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MEMC Electronic Materials (WFR)Stock (Manufacturing Industry, Integrated Circuits Industry, Semiconductor - Integrated Circuits Industry)
MEMC Electronic Materials supplies silicon wafers to semiconductor and photovoltaic cell companies. Its success is deeply rooted in the success and growth of the market for semiconductors, which is in turn fueled by a growing demand for mobile phones and solar power. Solar power in particular has been growing quickly as oil prices, environmental concerns, and government support for clean and renewable energy have all increased. Silicon wafers are commodity goods, meaning they are difficult to differentiate in any way other than price. Thus, while a worldwide silicon shortage is currently lifting the fortunes for all players in the industry, in the long run, price competition with competitors like Hemlock, Shin-Etsu, M. Setek, and DC Chemical can undercut MEMC's profit margins. To minimize this threat, MEMC has hedged some of its positions against falling semiconductor prices, including a multimillion dollar agreement to supply China's Suntech Power Holdings (STP), a solar power company, with silicon wafers over the next 10 years. In 2007, MEMC earned revenues of $1.9 billion (up 25% from 2006), an operating income of $850 million (up 52% from 2006), and spent $39.3 million on R&D (up 10% from 2006). MEMC announced that it would supply solar wafers to German based Conergy (GGYG.DE). The contract is expected to generate revenues between $7-$8 billion over the next ten years.
[edit] Company OverviewMEMC Electronics is a silicon wafer manufacturer whose majority shareholder, Texas Pacific Group--a prominent private equity firm--acquired a 72% stake in 2001, after the company nearly filed bankruptcy. Since then, MEMC has made a remarkable recovery and now generates a free cash flow and has far higher profit margins. TPG, however, has been selling off chunks of the companty during industry upturns ever since 2001 (right now, it owns 7.3%, but is still considered a major shareholder). This is significant because when TPG sells at a stock peak, MEMC's shares plummet, making the company extremely vulnerable to TPG's actions. [edit] Product BreakdownAs a silicon wafer producer, MEMC Electronics' products are used in semiconductor technology and in photovoltaic cells; semiconductors are used in computer technologies, like memory chips and integrated circuits, and photovoltaic cells are used to produce electricity from light energy. MEMC produces five main categories of silicon wafer.
While these wafers appear to be significantly differentiated, the reality is that the silicon wafer industry is essentially a commodities industry: products cannot be differentiated enough for different companies' products to be competitive by feature. As long as a wafer is pure enough to work without causing signal malfuntion, customers will purchase based on price, making the industry subject to low profit margins. [edit] Business and Financial Metrics
Over the past two years, MEMC has managed to increase profits AND profitability; this appears to be because costs did not go up in proportion to revenue, a sign of good cost-management by the company. [edit] Trends and ForcesThough there is very little that the company can do to differentiate itself competitively from competing silicon dealers other than lower prices, MEMC's overall success depends on the success of products that use silicon wafers, specifically semiconductors and photovoltaic cells. MEMC's products are sold en masse to a relatively small number of firms. This allows MEMC to take advantage of economies of scale but leaves the company at risk in the event a large customer leaves. For example, competitor Siltronic recently signed a deal to provide silicon to Samsung, one of MEMC's key customers. Samsung cutting MEMC ties would be disastrous for MEMC's revenues. Thus, demand by firms in the semiconductor and solar industries affects MEMC powerfully. [edit] Demand for Semiconductor TechnologySemiconductors are found in all microchips and anything that receives radio waves; this ranges from car radios to WiFi cards. The IT economy has been called the "silicon economy" because silicon is the primary material used to create semiconductors. The silicon wafer industry is relatively oligopolistic and about 10 firms supply silicon wafers worldwide. MEMC is in the top three and there is no clear industry leader. [edit] The Digital NativeThe digital native demographic is defined as the younger generation, which has grown up with constantly evolving technologies. Increased usage of digital photo, video, and sound drives the demand for newer, faster, more powerful hardware. Faster microchips will be necessary to meet this demand, which necessitates improving semiconductor technology. An increased demand for high-end silicon wafers would play to MEMC's established business strengths. [edit] Mobile Platform GrowthWith the increase of mobile platform functionality, consumers are demanding faster, more powerful mobile devices to drive applications on smaller devices (e.g., wireless Internet). High-end