RW: Jim Morgan took charge of Applied Materials in 1976. The semiconductor equipment maker was in default on bank loans and on the verge of bankruptcy. Jim sold off non-core businesses, and refinanced loans while bringing the firm back to profitability. In 2003 Applied Materials was profitable, number one in the semiconductor equipment marketplace, and with sales of over five billions dollars. In this 2004 interview Jim discusses his business philosophy, competing in the global marketplace, and why he routinely invests an astonishing twenty percent of revenue in R&D. Jim has also donated a book on the history of Applied Materials, and a sixty-fifth birthday biography DVD to the Stanford Libraries.
Well, Jim, tell us about the early days. Your family, growing up, what not.
JM: Sure. Well, fortunately, I grew up on a - a farm in a - in a family cannery in the Midwest, in Indiana. And so it was just a - a - a real opportunity for me to - to gain a lot of experiences that probably a - a lot - lot of kids today don't get a chance to - to see. But I was able to work with - work with other people when I was very young. I actually started working in the cannery when I was about fourteen, and so I got to know a lot of the - well, the - the different people that worked there. I got to play a lot of basketball as a kid. There's an Indiana - the Hoosiers were - that's what you did there as a kid. And it was a - I was outdoors a lot, and so it was just a great place to - to grow up. But I think probably some of the things that I remember most are - are one, just having the ability to, you know, get out - out into the various parts of the - of the farm. And - and also when I - when I'd get to factory they always - there's kind of a small group of people that were - that worked there that kind of looked after me when I was small. But, then after a while then I ended up having to supervise them. And so that transition was sort of an interesting experience for me.
RW: Well, you took mechanical engineering in college.
RW: Well, what - what set you on that course?
JM: Well, I think by growing up in - on a farm you're always working with equipment really young. So I learned about maintenance, and I - I just was comfortable with - with mechanical things, and - and electrical things. And so as a result of that, that - that kind of led me to go to - to pick a school where I could take mechanical - or take engineering. And I happen to pick Mechanical Engineering at Cornell. And I think what - what brought that about, it was a - a program that really gave you a broad view of - there's a program that gave you a broad view of - of engineering. And all - and - and then I combined that with my business - with a business degree. And so that - that gave me a unique combination of skills and an edu - educational background at a time when the - the economies were shifting to a more technical phase. And also there weren't many business-oriented people in the technology world as I came through. So I think it was really a - a factor that - it was really set the stage for me to have a chance to - to bring something different to the industry.
RW: And you met your wife?
JM: Met my wife at Cornell. Yeah. We were both - we met freshman year. And so in 1956 when we were - started at Cornell. And we got married when we - when she graduated, and - and - end of my senior year. And then we, you know, had - had one of our children at - at Cornell, and - and the other one in the - in the Army. So we - we started our family early, and - and as a result, you know, we're fortunate to have grandkids now.
RW: So what - what was your Army experience like?
JM: Well, I - I was really lucky. Since - I got a chance to - through just by pure coincidence I met one of my classmates at - from Cornell while I was Aberdeen Proving Ground during my basic training as a - a ROTC officer. And his roommate worked in a - in a group called the Army Material Command then. And - and I was just very fortunate to - to join the AMRY Material Command Board, which was long-range, small, about twenty-some people, long-range planning group that did - worked with General Bessen, who headed up all the R&D logistics and procurement for the U.S. Army. And that was just a great exposure to long-range planning, to production techniques, to management techniques, to - to use of computers, decentralization and management, which all really kind of helped me later on in my career.
RW: Well, that's great. So all this time, unbeknownst to you, you're preparing for this career.
RW: You didn't realize it.
JM: Didn't know what the career was going - actually, I - I was preparing most of the time to go back into the food industry.
RW: So after the Army, what?
