Already hurt by falling margins and losses, suppliers of lithography tools, IC testers, and other fab gear are slashing their product prices at an alarming rate in order to sustain their businesses.

For example, the average selling price (ASP) for a 193-nm scanner has dropped by as much as 37.5%, from about $16 million per unit in recent times, to around $10-to-$12 million right now, said analyst Risto Puhakka of VLSI Research Inc. in San Jose.

"Equipment vendors are discounting like crazy," Puhakka said. "The industry is discounting by as much as 40% on the average," he told SBN at ISS.

For example, in 2000, the cost to equip a typical 200-mm fab with 5,000 wafer starts per week was about $600 million in terms of the tools only, according to VLSI Research. In 2002, the cost to equip the same fab fell by 41.6% to $350 million, according to the firm.

Without a doubt, fab-tool makers have been on a nightmarish roller coaster ride. After record growth and profits in 2000, vendors hit the wall and began to slash prices in the first year of the downturn in 2001. "It started in the second half of 2001," Puhakka said. "That's when it really hit hard."

The fab-tool market looked promising in the first half of 2002, but the bottom dropped out in the second part of last year. Reports surfaced last month that vendors were heavily discounting their gear, especially automatic test equipment (ATE).

Vendors are offering a new round of discounts heading into 2003, although some believe that ASPs may have hit the bottom. "Discounting is still going on, but we think we're near the bottom," Puhakka said.

Not surprisingly, fab-tool executives at ISS were reluctant to discuss widespread reports of discounting in the marketplace. Traditionally, tool vendors do not like to discuss their product pricing details, nor do they care to address their respective discounting policies.

Some downplayed the troublesome discounting trend. It is common to offer some discounts to customers, said Nick Konidaris, president and CEO of Advantest America Inc., the U.S. arm of Japanese ATE giant Advantest Corp. "What do customers really want in terms of fab tools? Lower cost, lower cost, lower cost," Konidaris told SBN.

This is especially true in ATE, where chip makers are scrambling to lower the cost of IC test, he said. To help customers in this regard, the duo of Intel Corp. and Advantest in July formed a consortium to devise an open ATE standard. The so-called Semiconductor Test Consortium (STC) also consists of Motorola, Philips, National Instruments and others.

Teradyne Inc. and NPTest Inc. have also separately formed their own and competitive initiatives to develop ATE standards (see July 17, 2002 story ).

In a brief interview with SBN, Barry Rapozo, president of Tokyo Electron America Inc. (TEL), the U.S. arm of Japan's TEL, declined to comment on discounting in the fab-tool industry.

Analysts pointed out the TEL could still command a premium in some product areas, especially wafer track. The Japanese company reportedly has a monopoly in the area. It has 50%-to-60% market share in track, and virtually all of the 300-mm business, according to analysts.

Rapozo said TEL has more than 50%-to-60% market share in track, and all but one customer worldwide is using the company's 300-mm systems in production.