TOKYO ELECTRON LIMITED

IR

Q&A on Second Quarter Results for the Fiscal Year Ending March 2009

You have been through a number of downturns in the semiconductor industry-such as 1985-86, 1992-93, 1997 and 2001-02-and now this current downturn. How does this one rank in terms of magnitude?

This is probably the biggest. We are not just talking about the bursting of an IT bubble; there is a presentiment that we are going to see some fundamental structural changes, including reorganization of the industry. We will need to respond to the changes in an earnest manner and carry out a transformation of our own.

Compared to the last downturn, moves to implement cost reductions have been swift and substantial. What specifically are you going to do? And what about next fiscal year?

We saw the recession coming a year ago from looking, for example, at orders from DRAM customers, and therefore action was taken from December last year. Cutbacks in our European and US operations were completed by September. Since July, we have been limiting overtime throughout the company and we utilized the summer holidays to adjust the number of plant operating days. R&D would add up to a substantial sum if we included everything we wanted to pursue, but we have cut R&D costs to 63 billion yen by putting off non-urgent and unnecessary projects. Next fiscal year, we will probably need to tighten our belts further if the conditions of the second half of this fiscal year continue. We are still working on specific measures but we would like to avoid any reductions in personnel by pursuing greater efficiency, for example through the consolidation of our business sites.

You say you are going to reduce costs by an additional 12 billion yen compared to initial plans, but is that really possible? Are you going to cut selling, general and administrative (SG&A) expenses to around 110 billion yen?

Research and development alone will cost 63 billion yen, which will make it hard to lower SG&A expenses to that level. We will instead have to work on reducing expenses related to cost of sales.

When should we expect to see results from efforts to lower the break-even point? Next fiscal year?

We will do our best to achieve results starting next year, but some aspects will take time. Therefore we will essentially try to build a base enabling us to maximize profits during the peak period expected around 2011-12. We will take whatever action we can this fiscal year and follow through next fiscal year, but we will take our time over matters that will have adverse effects if advanced too quickly.

Conditions are tough with regard to the DRAM, NAND flash memory and liquid-crystal display (LCD) markets. In what order do you expect those markets to recover?

It is likely we will first see renewed investment in DRAM given the inevitable progress of the transition to 50nm technology. The NAND flash memory market will remain tough for a while but ought to rebound well when SSD*-equipped PCs hit the market. The slowdown in the LCD market has only just begun, so we can expect a recovery to arrive much later
*SSD (solid state drive): a storage drive employing NAND flash memory as a storage medium

Conditions are tough, but do you have any encouraging comments to make?

Conditions may be tough now, but the market is certain to bounce back in the medium term. Whatever we claim while the mood is generally pessimistic will never sound convincing, but we believe there are still adequate opportunities for growth in the semiconductor industry as new technologies continue to emerge. The DRAM market has managed to recover from every crash so far, despite views that it would no longer grow.

What is your outlook for orders?

The October-December period looks grim, but beyond that it is hard to tell, although SPE and FPD orders together are likely to fluctuate between 70 billion yen and 100 billion yen per quarter for some time. However, this is based on past experience and there is no substantial evidence with which to back it up.

Large-scale M&A, it seems, had been gently ruled out previously, but now you seem to be assuming a more positive stance. How did that come about, and do you have any potential targets?

So far we have said we would carry out, and have carried out, M&A for the purpose of acquiring technologies. In these harsh conditions, the number of customers is likely to decrease due to reorganization of the industry. That will make it less feasible for a number of equipment manufacturers to pursue the same products. Not only M&A to purchase technologies, but M&A to gain access to markets or "buy-time" might also be considered.

Like others, your customers also appear to be finding it tougher to procure funds due to contraction of funds. Do you have any plans for vendor financing?

We aren't planning anything large-scale. We occasionally get customers requesting to defer payment, but we are not a bank and can only respond to requests as best we can and within reason. We wish to make sure during economic emergencies that we do not suffer damage ourselves.

What will be your stance on the transition to larger, 450mm wafers?

It is a matter of timing. Progress on miniaturization has come to a difficult phase and we must make overcoming that barrier a priority. For that reason, we will be focusing on development relating to current 300mm wafers for the meantime. We believe the appropriate course for equipment manufacturers is to make progress on bringing down costs by miniaturization and then move on to 450mm wafers. Besides, it is crucial that 450mm wafer investment is made by multiple customers. Our stance remains the same. However, we value the customer's intentions and will continue to partake in serious dialogue.

Are there any changes to plans for the new Miyagi Plant?

Construction will start on schedule in April next year. The target for completion of the new Miyagi Plant is 2011-12. We want to operate at maximum production efficiency by then. As the market recovers we will have our hands full with production and will not be able to focus on production efficiency improvements. At times like this especially, when business is slow, we should try to bolster our facilities.