TEL People to Create Innovations

Market-Driven Technology Development

Tokyo Electron Product
Strengths
The strength of our products andtechnologies lies in our commitment to our customers beginning with the productdevelopment stage.
Semiconductor manufacturers
aim to differentiate their products through differences indevice design and in semiconductor manufacturing processes.
To assist with this goal, we workwith customers to develop manRyuichi Komatsubara
ufacturing technologies, giving
Executive Officer
top priority to supplying our cusSenior Vice President,
tomers with equipment thatTechnology & Marketingclosely suits their needs. Our
customers have come to recognize the high performance, repeatability, and reliability of our equipment, and as a result, we hold the
top market share globally for almost every piece ofequipment we market.
Volume manufacturing using 90 nanometer design
rules has begun in 2003. These new specifications
require even greater control of heat and time in thelithography process than in the past. In response tothese needs, we have given the new coater/developer Lithius™ add functions to improve process stability, for which volume manufacturing and delivery
is scheduled for the start of 2004. We have embedded measurement devices and a variety of sensors
into the equipment to provide feedback and feedforward functions to control processes. In addition,
the high productivity for improved exposure equipment throughput is another important sales point.
We are confident of maintaining our strong positionin the coater/developer market for next-generation
devices.
In thin-film formation, TELFORMULA™, a new typeof thermal processing system that we began fullfledged sales of in the fiscal year ended March 2003,
also offers many strong advantages. Featuring a hotwall thermal furnace and a quick turnaround time
due to the ability to process 25-wafer batches, hasresulted in driving a new market for mini-batch fur-10

Annual Report 2003 — Innovations Ahead

naces. The system can provide more precise boundary control because it can make sequential runs
incorporating different processing specifications.
Our customers have rated its capabilities very highly.
Another unique thin-film formation system TriasTM SPA
accomplishes high-quality nitridation and oxidation
processes. It was developed in cooperation with
Tohoku University with the support of the Ministry of
Economy, Trade and Industry (formerly MITI). For 90
nanometer or less processes, damage to the wafer
from plasma cannot be ignored. However, the highly
unique antenna system embedded in this equipment
enables the production of microwave plasma withextremely low electron energy of 3eV or less. Basedon the high-density radicals that can be created using
this microwave plasma, we plan to supply processsolutions not only for gate nitridation process but also
for oxide film formation, annealing, and a host ofother processes. We anticipate that TriasTM SPA will
become one of the core products of our thin-film formation business portfolio.
Requirements for Next-Generation Processes andFuture Challenges
With every new generation of IC, semiconductor
production equipment makers have boosted thevalue-added content of hardware, software, process
recipes, and process integration. Looking at theneeds of our customers over the past few years, thetwo main trends have been process development
based on actual device designs and intelligent
equipment with precision measurement devices
embedded in the equipment or in the manufacturing line. In the sense that these needs require us todeepen the comprehensive commitment to our customers, which we have pursued since we began in
the semiconductor production equipment business,
I see the former trend as further broadening thescope of our involvement. With the latter trend, we
have been developing these functions in our product lines for several years using business alliances,mergers and acquisitions, and other methods. As
with Lithius™, the products we will be launching in
future will have intelligent functions.
The surge in R&D costs of companies as chip shrinkage progresses is of some concern to all. BecauseAlbany NanoTech facility
including 300mm and 200mm
wafer R&D fabthey offer one method of alleviating these costs,
projects and consortiums featuring collaboration byindustry, government, and academia are growing inimportance. In Japan, we are actively participating in
the MIRAI and the HALCA projects, supplying
equipment and personnel. Outside Japan, we havevarious research activities linked with International
SEMATECH and IMEC. Recently, we decided to participate in the Albany NanoTech Project, an R&D
program that makes use of the facilities of the
University at Albany, State University of New York.
This project, which was supported by the government of Japan, was praised highly as an example ofhow basic technology developed at a university canbe combined with the application technologies ofthe private sector to yield excellent results. At theSecond Conference on Promoting IndustryAcademia-Government Collaboration, held on June
8, 2003 in Kyoto, Tokyo Electron received the Prime
Minister’s Award for its development of a practicalapplication of TriasTM SPA.
We participate in these consortium activities not
only to pursue innovative technologies that canachieve breakthroughs in next-generation processes, but also to achieve progress in efficiency andspeed of our R&D activities and in the use of integration infrastructures.

