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Nikon plans reform to reduce reliance on key customer Intel

Japanese group goes on price-cutting drive in chipmaking machine market

Nikon has been supplying 70%-90% of its chipmaking machines to Intel, according to a securities analyst, but is now seeking new customers (Source photos by Shinya Sawai and Yuichi Nitta).

TOKYO -- Nikon plans to cut 2,000 jobs, or 10% of its workforce, mainly due to a downturn in its mainstay camera business and structural changes in the global semiconductor industry, highlighted by sluggish performance of top American chipmaker Intel.

The Japanese multinational is now staging a price-cutting offensive in the market for semiconductor manufacturing equipment, according to industry officials.

Once the world's biggest maker of semiconductor manufacturing equipment, Nikon has seen its market share fall to 7%, affected by structural market changes symbolized by U.S. chipmaker Nvidia overtaking Intel in terms of market capitalization.

While Nikon has been supplying 70% to 90% of its chipmaking machines to Intel, it is now seeking out new customers with a price-cutting strategy in order to reduce its excessive reliance on the Santa Clara, California-based company, a securities analyst said.

Nikon is reportedly marketing the machines to chipmakers in China and elsewhere. Earlier in November, however, Nikon President Toshikazu Umatate admitted that the efforts were proving to be a challenge, saying, "We haven't advanced the development of new customers as fast as expected due to the effect of the novel coronavirus crisis."

Nikon had expanded its semiconductor production machinery business in step with domestic electric and electronic equipment makers handling computer chips. But as these companies successively pulled the plug on or trimmed down their chipmaking operations in the decade from 2000, Nikon has increased the supply of its products to Intel.

When Nikon fell into financial difficulties in 2002, Intel provided it with a development cost of 10 billion yen ($96.33 million), by accepting convertible bonds issued by the Tokyo-based company.

It appears that the long-standing mutual reliance between the two companies is starting to backfire.

Nikon sold nine chipmaking machines in the April-September period, half of what it sold in the same period a year earlier, Nikon said at a results briefing in November. "Unit sales of semiconductor exposure machines decreased sharply partly because a major customer's investment in them has run its course," Nikon said, referring to Intel.

"As the chip business has come to a difficult phase, we may need to flexibly review it, depending on our main customer's situation," Umatate said.

But a more serious matter for concern is Nikon's small presence in the market of equipment for the extreme ultraviolet lithography (EUV) process of transferring circuit patterns onto silicon wafers. While demand for the cutting-edge technology is expected to grow, Nikon has retreated from developing such equipment reportedly because of the high costs involved. The retreat came about as the management of Nikon at the time concluded that the economic rationality of the operation could not be justified, according to the company.

ASML of the Netherlands, the world's largest supplier to the semiconductor industry by providing lithography systems for the manufacture of integrated circuits, is the sole company that has succeeded in commercial production of EUV equipment.

Intel has thus procured the equipment from ASML but is taking time to build new production lines. In the meantime, the American chipmaker is losing its competitiveness, industry analysts said.

Intel, which has been producing semiconductors on its own, will consider farming out the production to a major contract manufacturer, Chief Executive Bob Swan said in late July.

Swan made the statement apparently because Nvidia, which has topped Intel in market capitalization, has succeeded in its fabless business model of designing and developing chips but outsourcing production.

If Intel cuts back on its own production of semiconductors, Nikon is likely to be directly hit by a drop in sales of its chipmaking machines.

In fiscal 2020, ending on March 31, 2021, Nikon is forecast to log 430 billion yen in consolidated sales, down sharply from 840 billion yen in fiscal 2015. The projected sales decline is largely ascribable to an expected drop in sales to 140 billion yen, from 520 billion yen, in the cameras and other image-capturing devices division.

The division is forecast to incur an operating loss of 45 billion yen in the current fiscal year. Of Nikon's four divisions, operating profit is expected only in semiconductors and liquid crystal display panel production devices, though this will likely be a meager 1 billion yen.

Nikon is also in an unfavorable position relative to domestic rival Canon in the market for steppers that transfer circuit patterns onto silicon wafers in the chip production process. Although the two companies split the market for exposure equipment for Flat-panel displays, Nikon does not produce deposition apparatuses used to make organic electroluminescent panels in the subsequent process. A Canon subsidiary is regarded as having the largest share of the global market for these.

In the market for mirrorless cameras that have lured users away from single-lens reflex cameras, Canon is also edging ahead in development and sales.

Also aggressive about new operations, Canon is expanding its business of monitoring cameras for corporate use through Axis Communications, a Swedish company that specializes in network cameras for physical security and video surveillance, that it acquired in 2015. In addition, Canon is planning a review of its business portfolio including commercial printing services and medical equipment.

As China is striving to increase domestic production of semiconductors in the wake of U.S. sanctions on chip exports, industry officials said there was an opportunity for Nikon to grab customers among Chinese chipmakers.

As well as its plans to find new customers, the company also has a strategy of actively expanding its chip business for the maintenance of existing equipment and the production of peripheral machines, including testing devices applicable to EUV technology and various other chipmaking lines.

According to a structural reform plan announced Nov. 5, Nikon will reduce the division's operating expenses by 63 billion yen through transferring the production of cameras from Japan to Thailand and job cuts. Focusing production on cameras for professionals or photography enthusiasts, Nikon will seek to bring the division into the black in fiscal 2021, despite operational reductions.

The reform, though drastic, may end up merely saving the company time if Nikon fails to turn around the chipmaking equipment business and grow new areas of operation.

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