Thank you very much for joining Advantest Corporation's IR fireside chat despite your busy schedule. We are excited to present this session and would like to introduce our panelists. From the left side of the slide, Douglas Lefever, Group CEO, Richard Junger, Chief Supply Chain Officer. I am Oike, Division Manager of Sustainability and Investor Relations Division. I will serve as the moderator for today's Fireside Chat session. The theme of discussion is strategic supply chain transformation enables future growth and delivers a competitive advantage. Following the fireside chat, we will open the floor for questions from the audience. We plan to close this session at 5:40 P.M. Japan time. Today's session will be delivered in English only. A script of the session is available on our website in English and Japanese on the Management Policy Business Briefing page.
For those who prefer to follow the session in Japanese, please download the Japanese script from the page and follow along during the session. The Q&A session will be conducted with consecutive interpretation in both Japanese and English. Before we begin, we would like to remind you that today's event contains forward-looking statements, all of which are subject to risk and uncertainties that may cause actual results to differ from those forward-looking statements.
Good afternoon, everyone. Thank you for joining us today, our Fireside Chat. Last year, we invited CTO and CEO, but this year, we invite Chief Supply Chain Officer, Richard here, and discussion with Doug, CEO. First, I'd like to ask both of you to have a self-introduction by yourself.
I think everybody knows me.
Yes.
I do not need to really do much introduction, but of course, I am the Group CEO and responsible for all activities in the company. Lately, been doing a lot more with my colleague Richard in the supply chain front because it is a big opportunity for the company. Richard?
Yeah, thank you. My name is Richard Junger. I am the Company Supply Chain Officer. I am within the semicon industry since 2006 in very, very different capacities in the supply chain context.
It is really a very special occasion now to talk about supply chain.
Mm-hmm. Thank you very much. First question, how has the rise of AI changed the environment surrounding Advantest's supply chain? Doug?
Yeah, I'll go first on this one, Junko-san. I think probably the biggest thing that changed with AI was kind of the mass production of advanced packaging in high volume. What that did was it added a level of complexity in tests that hadn't been there before.
Which meant that there was an increase in test times and test content now that the test industry had never experienced before. There's always unit volume was a driver and then some kind of transistor, Moore's Law-based test content increases. Now that went to another level that we had never experienced. In some cases, we were seeing multiples from generation to generation of test time. That created this exponential ramp in test and provided the subsequent challenges for us to meet that need. No one really even predicted the level of test content increase. Everybody, including our customers, were largely caught off guard. Luckily, we were able to stay ahead of it.
Richard can talk more about that. The other thing that I think could have been anticipated but has become more and more real is our testers look like data center racks.
We find ourselves sometimes competing with the very customers that we're serving for our testers. Everything from PC boards and the standard components and cables and connectors and all these things that go into a data center rack, those are the same things and same supply chains that we need for our testers. That's a level of complexity, I think, that is maybe not fully understood. We do work with our customers to make sure because they know that they need testers to test the parts that go into the racks ultimately. It's a constant level of communication we have around that. Those two things, I think, are big factors in what has changed recently.
Yeah.
Yeah, I definitely would like to echo what Doug said about the supply base, which has changed significantly. It's not like the glitches we've seen in the past, like in 2021, where there were shortages. Right now, there's really a major upheaval in the industry as a lot of those key suppliers of key commodities are trending towards supporting AI, which leaves another set of changes and that we're confronted with within our supply chain. As Doug said, it's really working with our customers and our partners in the supply chain to address those ahead of time and cope with them as they arise.
Mm-hmm. As business environment has changed, how has Advantest's approach to supply chain management evolved?
Actually, we made a couple of fundamental changes since 2021, where we basically were facing all those challenges that were around the supply shortages.
Yeah.
Which made us think differently on how to cope with the dynamics in the industry. We moved away from, let's say, classical forecasting, types of a waterfall model, to anticipating.
Which let us make some major bold decisions in getting ready and putting capacity in place ahead of time. We call it anticipating. It's really not just looking at a customer demand, it's looking at a broad picture of the ecosystem and how it evolves, and taking a look into the future and anticipate what might happen.