JM: Well, I - I'd decided by that time that I - I really wasn't going to go back into the food industry, or at least not back in the family business. And so I got interested in a company called Textron, which was - was one of the early conglomerates. Had about - it ended up kind of the timeframe I was there, had about thirty divisions. And I was involved - got involved with the high-tech portion of it there. About six of those working for the head of that group for a couple years. And that gave me both exposure to quite a few business and business methods. But it also gave me a, you know, real interesting view on the - on how - on sophisticated technology and technology management, which the government was quite strong on. And - because that was in the '60s it was a big push for - to go to the moon and - and get the aerospace program off the ground, as well as kind of a - a technology upgrade in the - in the defense sector. So that brought really topnotch people, topnotch management, things that were - were just - it was a great place to be for a few years. And so I actually - I spent about seven years in the industry with Textron. And - and they fortunately brought me out to California. So that's - I - that's how I got to Silicon Valley.
RW: Yet another step in this - in this great plan.
JM: Right. Right. And in fact I - I tell young people that, you know, I - you have to - preparation is a great thing, but having too firm a plan may restrict your opportunities as opposed to increase them. It's a - because you - I would never have planned my career, but I - by being prepared I just was able to take advantage of - of really exciting, and - and different, and unique, and challenging opportunities.
RW: Well, how did you get into venture capital?
JM: Well, you know, I think going back to when I was young; I was always interested in business ideas. In fact in some way, I remember my grandfather, or somebody gave me a book called Ideas That Became Big Business. It had about a two-page explanation of a lot of the business, like Bird's Eye Food, which a lot of people, you know, never heard of today, which is a early frozen food technique. IBM, Xerox, many of the early day, the auto comp - how this early auto company started. And I found that to be kind of a framework for me. So I think probably even when I was a - a late teenager, and maybe it's because of the family exposure, I kind of thought I'd like to be president of some org - of a company. I didn't care particularly how big it was or what it made, but I just thought the leadership of people that I've experienced through the family business - I liked working with people, I like working with ideas, and so - I don't know, I just think that I felt I needed to get some experience looking at other small emerging businesses. And so that really drew me to the - to the venture capital business. And I was lucky. I - there was a venture capital fund starting in Cal - in - in San Francisco called WestVen Management. And it was one of the first institutional funds where the money came from institution. It was small by today's standards. We were - we were challenged to spend twenty-one million dollars over about seven years. And today they put that in one deal. But it was - it gave me a chance to get to know most of the high-tech executives and the - and the venture capitalists in Silicon Valley. And so it was - and look at a lot of businesses, and so it was a great place to be. It fortunately - that was a good period for - I mean it was a tough period. I think probably in October of '75 you could have purchased all of the high-tech stocks except Hewlett-Packard and Varian for maybe a few hundred million dollars. Maybe three or four hundred million dollars. So it gives you a sense as to just how tough things were. But over time, you know, as new ventures got started and this credibility of some of the older venture firms gave rise to being able to raise even more, then kind of the whole venture capital industry became very large scale and quite different than it is today - or than it was then.
RW: Well, what - what brought you to Applied?
JM: Well, I - you know, I'd been used to running things. You know I - when I was fifteen I managed a small group of people in the warehouse, I - in the family business for a year, and had worked there every summer. I - I'd run projects in - in a division of Textron, and in the venture business I really - I did turn around. So I really was ready to - I just wanted to get back to running - running something, and being responsible for it, and - and helping grow it. So I started looking with the support of the - of the venture fund, although they didn't end up participating in Applied. And Applied was a company that was about to go bankrupt at that - in '76. And so the board and the - and, and the founder were look - was looking for someone who could come in and - and help provide new leadership to the company.
RW: So what did you find when you came here?
JM: Well, as I told my wife on the first day, it's - it's really a lot worse than I thought it was going to be. So - but I think - given after a few months it became clear that, you know, there's really a great core group of people. We had a - a couple of products that - that had potential to be expanded. But we're in a lot of - where our balance sheet was really bad. And - I think we had - when we kind of got done we had about a hundred - hundred thousand of equity and a lot of debt. And fortunately the bank worked with us, and I was able to get out of about five out of six activities, and that freed up capital and - and management resources and talent to focus on the business I - I felt was important to take ahead. And so that was a - that - it was a tough time at that point. But we were able to get it stabilized and - and take advantage of the product - couple products that we had, and that really formed the base for the company.
RW: So while you went through a - a classic restructuring of - of getting rid of the non-core areas, but you kept most of the old team.