semiconductors are crucial to radio devices such as cell phones as well as to microchip production and could be in far higher demand as the mobile market expands for two reasons. Semiconductors drive both data quality transmission as well as advanced hardware on high-end phones. [edit] Demand for Solar PowerSolar power is a rapidly emerging form of energy production that converts light (usually from the sun) into electricity through the use of photovoltaic cells, which are typically made of silicon wafers. Solar energy continues to grow as a viable form of electricity because of rising oil and gas prices, increased public awareness of environmental issues, and rising political support for clean energy. With oil hitting $100 per barrel in late 2007, the demand for alternative energies, such as solar, became more noticable. MEMC signed two notable solar contracts with Asian solar cell manufactures, Gintech and Suntech Power Holdings (STP). MEMC will provide solar wafers to the two companies. The contracts amount to between $7.5 - $9 billion dollars over the next 10 years. With these new contracts MEMC says it has solar agreements worth between $15-$18 billion over the next 10 years. [edit] Increasing Oil and Gas PricesOil and gas are non-renewable resources and the growing world dependence on oil and gas means a constantly decreasing supply. In recent years, oil and gas prices have risen to around $65 per barrel. Oil prices hit $100 per barrel in early 2008. High energy prices is driving a search for renewable energy sources to power the expanding world economy. Solar power is one such renewable source; the sun will not stop emitting light for another 4-6 billion years, and it releases far more than enough light in a day to power the entire planet. A continued increase in the solar industry bodes well for silicon wafer dealers like MEMC. [edit] Environmental IssuesOil and coal power are the two main energy sources for most of the world and release massive amounts of pollutants that contribute to adverse environmental effects such as acid raid. With a rising worldwide demand for energy, demand for clean forms of energy have risen. Solar energy is fairly clean as photovoltaic panels release no pollutants or emissions. Clean energies like solar energy have experiences increasing demand , especially in the U.S., which is the largest polluter in the world. [edit] ChinaChina will soon surpass the U.S. as top polluter in the world and there is increasing international pressure for China to adopt clean energy. China utilizes coal because it is cheap and bountiful but that energy sources currently produces a large amount of pollution. Suntech Power Holdings (STP) is the largest solar power company in China, and is well-positioned to take advantage of a possible increase in demand for solar in that country. MEMC recently signed a multimillion dollar agreement to supply Suntech with silicon wafers over the next 10 years, creating a potentially steady cash flow in the near future. This deal includes hedges against price fluctuations by to fixing prices for MEMCs products. MEMC will benefit if semiconductor prices fall and lose out if demand and prices increase worldwide. [edit] Global Climate ChangeGlobal climate change is a pressing public issue, especially in developing countries, due to disruption of agriculture and fresh water distribution, among other impacts. Social, political and scientific movements have lead to increased government subsidies for clean energy sources and global emissions caps. China has begun to implement similar standards. MEMC occupies a good position to profit from a continuation of this trend. [edit] Political Support for Alternative EnergyGovernments worldwide have implemented legislation to encourage alternative energy production. Examples include:
Emissions caps and clean energy mandates mean that corporations and utilities companies may turn to clean energy sources, directly benefiting solar power producers and input suppliers like MEMC. Subsidies and tax breaks means cheaper costs for installation, a major cost associated with solar energy. [edit] Silicon PricesThe rising demand of solar power has led to a shortage of silicon production and higher prices. In a price-competitive commodity industry, companies such as MEMC see positive revenue effects. However, the industry is highly cyclical and prices tend to fluctuate due to over- or under-supply of silicon as well as changing market conditions. In the long run, rising demand for silicon wafers due to solar power may generate a long-term upward shift for the semiconductor industry. [edit] CompetitionIt has been established that there is very little that can be done to differentiate silicon wafers; thus, MEMC competes with other firms through pricing. There are fewer than 10 major competitors in the industry, including companies such as Hemlock, Shin-Etsu Chemical, M. Setek, and DC Chemical. The activities of these companies play a major role in reducing MEMC's profit margins through output expansion and price reduction.
 MEMC Electronic Materials2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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