Accelerating China’s IC Industry Future Ken Schroeder, Chief Executive Officer

Accelerating China’s IC Industry Future Agenda KLA-Tencor overview KLA-Tencor overview China’s IC industry today: Advantages and challenges China’s IC industry today: Advantages and challenges Looking to the Future: 3 strategies for IC manufacturing success Looking to the Future: 3 strategies for IC manufacturing success Gaining a competitive edge: The unique role of process control Gaining a competitive edge: The unique role of process control Summary Summary

Accelerating China’s IC Industry Future Corporate Highlights #1 semiconductor process control company in the world #1 semiconductor process control company in the world ≈ 4800 employees worldwide, in 22 countries ≈ 4800 employees worldwide, in 22 countries Global technology & market leader in process control since 1976 Global technology & market leader in process control since th largest semiconductor capital equipment company in the world 4 th largest semiconductor capital equipment company in the world CY 2002 Revenue: $1.4B

Accelerating China’s IC Industry Future United States United States Historical Sales Average – 30% Europe Europe Historical Sales Average – 15% Japan Japan Historical Sales Average – 20% Asia Pacific Asia Pacific Historical Sales Average – 35% Helping Global Chipmakers Speed Time to Market and Profit

Accelerating China’s IC Industry Future KLA-Tencor in China Established presence in China since 1997 Established presence in China since 1997 Offices in Shanghai and Tianjin Offices in Shanghai and Tianjin Expanding operations in Zhangjiang High Tech Park Expanding operations in Zhangjiang High Tech Park 80% process control market share in China 80% process control market share in China Working with all major Chinese fabs Working with all major Chinese fabs Advanced training program for local staff Advanced training program for local staff Recruited from China’s top universities Recruited from China’s top universities Global Support Center serves entire Asia-Pacific region (excluding Japan) Global Support Center serves entire Asia-Pacific region (excluding Japan)

Accelerating China’s IC Industry Future Agenda Introduction to KLA-Tencor Introduction to KLA-Tencor China’s IC industry today: Advantages and challenges China’s IC industry today: Advantages and challenges Looking to the Future: 3 strategies for IC manufacturing success Looking to the Future: 3 strategies for IC manufacturing success Gaining a competitive edge: The unique role of process control Gaining a competitive edge: The unique role of process control Summary Summary

Accelerating China’s IC Industry Future “It took Japan three decades to become a powerhouse in technology, and it took Taiwan about one decade…China is expected to achieve similar strides in three to five years.” Electronic News, “The Waking Giant”

Accelerating China’s IC Industry Future China’s Formidable Foundation Huge and rapidly expanding economy Huge and rapidly expanding economy Large and fast-growing domestic market Large and fast-growing domestic market 1.3 billion consumers 1.3 billion consumers Strong demand for electronics Strong demand for electronics #1 in mobile phone market with only 14% penetration #1 in mobile phone market with only 14% penetration #2 in market for PCs #2 in market for PCs #2 in internet use #2 in internet use

Accelerating China’s IC Industry Future Demand Drivers Behind China’s Growing IC Industry Huge potential for domestic IC production Huge potential for domestic IC production China consumes 8% of worldwide chip production China consumes 8% of worldwide chip production Of that, >80% is imported Of that, >80% is imported Gap between domestic consumption and local supply major impetus for China’s IC industry Gap between domestic consumption and local supply major impetus for China’s IC industry Domestic Chip Purchases and Production in China Chip purchase$16B$25B Demand filled by internal fabs15%30% Source: Semiconductor Industry Association

Accelerating China’s IC Industry Future China’s IC Manufacturing Advantages Huge domestic market Huge domestic market Low-cost manufacturing and labor base Low-cost manufacturing and labor base Abundant supply of international and domestic talent Abundant supply of international and domestic talent Rapid inflow of international capital Rapid inflow of international capital Fast-growing entrepreneurial base Fast-growing entrepreneurial base Strong government incentives Strong government incentives Accelerated transfer of technology expertise Accelerated transfer of technology expertise All segments of semi industry – upstream and downstream – committed to China market All segments of semi industry – upstream and downstream – committed to China market