JM: Right. Well, I - I've always believed as a - when you're doing a turnaround, that you need the knowledge that's there. So my focus was to go through and assess the key people, and - and as - as you said, most of them were really - would add value to what I - had a vision of where we should go. And so what I did then was to kind of take them out of a separate corporate office building, put everybody back in a different building, and we sort of spread everybody out so they'd be close to the people. And - and I sort of believe you - if you can set a vision, and those that'll buy into the vision, and are competent, you keep them. And then you can kind of salt in some different particular skills that may be missing, or - or that's sort of a culture that may be missing in the company. And so I did that. I brought in a new financial officer. I - I mainly got everybody with a set of responsibilities and a - and a - an organization to be responsible to, and a customer to be responsible to, and kind of used that as a foundation to get the company through the - you know, "Let's - let's keep it - keep it alive and - and figure out where we're going" phase.
RW: That's great. But you did bring in a team from Bell Labs.
JM: Right. Right. After a - this was in '76 when I came in. And once - once we got it clear that we could generate cash out of the company instead of having it flow out of the company in losses, then we began to develop a strategy. And that - the strategy was to focus on semiconductor equipment. And, you know, I'd talked to - our customers wanted us to be successful, they were willing to work with us, we had a good - quite a few good technical people and good operational - a few good operational people. And so I set out to - with a kind of a - what we called the flying wedge strategy, and that was to - kind of the head of that wedge was the customers, and - and then what we tried to do was to provide our basic products which were Epi at time, and some chemical labor deposition equipment to make semiconductors, and then look for new technologies. And the also emphasize service. So we really focused on that. So to fill in the technical, I really needed some other products. And so one of the products that we had targeted to get was an etcher, which was - takes the material off of the - away from the chip select - off of the surface of the chip selectively to create the patterns. And - and we looked at different ways of doing it. And at that time there was something like fifty people trying to make single wafer etchers. And we kind of concluded from the marketing with our customers that we really needed to get the right results on the wafer. And so as we looked for our own solution as we were spending research, we ran across an idea - actually, a friend of mine had -
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- Dan and his team that they ought to talk to me - a venture capital friend of mine on the East Coast. And so they called me, and we talked with them over a period of about six months. And then they agreed to join the company, and they developed this, what we called 8100, which was a batch etcher, which was a different technology then than people were using - or were forecasting that they wanted to use. And so this was - kind of went - we - we often times have always taken fairly - kind of bet the company risk in directions that we felt might offer us a real unique advantage, or differentiation. And this was one of them. And I had a lot of confidence in - in Dan and - from my interaction with him, and we - we kind of developed a long-term partnership in - in our business to - over time. And what we saw was - it - it was an opportunity to really change how the industry did etching. And so now there's only three etcher companies of any - no - no - or these days. But we were of course one of the majors there.
RW: Well, it - it - it was apparent that - that we were falling behind the Japanese. And their yields were substantially higher -
RW: - with really the same equipment.
RW: So what was - what was the - what were we doing wrong here in the States, I mean...
