TOKYO ELECTRON LIMITEDANNUAL REPORT 06

I N T E R V I E W

TETSURO HIGASHI

Q&A

Chairman & CEO

How has the business environment of the semi-conductor production equipment sector changed
in recent years, and what direction will it take inthe future?

The driving force behind semiconductor demand has changed
profoundly over the last five years. Mobile communications

and digital consumer electronics are now the core applications
in a market that, just five to six years ago, was mainly led byPCs. Also, we have seen the steady evolution of the PC into
an item that has the features of a digital consumer product.
As a result, semiconductors are finding wider applications.
The result is a large increase in demand for semiconductors.
I expect this trend to continue to strengthen, driven by theemergence of various new semiconductor applications.
Another important trend is the continuing evolution ofsemiconductor memory. Along with the ever-improving performance of DRAM, NAND flash memory, which has emerged as
an ideal storage media offering large capacity and low power
consumption, is stepping into the limelight. NAND flash
memory is expected to be used extensively in Third Generation (3G) mobile phones and a wide range of digital consumer
items, on the strength of its ability to store lengthy digitalmusic files and moving images. In fact, a compact PC withNAND flash memory replacing the conventional HDD as thestorage device is just around the corner. With the shift toward
more powerful devices, the volume and value of semiconductors going into each unit is bound to increase.
Furthermore, demand for PCs and mobile phones is growing
rapidly in BRICs and other emerging markets. This geographicalexpansion will also work in favor of semiconductors, lifting
total demand.

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Taken together, this expanding range of applications,appearance of new key devices, increasing semiconductor

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the worldwide transition from analog to digital broadcasting,which is also certain to generate explosive demand.

content ratio in various products, and the geographical expan-

LCD manufacturers are already increasing capital invest-sion of the demand base, will push semiconductor demandment in response to this demand, and that should keep us

even further, suggesting that the semiconductor market willbusy for at least the next two years.

continue to experience dynamic growth. With this expanding

The shift toward larger mother glass, from which LCD

demand, the importance and responsibilities of semiconductor

panels are cut, is driving investment in production equipment.

production equipment (SPE) suppliers are bound to continue

However, from a long-term perspective, we must not overlook

to increase. As a leading SPE supplier, Tokyo Electron isthe fact that there is a limit to increasing the size of mothercommitted to supporting the quantitative growth and evolution

glass, which means that a new round of technology innovationof semiconductors through relentless technological innovation.

will be necessary. We are very aware of these factors, andTokyo Electron is working to develop a new business vision

How do you view the prospects for flat panel dis-that builds on our existing technologies.

play (FPD) production equipment, another coreproduct of Tokyo Electron?
The PC monitor used to be the core application for the LCDpanel. Recently, the demand for large-screen LCD TVs iswitnessing explosive growth. Since many people choose
large-screen TVs for viewing dynamic images of sports events,
I see the Beijing 2008 Olympic Games as a trigger for replacement demand directed at larger-screen LCD TVs. There is also

Three Waves of Growth in the Semiconductor Market
Increasing Semiconductor Content Ratio
Driving new lifestyles - ubiquitous access, EHS care, education

Expanding Applications
Wireless digital networks

Geographical Expansion
Beyond geographical isolation, primary driver for a nation's growth10

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There is a concern that increasing use of semiconductors in consumer electronics could cause a

ANNUAL REPORT 06

customer satisfaction and to get a fair price for our products.
But it goes without saying that we should not minimize thedecline in semiconductor prices and this could

focus on cost reduction.

rebound on SPE suppliers in the form of pricepressure from semiconductor manufacturers.

What do you see as currently the most important

How do you plan to deal with this?

management issue?