What may happen, actually, and how do we get ourselves in position to cope with it and support the industry. Another major move for us, we recognize there's a lot of uncertainty in the market, because we do know sometimes our customers are even challenged by anticipating what they need. So we decided as a company to get ourselves ready to put inventory as a key strategic tool, which means that we move from a just-in-time environment, which always limits you-
to a certain kind of bandwidth, to a just-in-case environment, which led us to make some substantial changes in thinking how we utilize our capital to support our customers. Another thing is, and this is a result of anticipating the industries about top-down decision-making. We're doing bottom-up collection of data from our customers, from the industry, but we know it only shows us a small window of what might happen, or gives us a small point of view here. And we said, "Okay, we also need to take this ecosystem approach and do kind of a top-down review and guide the company-
to make some bold decisions now in supporting our customers by expanding capacity ahead of time.
Mm-hmm. Any comment, Doug?
I would reinforce that last point about top-down. We, the last couple years, have done a lot more
top-down. That is simply because the bottoms-up approach, there is hesitancy sometimes from customers to give us the right forecast. We have a bunch of very experienced management in the team, I give Richard Junger a lot of credit for making decisions based on our conviction for the industry. The other thing is we have excellent customer relationships.
Sometimes it is an executive-to-executive discussion, those discussions do not match with what is happening bottoms-up.
But it's an easy decision to make that the executive level information is what we go by.
I will say, in the last year, it has been improving from a bottoms-up in that we're starting to get more longer-term forecast.
I've mentioned before, in some cases, we're getting 18-month forecasts. We have some companies even willing to give us multi-year forecasts, and that does help tremendously. And the reason they're doing that is because of the top-down approach they're also doing in their company.
Yeah.
So, that is just part of the business right now. I don't think it's ever really going to change. And for us, it has been the reason we've had the right capacity in place when these ramps came, because we made some very good top-down decisions.
Not only our side, but also customer side change.
Mm-hmm. I think that's a major change that we're seeing, because it's really managing demand and supply has become a much more strategic effort across companies, rather than a technical effort to, "Oh, I need a tester. I buy a tester. Now it's ready. I need capacity in the long run to get ready to support my customer.
Which has become really a strategic discussion at the executive level.
Yeah.
For sure, it continues to be complemented with forecasting on a more technical level, but I do believe that's one of the biggest changes we've been seeing, and we call it top-down. Actually, we might just say it has really become a strategic alignment and exercise across the companies.
Thank you for sharing this. We saw uncertainty in the market right now. What indicators does Advantest look at when making capacity decisions? You already touched on several points, but any additional comment, Doug?
Maybe I'll start, Junko. I mean, the whole world is asking this question, right?
Yeah.
In every boardroom, this is what's being discussed is, how long is this going to continue on? We, of course, watch all the different signals. We look at the large language model, profit per token. We look at data center CapEx and energy sources. We look at the foundry and memory wafer starts. We look at clean room space being built. We look at the equipment and materials industry that we're in at that layer. Then we look at the raw materials even.
We're looking at this entire supply chain stack and looking for kind of discontinuities to make sure that those things are adequately growing. But in the end, we rely on basically the customers that we deal with face-to-face. I think more often than not, people overcompensate for cycles, and we really take a long-term perspective on the growth. There's going to be some cycles downward, which we know how to deal with.
The bigger risk is not having the capacity.
AI and data center market is going to transition to edge and physical AI. I think that everybody understands that. The timing for that, people don't know, but it's going to come, and that's going to be another big tailwind to the industry. You have to be ready for that. I think a lot gets made of the bubble, supposed bubble. But in the end, we're just kind of marching along on a very long-term mission for the company, somewhat independent of what's going to happen in short-term cycles.
Yeah. Basically, just to add to it's really about this, what we determine and call scenario planning. So we're looking at all those parameters, and we define different scenarios by ourselves that allow us to adjust over time and validate them as we move forward in time to also align our strategy with what's happening in the ecosystem.
Because I think that's another dimension that we learned to look at, it goes beyond the detailed supply chain. It really, we need to look at what's happening in the global economy as well as in the geopolitical environment,
and understand those influences on potential supply chain shifts and changes and factor them into our scenario planning.
Thank you. Looking ahead, what makes you confident that Advantest can deliver the next phase of capacity expansion?
I could give the very short answer, we have done it before.