duction equipment, it has become a major industry
issue. From the point of view of promoting processdevelopment, the establishment of the previously
mentioned integration environment is vital in
addressing the problem of shorter life-cycles. On
the other hand, the development of the actual
equipment is obviously also an issue. As a result of
this dichotomy, we have been pursing the development of leading-edge technology that is not associated with development of business unit products
through an independent R&D unit called Corporate
Development. We are planning to relocate this R&D
unit closer to the site of the development of actual
products. In other words, we want the R&D unit to
be able to contribute to our manufacturing units
that are producing individual products. Moreover,
we are going to reorganize our R&D structure into ahorizontally linked organization built around suchcore technologies as thermal, plasma, vacuum,
atmospheric pressure system, and process application. This structure replaces the previous vertical
integration by technology system. Through thesesteps, we plan to achieve rapid sharing of a broad
range of technological information, further speeding
up our R&D process and improving its efficiency.
These, I believe, are our top priorities for the future.

Improving the R&D Process and Achieving
Greater Efficiency
Amid the growth in semiconductor applications for
consumer products in the form of system on chip(SOC) devices, the life-cycle of products is getting
extremely short. Because this situation also translates into a short development cycle for the device
itself, and in turn, the development cycle of the pro-Prime Minister’s Award for TriasTM SPA

Tokyo Electron 11

Accelerated Manufacturing for Speed Up and Cost Reduction

Tokyo Electron’s manufacturing
strength lies in its ability to adapt
our equipment flexibly to adiverse range of requirements ofcustomers. This capability keeps
customers satisfied, raises theirconfidence in TEL and is a significant driver of corporate growth.
Nevertheless, amid the current
trend in applications of semiconductors to consumer appliances,demand for cost reductions insemiconductor production
equipment from customers is
Hisashi Shirahada
increasing and the business cycle
Executive Officer,
is getting shorter. We believe
VP & General Manager,
Manufacturing
this trend will continue into the
future. Therefore, we are proceeding to strengthen our manufacturing division byincreasing speed and reducing costs.
Improving Operational Speed
To further improve our operations, we are aiming to
reduce lead times from order to delivery to twomonths for new products and three months for existing products. We are also working to trim the startup time from delivery to completion of installation
to two weeks. The steps being taken to achieve
those targets are improving the efficiency of capitaland human resources, reforming manufacturing
processes and standardizing equipment.
Specific measures to improve the efficiency of capital and human resources include speeding up processing and boosting efficiency by introducing ashift work system and operating our logistics system
around the clock. To reform our manufacturing
processes, we are targeting the shortening of the
manufacturing time by using information technology(IT) tools to reorganize processes to include additional parallel processing. In our standardization
efforts, we are working to avoid duplicating previous
design work and shorten the manufacturing time fordesign and custom-order components by creating
and making the best use of an open database con-12

Annual Report 2003 — Innovations Ahead

taining all our past design data. Furthermore, we aredesigning standardization into the tools from theproduct concept stage for our new thermal processing equipment, coater/developers and other equipment. We are confident that these actions willcontribute fundamental benefits to our operations.
Our cost reduction goals are a 30% cut in material
and fabrication costs over a three-year period.
Among the measures being taken to attain thoseresults are a review of our procurement and design
systems and reform of our logistics system. To
improve our procurement system, we are increasingpurchases of materials from China and Southeast
Asian countries and cooperating with suppliers in
examining methods to reduce costs of components
and parts. To upgrade the design system, we areapplying manufacturing management methods—
value analysis (VA) and value engineering (VE)—toachieve results. The VA system enables us to cut
costs by changing parts without affecting the performance of the product. And with new products inparticular, we are pursing cost reductions by applying VE methods that optimize the balance between
performance and cost beginning with the design
stage. To raise the efficiency of our logistics system,
we are actively developing a shared logistics system
to replace the individual systems of business units.
Strength as a Manufacturer
In tandem with these measures, we are implementing the IT tool-based Total Cost Down Project at
plants of Tokyo Electron AT and Tokyo Electron
Kyushu. This system was first introduced with great
success at Tokyo Electron Tohoku. In addition, toupgrade the design and manufacturing skills of individual engineers and the management capabilitiesof our project managers, we are reviewing our training and education system and our personnel performance evaluation system. Through these measures,
we are committed to further boosting our strength
as a manufacturer by ramping up the benefits of our
improved speed and cost reduction actions.

