MEMC Electronic Materials (WFR)

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See all Bulls Reasons Bulls: Reasons To Buy Solar Power is creating an fairly new market for silicon wafers 0% agree Solar Power is creating an fairly new market for silicon wafers The recent growth and future growth potential of the solar industry is creating an fairly new market for silicon wafers. MEMC is poised to take full advantage of this trend (e.g., its recent deal with Suntech). View or Edit Reason 0 votes 0% agree Finances and balance sheet have improved significantly 0% agree Finances and balance sheet have improved significantly MEMC has recovered and pulled itself away from bankruptcy, out of debt, and into positive free cash flow. View or Edit Reason 0 votes 0% agree Protected against semiconductor price fluctuations via long term deals 0% agree Protected against semiconductor price fluctuations via long term deals MEMC has hedged against semiconductor price fluctuations by locking in long term deals. It has a 10 year deal to supply silicon wafers to Suntech at current prices. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Product differentiation is hard if you're selling sand 0% agree Product differentiation is hard if you're selling sand Silicon is a commodity and currently, there are few ways for companies to differentiate their wafers from the competition. Thus, industry competition is based on pricing, often forcing companies to reduce profit margins in order to remain competitive. View or Edit Reason 0 votes 0% agree Semiconductor industry is cyclical 0% agree Semiconductor industry is cyclical The semiconductor industry is cyclical. Because pricing can be volatile, revenues and profits can also be very volatile. View or Edit Reason 0 votes 0% agree Vulnerable to the demand of a few key customers 0% agree Vulnerable to the demand of a few key customers MEMC provides large amounts of silicon to a few key customers; while this allows the company to benefit from economies of scale, it also makes the company extremely vulnerable to the supply decisions of those key customers. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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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 Overview

MEMC 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 Breakdown

As 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.

• Polished Wafers: Polished wafers are high quality silicon wafers that have been chemically and mechanically polished to reduce imperfections, like pits in the wafer, and improve the semiconductor properties of the silicon.
• Epitaxial Wafers: Epitaxial wafers are special silicon crystal wafers that are grown on top of standard crystal wafers; their properties allow them to increase reliability and also allow them to isolate different circuit elements in smaller devices, smoothing chip communications.
• Perfect Silicon: MEMC's "Perfect Silicon" wafers are defect-free, making them useful for highly advanced semiconductors and also freeing them from the need for the post-production engineering necessary to reduce flaws in other wafer types.
• Magic Denuded Zone Wafers: Oxygen combines with silicon very easily to produce imperfections in the wafers; most wafers need timely post-production engineering to control oxygen precipitation. MDZ wafers use patented MEMC techniques to control and reduce oxygen precipitation in the silicon without the need of such processes, keeping the silicon useful over time.
• Advanced Materials: MEMC's advanced wafer materials have higher electrical resistivities (resistance to the flow of electricity), making them ideal for wireless communications chips.

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 Forces

Though 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 Technology

Semiconductors 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 Native

The 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 Growth

With 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 Power

Solar 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 Prices

Oil 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 Issues

Oil 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] China

China 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 Change

Global 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 Energy

Governments worldwide have implemented legislation to encourage alternative energy production. Examples include:

• California's mandate that 25% of electricity come from clean sources by 2020 and 75% by 2050
• California's One Million Solar Homes initiative gives subsidies to developers to build fully solar powered homes
• A bill being passed through Congress this summer (2007) mandates that 20% of the United States' electricity come from clean sources by 2020
• The European Union is looking to get 22% of its energy from clean sources by 2010
• China's Renewable Energy Law aims to raise the total percentage of renewable energy used in the country to 10% by 2020

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 Prices

The 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] Competition

It 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.

[edit] References