Changing fortunes in the year of the dog

At its former manufacturing site in Fremont, the near-empty AXT car park suggests Mary Celeste comparisons. While that might be a little unfair, the California location is a shadow of its former self, when around 1000 people filled its four large buildings.

"2006 is a big turning point for us," says CEO Phil Yin, confidently predicting a revival in fortunes. Having revamped the senior management and dealt with operational problems, Yin believes that AXT s strong links in China will prove to be a big competitive advantage as demand for GaAs ramps up.

In Fremont, that Chinese influence is unmistakable: from the reception staff to the senior management; from the new red and gold corporate colors to the boardroom artwork. And China is where the company s heart now lies, along with more than 500 employees and five joint ventures that supply AXT with its critical materials.

Yin likes a challenge, which is just as well because when the industry veteran took over as its CEO one year ago, AXT was heading for the rocks. Just a few years after it was first to market with 6 inch vertical gradient freeze (VGF) material and held a market-leading position in GaAs substrates, things looked bleak.

The hangover that followed the 2000-2001 overcapacity binge hit AXT long and hard. It suffered a big fall in market share and revenue as rivals followed its pioneering VGF technology. Then came another blow - certain customers found that their AXT-sourced material suffered from poor surface morphology, causing "post-epi haze", and went to find alternative suppliers.

Combine that with [as yet, unproved] accusations of malpractice by former employees on health and safety grounds, a merry-go-round in senior management as operations switched from California to China, and the distraction of a damaging dispute with rival supplier Sumitomo Electric Industries, and Yin s task must have taken on nightmarish proportions.

But this is what Yin calls the "old AXT", one of damaged reputation. "We had bad baggage," he admits.

For the AXT board, enough was enough. Something had to be done. So they called Yin, a veteran of - among others - Aixtron, ATMI Epitaxial Services, Crysteco and IBM, to sort things out. Luckily for them, Yin was up for the challenge. First came the management changes: out went interim CEO Don Tatzin, while company co-founder Morris Young switched from a wide-ranging role, including CEO of Chinese operations, to a more focused position as CTO. That move can t have been easy for Young, but Yin saw it as a critical one for the future of AXT. "Morris is back to what he did best during his Bell Labs days," Yin said.

Similarly, the appointment of a new operations chief in the form of Minsheng Lin in July 2005 has beefed up the company s focus on production issues and quality control. AXT s material quality woes had stemmed directly from some relatively trivial operational oversights, the primary cause being identified by Lin as the use of a polishing solution that had been made up to the wrong concentration.

Fixing this problem, as well as bringing in automated cleaning stations, megasonics and spin-rinse driers is all part of the "new AXT", along with a revamped corporate image and a customer-first attitude.

Following the setup of the five joint-venture companies to supply AXT with raw materials and equipment, the Chinese links are stronger than ever (see "AXT s five joint ventures"). These ventures, in which AXT holds substantial shares and board presence, allow the company control over its supply chain, says Yin: "We are not susceptible to capacity constraints or swings in raw-material prices."

Part-ownership of a furnace supplier also allows AXT to add capacity relatively easily. Yin says that the design of these furnaces is critical, and this remains the company s most closely guarded secret. AXT has never patented the design, Yin insisting that this would let the cat out of the bag.

While AXT can pressure the joint ventures on price to reduce its overheads, this is only one part of the solution. Above all else AXT needs to take back substantial market share to approach profitability. In recent quarters there has been little sign of this - while revenue has begun to creep back up after a long downturn, the company continues to post a net loss. But Yin now expects to oversee a dramatic ramp-up.

That s partly because demand is increasing across the board, particularly as the latest cell-phone handsets devour ever more GaAs content. Crucially, AXT s rival suppliers, such as Freiberger, are struggling to meet the volumes demanded by their customers. As a result, AXT is brimming with orders, and has far better visibility on its customer requirements for the rest of 2006 than it has seen in recent years.

"Total requirements - in terms of square inches of material - could be close to double the 2005 figure by the year-end," predicts Yin. Aside from the squeeze on GaAs capacity, increasing demand for germanium looks like favoring AXT. The firm is one of only a handful of vendors, along with chief rival Umicore, to sell the germanium substrates used by Emcore and Spectrolab to make solar cells, and by Osram Opto Semiconductors in HB-LED fabrication. Osram s chip manufacturing volumes will no doubt continue to soar, while the use of multijunction solar cells in terrestrial applications is at last beginning to take off. Again the Chinese operation is crucial - one of AXT s joint ventures controls a germanium mine in Mongolia, ensuring that material supplies are largely under control, while 4 inch germanium substrates are in volume production thanks to a large order from the Chinese government for two satellite applications.

As you would expect from somebody who spent a lot of time in the silicon semiconductor business, Yin is keen on standards and roadmaps. As a result, AXT recently joined the SEMI organization as a corporate member. "Compound semiconductor [volumes] will not snowball unless we get standard specifications," he said.

For the Chinese community 2006 is the year of the dog, and as such is said to be one of reflection. If his expectations prove correct and market share flows back in AXT s direction, many will reflect that Yin has been the chief architect of AXT s long-awaited revival.