Marketing Expertise as a Reliable Partner

Founded as a trading company,
Tokyo Electron has developed its
business by supplying customers
in the electronics industry withrequired functions packaged
with engineering and support
services. In the semiconductor
production equipment business,
suppliers must instantly recognize the process needs of eachcustomer and incorporate theminto their products. We haveachieved our strong position in
the market based on a sales
Mitsuru Onozato
organization offering strong
Executive Officer,
technical knowledge of the prodSenior Vice President,
Sales
ucts and manufacturing processes. Our customer satisfaction
policy is reflected in our market share, which is oneof the largest worldwide, but it was also made evident during the fiscal year under review by theawards received from leading semiconductor manufacturers. To take one example, we have received
Intel’s Supplier Continuous Quality Improvement
Award for three years running—a most encouraging
award for the sales group manning the front lines ofour relationships with customers.
Reinforcement of Marketing PowerAs the costs of R&D and manufacturing steadily
increase in the semiconductor industry, the numberof business alliances among our customers is growing. As a result of these alliances, the loss of a business opportunity with one customer could possibly
lead to the loss of another customer’s business. To
avoid these situations, our first priority is to reinforce
the competitiveness of our products. To that end,
we believe that the Company must not only carryout joint product development with customers—thekey to business alliances—but also boost the marketing power of its sales force. For example, fromthe point of view of Tokyo Electron’s role as a multiproduct line vendor, individual salespeople must be
knowledgeable about more than just one product.
We believe that taking steps to instill in our sales-

people a high degree of knowledge of our equipment and their related manufacturing processes
contributes to a deepening of the relationship oftrust with our customers.
Cost Reduction Challenges
We also recognize that the Company cannot
achieve its overall goals for cost reduction,
improved speed and improved financial performance without the cooperation and assistance ofthe sales force. Therefore, we are exerting efforts to
reduce costs based on a small–but–efficient sales
force and shortened equipment installation time,and are proactively working with other divisions to
cut inventories.
China Market Promising in the Medium- to
Long-Term
Among regional issues, we are strengthening ouroperations in China, which is a new and steadily
expanding manufacturing base for semiconductor
devices. Currently, the market is not demonstrating
explosive growth due to regulations on advanced
technology and various other factors. However, inthe near future, we expect that it will expand substantially because of the low cost of infrastructure
and labor. During the current fiscal year, we are in
the process of constructing a new building in the
Shanghai region to be used for demonstrations andstocking parts. While avoiding the many risks in themarket, we plan to pursue sales activities as we do inother markets based on our customer first principle.

Tokyo Electron (Shanghai) Limited
New Headquarter Building

Tokyo Electron 13

Global Support of Process Application Engineering

In the semiconductor production
equipment business, customers
expect high-process performance equipment and highquality support services to be
packaged together. By establishing a network of more than 40
bases in 12 countries around theglobe to provide these highquality support services, Tokyo
Electron has built a strong relationship of trust with its customers through its pursuit ofcustomer satisfaction.
Jinzaburo Sakamoto
Executive Officer,
VP & General Manager,
Field Engineering