Accelerating China’s IC Industry Future China’s IC Manufacturing Challenges Transitioning from trailing-edge to leading-edge technology Transitioning from trailing-edge to leading-edge technology Perfecting the foundry business model Perfecting the foundry business model Preventing trade barriers Preventing trade barriers Addressing the shortage of skilled chip designers Addressing the shortage of skilled chip designers Competing head-to-head with top-tier foundries Competing head-to-head with top-tier foundries Speeding time to market on future device generations Speeding time to market on future device generations Developing a winning strategy Developing a winning strategy

Accelerating China’s IC Industry Future Agenda Introduction to KLA-Tencor Introduction to KLA-Tencor China’s IC industry today: Advantages and challenges China’s IC industry today: Advantages and challenges Looking to the Future: 3 strategies for IC manufacturing success Looking to the Future: 3 strategies for IC manufacturing success Gaining a competitive edge: The unique role of process control Gaining a competitive edge: The unique role of process control Summary Summary

Accelerating China’s IC Industry Future Why is Strategy Important to a New Semiconductor Company? Create competitive advantage before the contest begins Create competitive advantage before the contest begins Identify growth opportunities Identify growth opportunities

Accelerating China’s IC Industry Future 3 Strategies for IC Manufacturing Success Performance Leadership Cost Leadership Customer Intimate

Accelerating China’s IC Industry Future 3 Strategies for IC Manufacturing Success Performance-Leader Examples Performance-Leader Examples Microprocessors Microprocessors Intel Intel Leading-edge semiconductor processes Leading-edge semiconductor processes IBM IBM Digital Signal Processing Digital Signal Processing Texas Instruments Texas Instruments Performance Leadership Architecture and IP are key in this strategy

Accelerating China’s IC Industry Future 3 Strategies for IC Manufacturing Success Cost-Leader Examples Cost-Leader Examples Memory Memory Samsung Samsung Micron Micron Infineon Infineon Foundry Foundry TSMC TSMC UMC UMC Cost Leadership

Accelerating China’s IC Industry Future 3 Strategies for IC Manufacturing Success Customer-Intimate Examples Customer-Intimate Examples Fabless Fabless Altera Altera nVidia nVidia Xilinx Xilinx STMicroelectronics STMicroelectronics Telecom with Nokia/Ericsson Telecom with Nokia/Ericsson Sony Sony Parent company for PlayStation Parent company for PlayStation Customer Intimate

Accelerating China’s IC Industry Future Case Study: Japan IC Industry Tried to overtake Intel in Microprocessors Tried to overtake Intel in Microprocessors Lost leadership in Memory to Korea Lost leadership in Memory to Korea Leadership in Microprocessors* Leadership in Memory* Hynix Samsung Micron Mitsubishi Sharp Toshiba Intel Hitachi Mitsubishi NEC Toshiba $$ 2002 revenue. Source: Gartner, Inc.

Accelerating China’s IC Industry Future What Will be China’s IC Manufacturing Strategy? Most likely strategies Most likely strategies Customer Intimate Customer Intimate Fabless companies working with Chinese consumer companies Fabless companies working with Chinese consumer companies Cost Leadership Cost Leadership Can Chinese foundries become a low-cost leader? Can Chinese foundries become a low-cost leader? Cost Leadership Customer Intimate

Accelerating China’s IC Industry Future Agenda Introduction to KLA-Tencor Introduction to KLA-Tencor China’s IC industry today: Advantages and challenges China’s IC industry today: Advantages and challenges Looking to the Future: 3 strategies for IC manufacturing success Looking to the Future: 3 strategies for IC manufacturing success Gaining a competitive edge: The unique role of process control Gaining a competitive edge: The unique role of process control Summary Summary

Accelerating China’s IC Industry Future “China’s market is huge, but regarding profits in this business, there are plenty of uncertainties.” Richard Chang, CEO, SMIC

Accelerating China’s IC Industry Future Time-to-Market is Essential for Business Success Tele- phone TVPC Cell Phone Play- Station 2 Years <1.5 Semiconductor Innovations Time to Reach First 10 Million Customers

Accelerating China’s IC Industry Future Time Ramp Rates are Increasing Manufacturing Ramp Rates Month from Ramp Start WSPW nm (300 mm) 130 nm 180 nm 0.25  m 0.5  m 0.8  m B. Sohn, Intel F11X Mgr., Invited Speaker ASMC 2002,

Accelerating China’s IC Industry Future Technology Barriers Getting Higher Tighter specs New materials More process steps New processes New process tools New architectures Transistor Gate Dielectric Gate Dielectric 35 nm Gate Length 35 nm Gate Length

