Tokyo Electron Limited  Annual Report 08

m a n a g e m e nt Int e r v i e w

Question &Answer
Tetsuro Higashi
Chairman & CEOIn this section, Chairman
Higashi and President Sato
are asked about market
trends and Tokyo Electron’s
strategies and actions.

Kiyoshi Sato
President & COO

Q1: Tokyo Electron posted record earnings in the fiscal year to March 31,
2008. How would you sum up the year?
>> The various reforms we have been implementing produced
enormous benefits during the fiscal year.
Tokyo Electron achieved record earnings on all counts – sales of ¥906.1 billion, operating
income of ¥168.5 billion and net income of ¥106.3 billion. I think we can be very proud ofthese record profit and margin levels, which were achieved as a result of determined efforts
to enhance profitability during the three years or so covered by our first medium-termbusiness plans.
Broadly speaking, two areas of strategic focus led to this improvement in profitability.
First, the creation of new, high-value-added products. As semiconductor manufacturing

Net Sales, Operating Income andOperating Margin

processes have become more sophisticated and customer needs have diversified, we havedeveloped products with higher performance and higher productivity and delivered them to(Billions of yen)

1,200

18.6%

The second area of focus was the strengthening of our manufacturing capability. By overhauling all of our processes, including development, design, procurement and production
technology, we have improved efficiency in the manufacturing process while at the same timeshortening the manufacturing lead time and startup period after product delivery. We were also

635.7

529.6

673.7

600

11.2%

852.0

10.1%

906.1

900

300

able to realize both cost reduction and customer satisfaction, through quality-enhancing mea-0607

168.505

sures such that enable us to reduce the warranty expenses incurred at our customers’ site.
144.0

75.704

64.0

22.3

4.2%

008

Net sales
Operating income
Operating margin
Note: Effective from fiscal 2005, the Company made certain changes inaccounting polices as discussed in the notes to consolidated
financial highlights.
nnnn

8

the market in a timely manner. As these products entered the volume production phase lastyear, significant improvement in sales and profitability was achieved.

16.9%

Thanks to reforms such as these, we achieved an operating margin of 18.6%, far
exceeding the 17.0% medium-term target we set three years ago. One of the important
issues we have been continuously tackling is to generate cash synchronized with sales.
Here too, there was a substantial increase in free cash flow to ¥86.8 billion, in spite ofgreater demand for working capital.

Annual Report 08 Tokyo Electron Limited

Q2: Tokyo Electron’s share of the global front-end semiconductor production equipment (SPE) market has grown even further. What are thereasons for this?

been widely adopted, especially in the rapidly growing markets inWorldwide Wafer FAB Equipment Market and TEL Market Share
(Billions of US$)60

the Asian region, enabling us to increase our share of the frontend SPE market.

12.9%

During the fiscal year, investment in cutting-edge facilities for the production of high-­

14.0%

13.4%
12.6%

40 11.6%

capacity DRAM and NAND flash memory increased in the Asia region, including in Japan.

20

Demand for our products from memory manufacturers who require both advanced process
0performance and higher productivity is rising. In particular, our sales in Taiwan, with its concentration of DRAM manufacturers, increased about 1.8-fold year on year.

32.5

16.7

this has driven our growth.

26.0

ers demanding high-performance equipment have welcomed our products. I believe that28.4

We provide extremely significant backup capabilities for our customers in Asia, and custom-

35.8>> New products tailored to our customers’ requirements have

(Calendar Year)

03

04

05

06

07

Source: Gartner, April 2008, GJ08326
nnWorldwide Wafer FAB Equipment Market
TEL market share

Q3: There has been a shift in the order volume
since around autumn 2007. What are
your views on future market trends?
>> There will be a dip in capital expenditure in the SPE market this year, but theflat panel display (FPD) production
equipment market is headed for substantial growth.
Aggressive capital expenditure in 2007 on high expectations of growth in demand for memory products disrupted the supply/demand balance inthe memory market, so 2008 is likely to be a difficult year in terms of capital investment.
However, as storage media for consumer devices, DRAM and NAND flash memory arelikely to propel the market going forward, which should lead to improvement in the supply/
demand situation followed by a recovery in customers’ capital expenditure in the not-toodistant future.
In the FPD production equipment market, meanwhile, liquid crystal panel makers are
ramping up capital investment to meet the expansion in demand for digital TVs, with a focus
on equipment primarily for the production of large substrates, so there will probably be ashift to significant growth from the latter half of 2008.

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Tokyo Electron Limited  Annual Report 08

Q4: What initiatives are you implementing to achieve even greater growthwhen the next silicon cycle peaks?
>> We are aiming to further strengthen process development sothat we can surge ahead when the next growth period comes andbolster R&D in order to cultivate new fields. We are also looking toenhance our manufacturing technology so as to achieve maximum
manufacturing efficiency.
The first initiative is growth in existing fields. We will develop technologies that meet ourcustomers’ requirements, including further miniaturization and technologies for devices withlower power consumption, and roll them out in new products. Needless to say, technologicaldevelopment will be the source of growth. Particularly in semiconductor process development, it used to be that customers took the lead role in development, but now many customers are focusing on circuit design and software development, and equipment
manufacturers are expected to undertake part of theprocess development. Over the past few years, wehave refocused our attention on strengthening ourprocess development capabilities, with a certain levelof success. Still, I think there is room for us to do morein this area. From a medium-term perspective, I therefore think it will be important for us to strengthen collaboration with universities and R&D bodies, as well as
to reinforce our process development engineering.

