain potential threats to global recovery (not to mention those we can’t identify yet!). 3 Economics Health Score 2003 Economic Policy North America Europe Japan Asia/Pacific Capital Spending North America Europe Japan Asia/Pacific Consumer Spending North America Europe Japan Asia/Pacific Dollar Depreciation North America Europe Japan Asia/Pacific Global Trade North America Europe Japan Asia/Pacific Wild Cards North America Europe Japan Asia/Pacific SARS, South Korea, Terrorist Attacks 2004 2005 ? 4 Global GDP Growth, 2000-2004 U.S. tax cuts stimulate strong U.S. consumer spending Eurozone adopts looser economic policies Capital spending revives Dollar depreciates slowly Wild cards limited Real GDP Growth (Percent) 5 +3.4 3 +4.0 4 +1.2 1 +2.2 +2.0 2 0 2000 2001 Source: Global Insight 2002 2003 2004 2H03 revival still possible, but full recovery may be pushed out to 1H04 U.S. tax cuts fail to stimulate U.S. consumer spending Eurozone maintains tight economic policies Capital spending falters Dollar crashes Wild cards wreak havoc 5 Macroeconomic Picture Brightens: Quarterly U.S. GDP Growth — June 2003 U.S. GDP Growth (Percentage of SAAR) 6 5 3 2 1 0 Forecast 4 -1 -2 -3 Source: Global Insight and Gartner Dataquest (June 2003) 6 overall IT demand IT Spending — Unweighted/Weekly: War With Iraq and SARS Outbreak Sway Sentiment Projected Index 200 Current Trend: Current spending remains below budgeted levels Stalled recovery in current spending Contributing factors: Major break in SARS news Major combat finished War breaks out Strong demand – War with Iraq – SARS outbreak – Slow economy 100 Weak demand 0 9-Mar. 23-Mar. 6-Apr. 20-Apr. Week Ending Untrended and Unweighted Projected Untrended and Unweighted Current 4-May 18-May 1-Jun. Technology manufacturing and communications vertical market lag current spending Projected demand in 2004 slightly higher, but still below prewar level 7 Overall IT Trend — Weighted/Monthly: 2003 Cautious Underspending; 2004 Increase Trend: Current spending remains below budgeted levels Stalled recovery in current spending Contributing factors: – War with Iraq – SARS outbreak – Slow economy Technology manufacturing and communications vertical market lag current spending Projected demand in 2004 slightly higher, but still below prewar level 8 Gartner Dataquest’s Index of Semiconductor Market Leading Indicators — June 2003 Semiconductor Revenue Growth 60% Actual Forecast 50% 40% 30% 20% 10% 0% -10% -20% -30% Semiconductor Growth Indicator -40% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 9 Monitoring Phased Recovery Through 2004 Recovery under way but: – Equipment markets slow – Cell phones the only bright spot, but can it be sustained? – PC market remains sluggish Continued recovery depends on: – Cell phone strength – Corporate PC replacement cycle beginning in 2H03 – General improvement in electronic equipment production (especially communications) in 2004 1H03 2H03 1H04 2H04 Spending Consumer Corporate Cell Phones ? PCs Communications 10 Quarterly Semiconductor Revenue: Market Expands on 2H03 Improvement Scenarios Optimistic Most Likely Pessimistic Billions of Dollars 2002 2003 1.9% +12.3% +8.3% +1.3% 65 60 55 50 45 40 35 30 1Q00 3Q00 1Q01 3Q01 Optimistic 1Q02 3Q02 1Q03 Most Likely 3Q03 1Q04 3Q04 Pessimistic 11 Semiconductor Revenue Forecast: Recovery Gains Momentum in 2003 Billions of Dollars 300 22% -5% 250 6% 23% 200 8% 2% 150 100 50 0 1996 1998 2000 2002 2004 2006 12 Supply Outlook: Semiconductor Inventory 1.8 1.7 Gartner Dataquest Semiconductor Inventory Index Key Conclusions: 1.6 1.5 Inventory days peaked in 1Q01 1.4 Healthy drop in 1Q03 1.3 1.2 1.1 1 0.9 0.8 1Q99 1Q00 1Q01 1Q02 1Q03 13 Overall Wafer Fab Utilization Ratio of Silicon Consumed to Fab Capacity Leading Edge 100% 90% 80% 70% 60% 50% 40% 14 Photomask Revenue Forecast: After Two-Year Decline, Growth Returns in 2003 Scenarios Optimistic Most Likely Pessimistic Millions of Dollars 4,000 2002 2003 -2.9% +5.4% +2.2% -1.2% 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1996 1998 2000 2002 2004 2006 2008 15 Semiconductor vs. Photomask Revenue Semiconductor Revenue (Billions of Dollars) 250 200 Photomask Revenue (Percentage of Semiconductor Revenue) 3.5 3.0 2.5 150 2.0 100 1.5 1.0 50 0 0.5 0.0 16 Photomask Revenue by Layer Linewidth: Sub-0.25 Micron Is Driving Force 100% 80% 60% Sub-0.25 Micron 40% 0.25 to 0.7 Micron 20% 0% 0.7 Micron and Above 17 Photomask Unit Forecast: Growth Returns in 2003, but Muted Photomask Units (Plates) 800,000 750,000 700,000 650,000 600,000 550,000 500,000 450,000 400,000 1996 1998 2000 2002 2004 2006 2008 18 Aggregate Photomask ASP Forecast: Mix Drives Strong Growth Aggregate Photomask ASP ($) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1996 1998 2000 2002 2004 2006 2008 19 Photomask Set Cost: Cost in Second Year of Production Thousands of Dollars 700 600 500 400 300 200 100 0 1992 0.5 Micron 18 Layers 1995 1998 2000/1 2003 0.35 Micron 20 Layers 0.25 Micron 22 Layers 0.18 Micron 28 Layers 0.13 Micron 32 Layers Note: Set cost is best estimate for 2002. 20 Some Thoughts to Ponder on Mask Cost Myriad possibilities (in design, material, equipment process, usage) for reducing photomask cost – Is there really any price elasticity? – Where are the margins for photomask maker to secure its and the industry’s future? Is this a nonprofit business? Photomask expenditure as a percentage of semiconductor revenue is not declining but also not appreciating – Are photomask prices too low to ensure options for an economically viable future? Classifieds Wanted! Needed! New Business Models for Photomask and ASIC 21 What Does the Future Hold for Lithography? 193-nm immersion: Will the industry dip in? 157 nm: To live or not to live? EUV: Eternal bridesmaid or happily ever after 32? Maskless, nano-imprint and other technologies: Is there a chance to break into the market? When? Bottom Line The longer incumbent technologies are extended and maskless technology is delayed or muted, the better for photomasks. But please, no bifurcation in lithography technologies. 22 Conclusions Economy Expect improvement in 2003, albeit back-end-loaded Weakness in Europe and Japan sharpens need for U.S. improvements Electronic equipment Expect gradually improving macro conditions to spur phased recovery Start of Y2K PC replacement cycle expected; strength is questionable Corporate spending returns in 2003; strength depends on economy Semiconductors Expect revenue growth of 8 percent in 2003 Expect tightening capacity utilization and better demand to drive 2004 Photomasks Photomask revenue to grow slowly in 2003 Long-term CAGR of 8.8 percent is ASP-driven Rising photomask cost is reality and will lead to lower usage Not business as usual anymore: Consolidation a must for photomask merchants Will captive component of mask market increase? Will lithography demand bifurcate? 23