Accelerating China’s IC Industry Future Leading Edge Technologies Have Small Market Windows Being 3 months late to market can wipe out all profits Advanced manufacturing strategies are needed to accelerate up the yield curve RampDevelopment Time Yield Production Accelerated Yield Learning Accelerated yield learning speeds time-to-market

Accelerating China’s IC Industry Future Implement Fix Implement Fix Characterize & Analyze Characterize & Analyze Detect & Measure Detect & Measure Process Control Accelerates Fab Profitability Monitor & control the quality of the IC process and products Monitor & control the quality of the IC process and products Maximize Fab ROI Maximize Fab ROI Better performing + more reliable chips = Higher ASPs Better performing + more reliable chips = Higher ASPs Quality of process = Increased yields & faster ramps Quality of process = Increased yields & faster ramps Faster time to market boosts fab profits Faster time to market boosts fab profits

Accelerating China’s IC Industry Future How KT Accelerates Fab Profitability Reticle inspection: Finding the errors before they print Wafer inspection: Finding the process defects that kill yields Metrology: Finding the errors that decrease device performance Analysis software: The glue that ties it all together Buried void 35 nm Gate Length 35 nm Gate Length CD Errors Analyze Report ActSimulate

Accelerating China’s IC Industry Future The Value: Increased Fab Competitiveness & Higher Fab ROI Assumptions: Device type: Logic Device type: Logic Wafer Size: 300mm Wafer Size: 300mm Wafers Starts per month Wafers Starts per month Development:500 Development:500 Ramp:2,000 Ramp:2,000 Production:20,000 Production:20,000 Die per wafer: ~275 Die per wafer: ~275 Starting Die ASP:$30 Starting Die ASP:$30 Price decline per/Q: 7% Price decline per/Q: 7% Months Die Yield 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Development: $150M 3 months faster to 20% yield Ramp: $200M 20%-50% yield 2 months faster Production: $120M 50%-80% yield 9 months faster 10% higher overall yield Model Source: UC Berkeley, KT

Accelerating China’s IC Industry Future Accelerating Fab Profitability: 3 Examples Customer BenefitsCust Savings $17M Reticle DefectivityReticle Inspection: Isolated repeater defect 7 weeks faster than traditional methods $27M Wafer DefectivityWafer Inspection: Detected major yield killing defect 5 weeks faster than traditional methods $13M UCL LCL Target Problem Gate Leakage Control Parameter Metrology Solution: Problem identified 3 weeks faster than traditional methods KT Solution Quantox XP TeraStar eS20XP

Accelerating China’s IC Industry Future Total Defect Inspection Tool Per Fab Average Defect Learn Rate (Per Month)* 6% 8% 10% 12% 14% 16% 18% 20% Copper Defect Learning & ROI vs. Number of Tools *Avg of 12 months Source: KLA-Tencor $20M $30M $40M $50M $60M $70M $80M $90M Company D Company A Company B Company C Company E Company F Incremental Revenue Per Year Basis: 200mm wafer, 1.50cm 2 Die, $30 ASP/die

Accelerating China’s IC Industry Future Accelerated Yield Learning: Savings Comparison Dev'l $ Gain Ramp $ Gain Prod $ Gain Months Cum Revenue Gain Months Lagging technology, 200mm fab Leading technology, 300mm fab 10 times the savings, revenue gains Dev'l $ Gain Ramp $ Gain Prod $ Gain Cum Revenue Gain

Accelerating China’s IC Industry Future Agenda Introduction to KLA-Tencor Introduction to KLA-Tencor China’s IC industry today: Advantages and challenges China’s IC industry today: Advantages and challenges Looking to the Future: 3 strategies for IC manufacturing success Looking to the Future: 3 strategies for IC manufacturing success Gaining a competitive edge: The unique role of process control Gaining a competitive edge: The unique role of process control Summary Summary

Accelerating China’s IC Industry Future Summary China positioned to be a major player in IC industry China positioned to be a major player in IC industry Infrastructure advantages enable fabless and low-cost leadership strategies Infrastructure advantages enable fabless and low-cost leadership strategies Major growth and revenue opportunities are at the leading edge Major growth and revenue opportunities are at the leading edge Accelerated yield learning key to success Accelerated yield learning key to success Process control best practices accelerate development, technology transfer and ramp; maximize yields Process control best practices accelerate development, technology transfer and ramp; maximize yields