JM: Well, I - I think - my impression was I - I had told several of the - the semiconductor leaders in the late '70s that, really, Japan was going to become a factor. They pretty much discounted that because they felt that they could - the technology would - they could out-technology the Japanese. But I think what the Japanese did in a lot of industries in the '80s was to - to develop the ability to be predictable in the quality and the reliability of their products. And that methodologies that they developed in manufacturing, and even in engineering design, really put them in a very strong position to compete against companies that didn't put much emphasis on that. So - and it kind of takes me back to one of the things that - that I found when I - I was actually in the venture business. As I watched the Silicon Valley companies, very few of those companies thought about doing what we use as a comment in the U - inside Applied, is the whole job. They would just - they were great technology focus, they kind of create a - a great idea, and it'd become a great kind of a good prototype. But trying to get the whole job done, including getting paid, and managing your balance sheet, and doing the customer marketing, lots of that really didn't get - all that didn't get done. And so so many of the companies became what I called kind of the living dead. They had a good idea, they got started, they got a little momentum, and then they - they faded for one reason or another. And a lot of it because they just couldn't get multiple products, they couldn't manage the - what I - we called the whole - whole job. So I started early on working on that concept within Applied. And - and I think that caused us to come together, and it also caused us to be sensitive to what was happening in Japan. And being in Japan, I made my first visit to Japan in - when was it - 1997. And I went over on Japan Airlines. I'd never been outside North America. So it was an interesting experience because when I got on, the service going to Japan, evening coach was, which I flew those days, was excellent, and - and focused on the customer. And then when you got into Japan you found that same sort of mindset between the Japanese, and there's much better sense of partnering to help each other be successful. There was a lot of confrontational relationships between suppliers and customers in the United States in those days. And so we saw that as an opportunity - made a decision early on, actually, on that first trip that we were going direct in Japan. No other company had - almost every other company in the world had to go through a trading company. And we were advised to do that by essentially everyone. And so what I - what I tried to do was to figure out - I felt we just had to get closer to the customer if we were going to be successful long-term. And so we were very fortunate. We found a fan - fran - one of the fellows at work at our trading company was going to leave, and so we asked him if he'd be willing - if he was going to leave why not come with us and help set up Japan for - for Applied? And he did that. In fact, he just retired the - the other night. And he's just done a great job. And so that also kind of built my interest in Japan. In fact, my wife, some of the - I've enjoyed - my wife and I both have enjoyed some - Japan so much that we've kind of got our house a little bit Japanese-esc as you might say because we - we just like their - the quality, and the subtlety, and the - and the way they - they do a lot of things. So go - going back to when the effect on - on the industry, is I think we just didn't - didn't recognize how much an impact quality products and - and - and - at reasonable prices and - and so forth were going to have in the U.S. And it really did in it - during the '80s, as you know, have a very significant impact. And we just were fortunate as we got the benefit of learning from that, and of course made Applied really a much stronger company.
RW: But why didn't the Japanese develop a really strong competition in the equipment business?
JM: Well, actually our - our second largest competitor is - is a Japanese company. But it's a smaller market. And it's - it's been a cyclical growth market. And a lot of people didn't focus on it as a real business. And I think probably because I grew up in - in the agricultural and the canning world I was comfortable with a cyclical business. I kind of felt that you had to focus your business because a lot - a lot - one of the reason I was a - came to the company is that the investment bankers and a lot of the outside advice the previous - the founder and CEO had had is you ought to diverse a way - diversify away from the cyclicality of the business and to get into other business. The problem was it took essentially all your technical capability, all your managerial skills, and all your sales skills, and all your balance sheet to do a good job dealing with the cyclicality. So what I did essentially was to get rid of everything else and use a cyclicality as an opportunity. So we got our balance sheet in shape, and so we would invest maybe twenty - maybe - I think the highest was twenty-two percent of sales during tough times to get new products in place so when the upturn came we gained share and had new products. And so we used that to our advantage as opposed to looking at - at the cyclical part of the business as a - as a disadvantage. But what that effect on other people is a lot of the bigger players decided they couldn't stay in it, the customers who were building equipment as we gained capability were willing to buy from us instead of using their internal sources. And I think the market, though even at the time you don't ship a large number of machines, so it's hard to have too many sup - too many suppliers get to be successful in it.
RW: Well, we certainly thought that the Japanese were going to take over.
RW: And - and then they - and now it appears that Taiwan, and - and now Mainland China -
RW: - are on that track.
JM: Yep. Well, I think that, you know, this technology, the whole idea of semiconductors, and - and the application of semiconductors, and therefore the - the equipment that makes this technology possible, the equipment like we make, because you know, if you think about it, Applied materials equipment is used to make virtually every chip in the world. And in that came about because if you go way back, one of our earlier sort of themes was is that, you know, we make the equipment systems that make the chips that change the world. And that's - that's really kind of what's happened. So most countries now want the capability to build semiconductors because it supports their applications. And - and - and I think you just see that developing now in - in other parts of Asia, probably eventually India. And - but you have to continue to invest in the technology. And so the Japanese kind of let down their investment aggressiveness in the late '90s and so kind of missed a kind - a round of - of technology and got behind. And then - now they're making a recovery and making - making quite a bit of progress.
