MEMC Electronic Materials, Inc. (NYSE: WFR) released its financial results for the first quarter ending March 31, 2001 with net sales declining 3.2 percent to $219.8 million for the 2001 first quarter, compared to consolidated sales with MEMC Korea of $227 million during the same period last year. The company reported a net loss of $17.6 million for the quarter, compared to a net loss of $27.3 million for the same quarter last year. The net loss was narrower than the analysts consensus estimation, according to First Call/Thomson Financial.

"As has been widely publicized, the semiconductor device manufacturers have very limited visibility into the coming quarters. We anticipate a sequential decline in revenues in excess of 15% for the second quarter of 2001 as compared to our first quarter revenues, as a result of further declines in product volumes, as well as increased pressure on our average selling prices." concluded Mr. Klaus von Horde, MEMC's Chief Executive Officer.

As part of the cost reduction, MEMC is planning to reduce approximately 7 percent of their total workforce, as well as temporary plant shutdowns.  Despite the weakness in the market, MEMC expects sales of the 300 millimeter wafers and new products including HPS 2™, Advanta™, EPI II™ and MDZ™ wafers to represent about 20 percent of their revenues this year. The new products, particularly EPI II™ and MDZ™, should have little or no silicon grown-in defects in the device active layer and hence improve chip manufacturing yield. Grown-in defects are silicon defects produced during crystal growth using the current Czochralski technology.

The share price of MEMC has been trading in the range between $7 and $11 for the past 6 months. Although investor sentiment for MEMC has shown significant improvement, we believe that MEMC's share price could remain in this trading range as the silicon wafer business continues to face issues from overcapacity to a decline in gross margin. 

There is mounting evidence that pricing pressure and a decline in gross margin will continue to have an impact on both the top- and bottom-lines of the company's financial statement as silicon companies are competing in an anemic growth market. According to the Semiconductor Equipment and Materials International (SEMI) trade group, the silicon wafer business is expected to grow only 2.7 percent this year to $7.77 billion, from $7.519 billion last year. The growth is expected to continue at the moderate rate of between 5 and 6 percent during the next two years.

The recent announcement of the merger between the silicon businesses, Sumitomo Metal Industries Ltd. and Mitsubishi Materials Corp., is more evidence that the companies need to reduce cost and increase market share in order to effectively compete in a tough business environment. After the completion of the merger, expected by January 1, 2002, the combined companies will have an estimated worldwide market share of over 23 percent, slightly behind Shin-Etsu Handotai (SEH) Co. Ltd, the number one silicon wafer supplier, with 24.7 percent market share, according to a July 2000 report by Gartner Dataquest.

From a strategic viewpoint, Sumitomo and Mitsubishi's merger poses not only a threat to SEH, the number one supplier, but also completely eliminates Wacker Siltronic from a race for second place in worldwide wafer shipments. Late last year, Wacker Siltronic, a subsidiary of German-based Wacker-Chemie GmbH, acquired a 55% equity share in Nippon Steel Corp.'s silicon wafer production company, NSC Electron Corp., in order to increase its share to 20 percent and secure its number two position in the world market.

We believe that an integration of NSC Electron Corp. into Wacker's organization could possibly face significant difficulties since both companies are completely different in both management styles and corporate culture. If the integration fails, it is likely possible that Wacker Siltronic could end-up losing its market share to SEH and Sumitomo-Mitsubishi. 

In the long-term, we believe that the average wafer price could further decline as Chinese silicon wafer manufacturers begin to flood the market with their 200 millimeter production. According to Semiconductor Business News, China's Grinm Semiconductor Materials Co. Ltd., one of the three major Chinese silicon wafer manufacturers, is beginning its initial 200 millimeter production this year. The company already claimed that its products are the same level as SEH, in terms of quality.