Who Pays for it All? The Equipment Leasing Alternative

N/Aand new, state-of-the-art, fabrication tool installed today will be obsolete in 18 months. Upgrades and modifications may extend its useful life for several generations, but it will no longer be useful for leading edge production. What happens to equipment that's behind the technology curve, but still has years of depreciation costs and years of useful life left?

Looking at the same dilemma from a different point of view, many applications, including automotive control systems and high frequency telecommunications components, simply do not gain enough performance or manufacturing productivity from smaller feature sizes to justify the expense of a state-of-the-art fab.

What are the alternatives to multi-billion dollar investments in sub-0.25 micron manufacturing capability? Once, vertically integrated chip companies used the first question to answer the second: older equipment spent its remaining life making inexpensive, trailing edge components. Now, rapid technology changes and industry fragmentation are breaking down the depreciation-based business model.

<%=company%> (CEG; San Diego, CA), a division of Comdisco, Inc. (Rosemont, IL), is the largest of several companies attempting to provide new answers to these questions. The company provides a wide range of equipment management services, including leases, equipment reconditioning and remarketing, and asset exchange programs.

According to Michael Herman, president of CEG, equipment management programs allow companies to reduce the cost of the use of the equipment, while retaining the flexibility to upgrade or exchange. Equipment management, he said, involves assessing an organization's current technology and its use, then determining its value and anticipated life. It also takes into account market demands, technological advances, and pricing fluctuations. Thursday, CEG announced it will supply Micronas Intermetall GmbH, a German subsidiary of Micronas Semiconductor Holding AG (Zurich, Switzerland), with various semiconductor manufacturing and test equipment and asset management services. The program, involving equipment valued at DM 101 million ($56 million), will result in a major upgrade at Micronas Intermetall's Freiburg, Germany plant, which makes mixed signal analog chips. The fab, currently equipped to produce 5-in. wafers at 0.8 micron, will be capable of producing 6-in. wafers at 0.5 micron after the upgrade. About 60% of the equipment is already installed, with the remaining 40% to be phased in over the next six months.

As David Coons, CEG's vice president of European sales, told Semiconductor Online, the two companies first made contact in February, 1997. At that time, the upgrade to 6-in. wafers was in the planning stages, and Intermetall was owned by ITT. After working with the CEO, financial officer, and vice president of technology, Coons said, "it became clear that over four or five years they would not be using a certain percentage of the equipment."

Following the Micronas acquisition, local banks were much less interested in financing a large equipment purchase. Yet, payments began to come due as the equipment was installed in February and March of 1998. At that point, Coons explained, Intermetall turned to a lease arrangement for three reasons:

1. The lease improves cash flow, scheduling the cost of the equipment in parallel with the revenue it generates.

2. Comdisco is not a bank. CEG shoulders some of the risk of the equipment purchase, hoping to capture the residual value when the equipment is returned and remarketed.

3. Banks are more comfortable with the lease structure. If the client has financial difficulty, CEG is able to capture more of the equipment's resale value than a bank could.

Some equipment, such as wet benches, is not leaseable or resalable because of damage or contamination concerns. Still, Coons estimates 25-30% of front end equipment can be more economical to lease.

Foundries and joint ventures are particularly interested in equipment management services, since both need frequent technology upgrades. Foundries benefit from the rapid technology changes possible with a lease program. Joint ventures find a lease simplifies cost sharing and equipment disposition: it's easier for the partners to divide dollars than individual tools.

Still, Coons emphasized that equipment leasing is not just a financial alternative. Comdisco, for instance, sets up regular technology roadmap meetings to discuss equipment swaps and upgrades. "The toolset is always subject to change."

By Katherine Derbyshire

For more information: Comdisco Electronics Group, Herst Towne Center, 3655 Nobel Drive, Suite 600, San Diego, CA 92122. Tel: 619-554-0246 or 800-285-3040; Fax: 619-550-7444.