The digital consumer market is characterized by a wide range

As a business, our goal is to continually generate a high levelof products and price volatility. In this environment, semicon-of cash flow. In this context, raising the operating margin andductor manufacturers, our customers, need to step up new

asset turnover are the most pressing management issues.

product launches to stay competitive. They have to raise

In the past fiscal year, our operating margin improved toproductivity by cutting down the lead time for the start-up of

11.2% following a harsh recession in semiconductors. But we

new production lines, shorten manufacturing cycle times andare far from satisfied with this. We will continue to make every

boost yields. Furthermore, customers’ expectations toward us

effort possible to further raise our operating margin. Raising

to come up with technological advances in semiconductor

profit margins boils down to strengthening product develop-processes are increasing, as seen in responding to lower

ment and manufacturing capabilities, the core activities ofpower consumption demands.

any manufacturing company. In view of these considerations,

It is very clear to me that responding with revolutionary

we need to further increase our R&D spending.

new technologies and developing SPE with superior costTokyo Electron is committed to continuing to improve its

performance are the best ways to meet our customers’ realtechnology and to creating new businesses. To achieve theseneeds. If we can supply highly reliable SPE with outstanding

goals, a sound corporate culture must be passed down toproductivity and process performance, we can expect to win

future generations. Tokyo Electron was established in 1963 byWireless digital networks will drive the market(Billions of U.S. Dollars)

1001980s

Early 1990s

Late 1990s

Early 2000s

Mainframe ComputersPCsMobile Phones•Digital Consumer Electronics•Automobiles, etc

Wireless Digital Networks

50■ Semiconductor CAPEX

08590•New Wireless Connectivity•High Performance Mobile Tools•Digital Broadcast & Digital TVs•Emerging Applications
Healthcare
Education
Security

9500

1105

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TOKYO ELECTRON LIMITEDANNUAL REPORT 06

I N T E R V I E W

a few young people full of venture spirit. That spirit has been

way to return profit to shareholders is to maximize corporate

passed down through the years, making it possible for Tokyovalue through sustained growth, continuing investment inElectron to launch innovative equipment for semiconductor

growth areas is given the highest priority in the allocation ofand LCD panel manufacturing, areas characterized by rapid

cash flow. This is because, unlike other markets, the sheer

technological change. The environment in which we operate

speed of technological innovation in the markets in whichsthas changed profoundly since we entered the 21 century,

Tokyo Electron operates is astounding.

and the speed of the technological innovation demanded has

Tokyo Electron will be quick to identify potential growth

accelerated. As the global leader in SPE, Tokyo Electron must

technologies. We also consider strategic alliances and M&As

rise to the challenge of innovating still more. We must meetas important options for acquiring new technologies andthis challenge by ensuring that a venture spirit is instilled

intellectual property rights.

throughout our organization.

Dividends to shareholders are also an important management issue. Tokyo Electron’s dividend policy is to continue

Tokyo Electron has a strong cash position throughlinking dividends to consolidated net income, with the aim of a

successful cash flow management. How do you plan

consolidated payout ratio of 20%. I am pleased to note thatto use this cash and what are your policies regard-

Tokyo Electron has increased its dividend for three consecu-

ing the sharing of profits with your shareholders?

tive years up to the fiscal year ended March 2006.

In fiscal 2006, we used part of the cash to retire debt, raise thecash position, and other moves to strengthen our financial base.
The use of cash flow is based on our comprehensive
judgment of the operating environment and the company’s
financial position at that time. Since we believe that the best

Free Cash Flows

Cash and Cash Equivalents and Interest-bearing Debt

(Billions of Yen)

(Billions of Yen)

150

200
155.8

114.4

100

106.9

77.6

78.9
68.3

41.8
21.4
14.1

–40

7.9

115.4

99.5
53.0

48.4

42.7

65.1

50

–7.3

–0.7
–8.5

–7.5

–10.5

2003

2004

2005

2006

–35.8

2002

140.0
127.0

100

50

0

151.4

150

0

■ Operating cash flows■ Investing cash flows
Free cash flows

2002

2003

Cash and cash equivalents
Interest-bearing debt122004

2005

2006