RW: Well, you - you mentioned the countries want to have semiconductor capability.
RW: So they're willing to do tax breaks -
RW: - all - all sorts of things. And it - and it puts the U.S. companies at a real disadvantage.
JM: Right. I mean - you need - you need advantage - advantageous fi - terms and - and financing because of the investments that are required to - to build factories. And - and, you know - and they're play - as a newer entrance come in they'll tend to provide that. Some states have helped here in the U.S., but there's a tendency to provide that. So then that's kind of led the shift to the fabless businesses and so forth, where a lot of the chip companies actually do design and so forth in the U.S., but they may get it - built in a foundry someplace.
RW: So in another five years, how many American companies are - how many American-based companies are going to have fabs here?
JM: Oh, I think quite - quite a few. There's - they'll be a lot of the legacy fabs, then - and there'll be a few new ones built in the U.S. because it's still a good place. It's not a labor competitive kind of a thing so much. It's - it's more of a - of a technology and - and a - and a depreciation in tax environment. And so I think that, you know, people always said that the chip industry - actually in '81, which was a tough time for the industry, a tough time for Applied, we - there was a big discussion about how they're only going to be five companies in - of semiconductor companies in the world, you know. And - and they - in those days they were going to be, I would guess it was Intel - may not have even been Intel. At that point it was TI, IBM, Motorola, and probably - probably Intel and so - and - and -
RW: And Slumberger.
JM: And Slumberger. Right. That was the other. That was the one I was thinking of. So - so that - of course that's changed, and there's a lot more chip companies have developed around the world, and - and so I think we're still in the early stages of the development of the industry.
RW: But - but it's crazy. A - a factory that costs two or three billion dollars, and has a - an effective lifetime of less than ten years.
JM: Right. Right.
RW: That's unheard of.
JM: Well, that - but if you go back, the cost per function still keeps coming down. And as long as we - as long as - as long as we're able to put using a - a chip technology and design - and the chip design technology, as long as we can continue to increase the functions per square centimeter on the chip, you know, you'll continue - it's still cost effective to even build these big fabs. So it's a - it's an amazing industry. It's a - it's been an - exciting to see.
RW: Yeah. It's - it's nuts. Well, now you've been an - an advisor to several - I guess to three United States presidents.
JM: Yeah. That's - that's right.
RW: Do they appreciate - I mean what has been their take on this?
JM: Well, I - I think most of the - I - the first one was during the - actually the end of Reagan's - and the end of Reagan's-beginning of Bush's time, they set up the National - a National Council to look at the semiconductor competitiveness. So - so that was the first one, and that resulted in kind of a resurgence in the semiconductor industry. And some of the things that took place was a reemphasis on technology, both in - in the companies and also in universities. There was a greater effort to collaborate between the semiconductor chip manufacturers, and the equipment and material suppliers. And those were things that were happening. And in Japan, for example, the - we're doing a better job and that. So a - a lot of the - those things then came about. And then there's a pretty strong resurgence of the chip industry here in the - in the U.S. But that was when we - you know, we was faced up as a country and as an industry to - to dealing with it. And then in the case of - the issue was Asia. My, you know, sort of specialist expertise beyond the company until recently, has sort of developed from Asia. Not because I grew up in Asia or speak a lot of Asian language, but I just put a lot of miles in Asia over the last - since 1977, my first trip to Japan, and - and by going there you build up a knowledge base. And so President Clinton asked me to serve on the Advisory Council for Trade and Investment, which I know. So that brought that about. And then most recently with President Bush I've been the Vice-Chairman of the President's Export Council. So - then we just actually made a trip to China just recently as part of that.
RW: Well, that's pretty exciting. But thinking about Applied, it's - it's very similar to an outfit I used to work for - Intel.
RW: You've got the distributed geographically - you got - you got the cyclical business and investing when the other people aren't. So did you all pattern this after Intel?
