Accelerating China’s IC Industry Future

Accelerating China’s IC Industry Future Ken Schroeder, Chief Executive Officer

Agenda • KLA-Tencor overview • China’s IC industry today: Advantages and challenges • Looking to the Future:3 strategies for IC manufacturing success • Gaining a competitive edge: The unique role of process control • Summary Accelerating China’s IC Industry Future

Corporate Highlights • #1 semiconductor process control company in the world • ≈ 4800 employees worldwide, in 22 countries • Global technology & market leader in process control since 1976 • 4th largest semiconductor capital equipment company in the world CY 2002 Revenue: $1.4B Accelerating China’s IC Industry Future

Helping Global Chipmakers Speed Time to Market and Profit EuropeHistorical Sales Average – 15% United StatesHistorical Sales Average – 30% JapanHistorical Sales Average – 20% Asia PacificHistorical Sales Average – 35% Accelerating China’s IC Industry Future

KLA-Tencor in China • Established presence in China since 1997 • Offices in Shanghai and Tianjin • Expanding operations in Zhangjiang High Tech Park • 80% process control market share in China • Working with all major Chinese fabs • Advanced training program for local staff • Recruited from China’s top universities • Global Support Center serves entire Asia-Pacific region (excluding Japan) Accelerating China’s IC Industry Future

Agenda • Introduction to KLA-Tencor • China’s IC industry today: Advantages and challenges • Looking to the Future:3 strategies for IC manufacturing success • Gaining a competitive edge: The unique role of process control • Summary Accelerating China’s IC Industry Future

“It took Japan three decades to become a powerhouse in technology, and it took Taiwan about one decade…China is expected to achieve similar strides in three to five years.” Electronic News, “The Waking Giant” Accelerating China’s IC Industry Future

China’s Formidable Foundation • Huge and rapidly expanding economy • Large and fast-growing domestic market • 1.3 billion consumers • Strong demand for electronics • #1 in mobile phone market with only 14% penetration • #2 in market for PCs • #2 in internet use Accelerating China’s IC Industry Future

Demand Drivers Behind China’s Growing IC Industry • Huge potential for domestic IC production • China consumes 8% of worldwide chip production • Of that, >80% is imported • Gap between domestic consumption and local supply major impetus for China’s IC industry Source: Semiconductor Industry Association Accelerating China’s IC Industry Future

China’s IC Manufacturing Advantages • Huge domestic market • Low-cost manufacturing and labor base • Abundant supply of international and domestic talent • Rapid inflow of international capital • Fast-growing entrepreneurial base • Strong government incentives • Accelerated transfer of technology expertise • All segments of semi industry – upstream and downstream – committed to China market Accelerating China’s IC Industry Future

China’s IC Manufacturing Challenges • Transitioning from trailing-edge to leading-edge technology • Perfecting the foundry business model • Preventing trade barriers • Addressing the shortage of skilled chip designers • Competing head-to-head with top-tier foundries • Speeding time to market on future device generations • Developing a winning strategy Accelerating China’s IC Industry Future

Why is Strategy Important to a New Semiconductor Company? • Create competitive advantage before the contest begins • Identify growth opportunities Accelerating China’s IC Industry Future

3 Strategies for IC Manufacturing Success CostLeadership PerformanceLeadership CustomerIntimate Accelerating China’s IC Industry Future

3 Strategies for IC Manufacturing Success • Performance-Leader Examples • Microprocessors • Intel • Leading-edge semiconductor processes • IBM • Digital Signal Processing • Texas Instruments PerformanceLeadership Architecture and IP are key in this strategy Accelerating China’s IC Industry Future

3 Strategies for IC Manufacturing Success • Cost-Leader Examples • Memory • Samsung • Micron • Infineon • Foundry • TSMC • UMC CostLeadership Accelerating China’s IC Industry Future

3 Strategies for IC Manufacturing Success • Customer-Intimate Examples • Fabless • Altera • nVidia • Xilinx • STMicroelectronics • Telecom with Nokia/Ericsson • Sony • Parent company for PlayStation CustomerIntimate Accelerating China’s IC Industry Future

Case Study: Japan IC Industry • Tried to overtake Intel in Microprocessors • Lost leadership in Memory to Korea $ $ 25000 8000 20000 6000 15000 4000 10000 2000 5000 0 0 Intel Sharp NEC Hynix Micron Hitachi Toshiba Toshiba Samsung Mitsubishi Mitsubishi Leadership in Microprocessors* Leadership in Memory* Accelerating China’s IC Industry Future 2002 revenue. Source: Gartner, Inc.