Improvement of Support
Services Capability

we have offered optional services for an additionalcharge to further enhance the level of customer satisfaction with our equipment under the name of TEL
Service Advantage (TSA). At a customer’s request,
we provide support services after business hours,
emergency on-site support and quick start-up services. In addition to being highly rated by our customers, TSA contributes to higher operating rates
and productivity. In the future, we will push forwardwith the establishment of a business model basedon the active discovery of and response to customer
support service needs that is positive for both TEL
and our customers. This model will create income
for Tokyo Electron by supplying value to customers
in the form of greater customer satisfaction andvalue-added content.
Contribution to Operational Improvement

In recent years, our customers at semiconductor
plants have raised the bar on their cost reduction,
efficiency, and uptime goals; and consequently, they
are demanding even higher levels of support fromequipment suppliers. In particular, to provide support services for equipment used to manufacture
ultra-miniaturized devices, it has become essential
to have the capability for and knowledge of processapplication, not just knowledge of the hardware. For
that reason, we are emphasizing process education
to upgrade the skills of our engineers. Moreover,through the Internet (e-Business) we are supplying
customers with real-time technical information
resources. Specifically, our e-Support services provide information on equipment problems and theirsolutions, as well as on improvements and modifications. To enable customers to immediately deal withproblems by themselves, we have added an eTroubleshooting function into our equipment, andplan to implement training of customers for thisfunction.
Service as a Profit CenterIn addition to earning a profit on our hardware andachieving cost reduction, we are also establishing a
new business model that converts our service
department into a profit center. For several years,

14

Annual Report 2003 — Innovations Ahead

From the standpoint of cost reduction, we will pursue multi-product support services where one person can serve as a field engineer for multiple typesof equipment. We will also seek cost reductions bystrengthening our business agreements with partner companies, working to achieve more effective
use of our engineers, and improving the efficiency of
our logistics systems. We are also taking steps toreduce and optimize our parts inventories on a global level introducing a stricter management structure
in coordination with our sales group and plants.

Global Support Network

Asset Management to Generate Extra Cash Flow

In the semiconductor production
equipment business, it takes several months to install and adjust
equipment after it is delivered tothe customer. Taking into
account the payment terms ofthe customer, recovery of
expenses can take some time.
This problem is compounded by
the fact that we pay suppliers onmuch shorter terms in consideration of the guarantee they provide on merchandise. As a result,
our working capital tends to be
Mamoru Hara
negative when business is in an
Executive Officer,
upturn and positive during periExecutive Vice President,
Administration
ods of adjustment. Indeed, for
the Company to continue tobuild corporate value, it is essential to improve cash
flow by creating profits and reducing working capital.

control inventories that were lent to customers forevaluation with target amounts in each business
unit.
Based on these measures, we expect to achieve an
improvement in cash flow of several tens of billionsof yen, as well as gaining benefits from reducing ourinterest-bearing debt and interest burden. In addition to improving our profit structure through the
reduction of fixed expenses, we intend to strengthen
our balance sheet and cash flow by ramping up
these efforts over the long term. The ultimate goal ofthese efforts is to continue to build corporate value.

Improving the Balance Sheet and Cash FlowTo reinforce our balance sheet and our cash flow,
we are aiming to shorten the collection period for
trade notes and accounts receivable and the inventory turnover ratio by 30% within two years. To
achieve these goals, the entire company is working
to shorten start-up times and reduce trade notes,
accounts receivable and inventory. As indicated by
the key word “speed up” used by Executive Officer,
Mr. Shirahada in his explanation, we are shortening
the installation time through integrated reform ofdesign, manufacturing, and service. To reduce tradenotes and accounts receivable, the sales and service
departments are partnering with the administration
department to decrease receivables for accounts
where customers have not yet completed theinspection and acceptance process. These efforts
are in addition to shortening start-up times. To
decrease our parts and components inventories, weplan to increase the efficiency of our global logistics
system. This is being accomplished through integration and other measures to enable us to decrease
the stock of parts kept at customers’ semiconductor
plants for support services. Moreover, we will strictly

Receivables & Inventory Turnover Period
Days
200

150

100

50

0
1998 1999 2000 2001 2002 2003
Receivables Turnover Period

2005

Inventory Turnover PeriodTokyo Electron 15