JM: No. I think we pioneered most of a lot of this stuff. And in our own way. Because theirs is a different sort of mindset. I mean I've always had that mindset. I don't know, it's just - it's kind of - now I think I grew - I think that came about from my perspectives back on the farm, you know. You - you kind of got to go ahead no matter what the pricing is and the - because you got another year coming up. But what we tried to do - I mean we tried to focus on a few specific things. One was to get the technology - to lead in the technology in - in as many areas, and bring as many products out as we could, as long as it was - was in the wafer size. I mean as long as it was a - processing wafers. So as long as a - a - the semiconductor customers, the Intels, the - the TIs, the - the Sonys, the Samsons, as long - Siemens, and Pentium, as long as those - as long as they - once they got the wafer inside, we tried to provide as many steps as we could. So that was sort of a product strategy. And then we felt to differentiate we really - one of the things that - was to have a service and support and capability. And - and so I - I - actually I had a chance to work with a service guy when I was in the factory, and we - we never - in the family business we never failed to start the factory during seasonal business. It starts - runs from seven 'til eleven every - every day. And you got to start at seven. We - I never failed to start. But sometimes we'd be up at two o'clock in the morning with a service guy getting ready. And so I supported our service people early on, and it became an important part of Applied, and it's actually twenty percent of our business now. And it's - in a few years they could be four-five billion dollar business. But it's to help the customers and do more and more of the work for them. And they - they like that. So that was a differentiating capability for - for Ap - Applied. And that also helps you in the downturn. So that helps counter the cyclicality. So we kind of came to a conclusion among us that we'd focus on the service through the customers, we'd keep our R&D going in - in the downturns, and we'd build the operational capacity to be flexible so that we could go up or down depending on kind of how the environment was. And that kind of let us bond with our customers. And - and we've - we've - we've built that sort of into the culture of the company. Very global - I guess it kind of - the - what's been fun for me is to - is just to see the people development. I mean the company is - has become a really global company in the sense that management was global, the board was global, the - the - a lot of the people started in company as college graduates, and now they just have a huge network. So they get a lot done before - without us, without the management ever being involved in it. Almost everyone's worked on multiple teams solving collective global issues together, what - whatever it's in finance or spares or technology or - or a customer requirements. And - and so you have sort of a strong technology base, you have a - in broad, probably there's more - well, the thing's been fun for me is it's - there's more kind of diversified technologies in Applied than almost any company I've ever been exposed to, because you - you have not only the - the chip side of what's required, but you have a lot of computer requirements and process diagnostics and mechanical, and chemistry, and physics, and - and so it's a - brings together a really a - a technically eclectic group, and they're global. So a lot of - a lot of - a lot of - and - and so we really have used that to kind of develop the company and make it - make it a - a spirit that's within the company.
RW: But there's a lot of people here in the U.S. that fear glo - globalization -
RW: - outsourcing -
RW: this all - you know, they can see their jobs going away. And yet Applied is a - has embraced it -
RW: - and used it.
JM: Well, we - we export about seventy percent of our business outside of - of the U.S. So - so we're an export. And we've been able to do that by being able to do a strong job in each of these countries. We also - we also buy parts and things like that from different places in the world. But we - we think that, you know, you - once you learn that you have to compete with the global environment you do things that make you competitive. And I think it really enhanced the U.S. in the mid '80s because when we started to realize that we had to compete on quality and service, it kind of changed the - the level in the U.S. And so we went from really moving aggressively towards Japanese suppliers to - to having more and more U.S. suppliers because we got them to go face the fact that they had to make a change, they did and they were very competitive. So I think it's a - it's a case of really trying to figure out how you're going to be competi - compete because you're going to compete on a global basis ei - either because you do it or somebody else is going to get the business because they do it.
RW: Yeah. You have to.
JM: You have to.
RW: Yeah. No choice. Well, do you have any final words or - thoughts about the industry or -
JM: Well, I think that some of the things that have - have helped the industry and helped - helped us is we've always kind of believed in perseverance, or it's kind of been a culture of mine. And that's really critical to being in this kind of a business because it's a tough - these are tough businesses. Exciting businesses but tough businesses. And so, you know, being able to - to - and I think they're really people focused. I mean they just - getting and keeping a developing the best people is - is really a sort of one of the most critical things to building these high-tech companies and - and particularly in the semiconductor - semiconductor equipment field.
RW: Well, thank you, Jim.
JM: Yep. Good.