Toward More Growth
Achieved record sales and profit
Achieved 18.6% operating margin
Restored operating margin to 10%

New growth strategy
Second medium-term management plan

First medium-term management plan

Structural reform period
s2EDUCED FIXED EXPENSES
s!DJUSTED INVENTORY

FY2002 – FY2004

10s&URTHER IMPROVE OPERATING MARGIN

s%NHANCED NEW PRODUCT CREATION
s3TRENGTHENED MANUFACTURINGs)MPROVED BUSINESS EFFICIENCY

FY2005 – FY2008

FY2009 –s$EVELOP NEW BUSINESSES

Annual Report 08 Tokyo Electron Limited

The second initiative is the scale of expansion through new business development. Inaddition to our mainstay semiconductor and FPD production equipment operations, in theenvironmental/clean energy field we will press ahead with the commercialization of CVD(chemical vapor deposition) systems for thin-film PV (photovoltaic) cells. For making SiC (Siliconcarbide) devices which contribute to energy saving, we will also develop SiC epitaxial equipment,and help to realize the practical use of SiC devices at higher quality and lower cost. We are also
tackling environmental issues through technology, with a focus on designing equipment tomeet environmental standards.
The third initiative is manufacturing reform. In August 2007, our new No. 3 factory at theKoshi Plant became operational, and subcontractors previously dispersed around theKyushu region were consolidated there. This move eliminated time needed for truck transportation, packing/unpacking and delivery inspections, and has contributed to shorter manufacturing lead time, lower distribution costs and enhanced quality. These positive results
are now benefiting other group plants.

Q5: Tokyo Electron is planning to construct a plant in Miyagi Prefecture tofunction as a new production base. Please tell us about your plans
for this plant.
>>The etch system market is expected to grow significantly in themedium to long term. By integrating our technology development
and production bases, which are currently separated, we are aiming
to further increase the scale of our revenues and raise profitability.
Going forward, we anticipate continued strong growth in the SPE market, with substantial
growth in the etch systems market in particular. Thus far, we have carried out the development and production of etch systems – one of Tokyo Electron’s mainstay businesses – atseveral different sites. However, due to increasing space constraints, we are constructing a
new base in Miyagi Prefecture where we will consolidate our etch system operations.

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Tokyo Electron Limited  Annual Report 08

In the SPE sector, technological innovation is fast paced, and as our business relies on
the development of new technologies, it is vital for us to secure outstanding humanresources. We already have an operational base in Miyagi Prefecture, and we expect theregion to also provide us with strong backup resources, enabling us to develop cuttingedge technologies through the recruitment of talented personnel from the region’s manyeducational institutions, as well as through industrial-academic collaboration.
At the new plant, which is scheduled to commence operations in 2010, we intend toestablish a structure for manufacturing the highest-quality equipment in the world with evengreater efficiency. In constructing a base that integrates technology development, design andmass production, we aim to establish a competitive edge and enhance productivity. The
Kyushu Plant initiatives mentioned above will also be developed at the new plant, and we will
be looking to shorten manufacturing lead time and cut logistics costs by consolidating production within the plant with the participation of our suppliers. We plan not only to alleviate theenvironmental impact in terms of logistics, but also to tackle environmental issues proactively
in areas such as energy-saving design. We are very excited about the prospects for futurebusiness expansion that our new 21st century plant will bring.

Q6: Please tell us about Tokyo Electron’senvironmental initiatives.
>> It is crucial for management totackle environmental issues, and there
are also significant business
opportunities.
Climate change and global warming are issues ofgreat concern, and there have been calls for concrete measures to be adopted to tackle global
warming in the industrial sector. A wide range of measures and regulations has beendrafted, but only technological innovation in terms of emissions reduction and energyconservation can resolve these issues. Developing these technologies into a large-scalebusiness in response to global demands will make a significant contribution to society.
For Tokyo Electron, an important issue is how to develop products that have a low environmental impact, and particularly how to cut down on energy consumption. It is also importantto reduce the gasses, chemicals and water used in semiconductor manufacturing processes.
Moreover, we can have a much broader social impact by developing equipment and processes that help to reduce the amount of power consumption of semiconductor and display
products themselves. I also think we can do more in terms of product transportation, as there
are many other possible solutions to tackle global warming, such as switching from air to sea
transport and choosing plant locations that minimize the distance traveled by trucks.
12Annual Report 08 Tokyo Electron Limited

Another important initiative is helping to tackle global warming through the solar PV production equipment market. PV cells are attracting interest as clean energy devices, andefforts are being stepped up to apply this technology to large-scale power generation.
Given the ideal environmental performance of this technology, we anticipate strong growthin the PV market over the longer term, and hence also in the market for PV production
equipment. The goal is to achieve a power generation cost equivalent to thermal power by
2030. A wide range of technological innovations can be expected during this time, in turnproviding numerous opportunities to enhance production equipment technology.
We had already conducted extensive exploratory research into PV production equipment when we announced our entry into the PV production equipment market in February
2008. Together with Sharp Corporation, we have established a new joint venture company, specializing in development, to commercialize plasma CVD systems for use in thinfilm silicon PV cells. The thin-film silicon PV cell, a type of solar cell containing a thin layerof silicon deposited on a glass substrate, has attracted much interest in recent years.
These cells can be produced inexpensively and could become widespread in the future.
We plan to develop high-productivity plasma CVD systems for thin-film silicon PV, shipping the first products in 2009.

Addressing Environmental Issues With Technology
Our mission and responsibility—and a major business opportunity
Enhance the energy efficiency of Tokyo Electron products
Provide manufacturing equipment forenergy-saving devices
Provide manufacturing equipment for clean energy

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