What Will be China’s IC Manufacturing Strategy? • Most likely strategies • Customer Intimate • Fabless companies working with Chinese consumer companies • Cost Leadership • Can Chinese foundries become a low-cost leader? CustomerIntimate CostLeadership Accelerating China’s IC Industry Future

“China’s market is huge, but regarding profits in this business, there are plenty of uncertainties.” Richard Chang, CEO, SMIC Accelerating China’s IC Industry Future

40 35 30 25 20 15 10 5 0 Tele- phone TV PC Cell Phone Play- Station 2 Time-to-Market is Essential for Business Success Time to Reach First 10 Million Customers 37 23 Years 9 4 <1.5 Semiconductor Innovations Accelerating China’s IC Industry Future

Ramp Rates are Increasing Manufacturing Ramp Rates 130 nm 90 nm(300 mm) 180 nm 0.25 mm 0.5 mm WSPW 0.8 mm 0 5 10 15 Month from Ramp Start Accelerating China’s IC Industry Future B. Sohn, Intel F11X Mgr., Invited Speaker ASMC 2002, www.semi.org/web/wevals.nsf/pcde4ASMC02/1 Time

800 600 400 200 0 Technology Barriers Getting Higher Transistor 35 nm Gate Length Gate Dielectric New processes Tighter specs New materials 0.35 0.18 0.07 New architectures New process tools More process steps Accelerating China’s IC Industry Future

Being 3 months late to market can wipe out all profits Advanced manufacturing strategies are needed to accelerate up the yield curve Leading Edge Technologies Have Small Market Windows Accelerated Yield Learning Development Ramp Production Yield Time Accelerated yield learningspeeds time-to-market Accelerating China’s IC Industry Future

Process Control Accelerates Fab Profitability • Monitor & control the quality of the IC process and products • Maximize Fab ROI • Better performing + more reliable chips = Higher ASPs • Quality of process = Increased yields & faster ramps • Faster time to market boosts fab profits Detect & Measure Implement Fix Characterize & Analyze Accelerating China’s IC Industry Future

How KT Accelerates Fab Profitability Buried void Reticle inspection: Finding the errors before they print Wafer inspection: Finding the process defects that kill yields Metrology: Finding the errors that decrease device performance Analysis software: The glue that ties it all together Report Simulate Act Analyze 35 nm Gate Length CD Errors Accelerating China’s IC Industry Future

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 3 6 9 12 15 18 21 24 27 30 33 36 The Value: Increased Fab Competitiveness & Higher Fab ROI Assumptions: • Device type: Logic • Wafer Size: 300mm • Wafers Starts per month • Development: 500 • Ramp: 2,000 • Production: 20,000 • Die per wafer: ~275 • Starting Die ASP: $30 • Price decline per/Q: 7% Production: $120M 50%-80% yield 9 months faster 10% higher overall yield Ramp: $200M 20%-50% yield 2 months faster Die Yield Development: $150M 3 months faster to 20% yield Months Accelerating China’s IC Industry Future Model Source: UC Berkeley, KT

Quantox XP TeraStar eS20XP Accelerating Fab Profitability: 3 Examples Customer Benefits Cust Savings KT Solution Problem Gate Leakage • Metrology Solution: • Problem identified 3 weeks faster than traditional methods $13M UCL Control Parameter Target LCL Reticle Defectivity Reticle Inspection: • Isolated repeater defect 7 weeks faster than traditional methods $17M Wafer Defectivity • Wafer Inspection: • Detected major yield killing defect 5 weeks faster than traditional methods $27M Accelerating China’s IC Industry Future

20% $90M 18% $80M 16% $70M 14% $60M 12% $50M 10% $40M 8% $30M 6% $20M Copper Defect Learning & ROI vs. Number of Tools Total Defect Inspection Tool Per Fab Company A Company B Company C Average Defect Learn Rate (Per Month)* Incremental Revenue Per Year Company D Company E Company F 0 5 10 15 20 25 Basis: 200mm wafer, 1.50cm2 Die, $30 ASP/die *Avg of 12 months Source: KLA-Tencor Accelerating China’s IC Industry Future

Accelerated Yield Learning:Savings Comparison Lagging technology, 200mm fab Leading technology, 300mm fab Prod $ Gain Ramp $ Gain Cum Revenue Gain Cum Revenue Gain Prod $ Gain Ramp $ Gain Dev'l $ Gain Dev'l $ Gain 0 6 12 18 24 30 36 42 48 54 60 0 6 12 18 24 30 36 42 48 54 60 Months Months 10 times the savings, revenue gains Accelerating China’s IC Industry Future

Summary • China positioned to be a major player in IC industry • Infrastructure advantages enable fabless and low-cost leadership strategies • Major growth and revenue opportunities are at the leading edge • Accelerated yield learning key to success • Process control best practices accelerate development, technology transfer and ramp; maximize yields Accelerating China’s IC Industry Future

Accelerating China’s IC Industry Future