We have a track record that we created over the last five to six years,
in significantly ramping our supply chain.
Yeah
Based on the processes we just described earlier in this conversation here, preparing ourselves by making sure we have the capacity available when it is needed, also being able to quickly respond to more than increased capacity for some of our products tenfold, by 20 times for some of our modules. It is going to be another huge effort also to take it to the next level going forward. We do have already the thought process and planning going for the next step. It is basically, we have the confidence because we have done it before. We had a very strong track record, basically, we are already thinking ahead of time, so we are not stopping at this moment right now.
Richard, maybe talk a little about what we learned, lessons we learned in 2021, really, in that time.
Oh, I love to talk about that.
Yeah.
That was actually a very, I would call it was a challenging but a very good time for us because we learned a lot of lessons. It was about supply chain visibility, one thing. We needed to have visibility from end to end down into our supply chain, sometimes down to the wafer level, giving us enough time to respond to changes quickly. Buffer strategy was another thing that we mentioned, accepting the fact that this industry is so dynamic that we need to use different tools-
to get ready. Partnerships with our suppliers, another key element. We engaged much deeper with our core and key suppliers at a strategic but also at a technical level. We, at a strategic level, we really intensified the exchange between our executives while we complemented it with a tool set on using DX tools, digital transformation tools, to connect our companies so we have a more timely flow of information between the companies, also adjusting our supply chain models.
There were a lot of different learnings we had from that time that we implemented as part of our strategy.
That was one element. The other element really goes back to us as a company making the choice that we're going to put capacity in place ahead of time and looking at scenario planning. Advanced planning was another building block that we introduced as part of those learnings. And we continuously evolve from those because industry doesn't stop
nor do we. We want to make sure that we evolve our capabilities, be it in logistics, be it in data management, be it in engaging with our suppliers as we go.
Yeah. When I look back on those, I think, I mean, I have different memories sometimes because of the escalations and the calls that were happening every day. But I think we did a few very important things, and you touched on a lot. We put in long-term agreements with
Yeah
suppliers, these LTAs that now are very common, but we were putting them together for components that we didn't even think that we would need to have
Yes
those kind of agreements. And we went to multi-sourcing in a lot of cases, beyond just two-
Exactly
sometimes a half dozen in some cases. We built a new procurement team. DX tools-
What's DX?
digital tools.
Yeah.
The other thing we did was really, we had escalation and kind of executive level relationships. Typically, for me, I would be always talking to our customers, these top executives. Now, because of what happened in 2021, I have to have all the relationships with the CEOs of the suppliers. Having built those relationships really has come in handy now as we face these challenges that we are now with the expansion. I think those are just a handful of things that we learned in 2021 that have been really beneficial now that we're in a kind of another shortage timeframe right now.
Yeah. We need to be ready to capture growth opportunities, but on the other hand, there's always the risk, demand falling short.
How do you balance the two?
Actually, it's about how we use our supply chain and set it up. Let's talk about supply side.
That's where we use strategic inventory. We as a company have defined a strategy for ourselves to have a just-in-case operating model, which means that we put aside quite some flexibility on the inventory management. It allows us basically to build up actually in a positive sense, inventory when business slows, so we're ready to capture the next wave.
Next wave.
This is actually enabled by the fact that we do have a long-term platform strategy, which gives us the confidence that we can basically well prepare this inventory for the next ramp as the platform provides us with continuity in terms of use of supply and material. This is now being complemented by using our contract manufacturers, because they do have the economies of scale to support us through the business cycles. We've been seeing this also in the past quite often and have been really benefiting this model quite a bit, because it kept our fixed cost structure low and enabled us basically to follow the cycle in terms of our variable cost environment and structure. These two tools really help us to navigate through the cycle.
Yeah. I would say too, there's a willingness for the management team, our board of directors understands this, that strategic inventory is gold. I mean, it's not something to take and look at risk of obsolescence. It's just the opposite. We want to have this because we have, again, such conviction about the long term. As Richard said, platform strategies where we have platforms that will last 10, 15 years. This inventory is liquid for us. I mean, it really can get used, and if there's a downturn, when stuff comes back, it'll be still useful. That's not like your conventional way to run businesses, be it ROIC kind, days inventory outstanding, and looking at the risk of, and these things. We really take a different approach right now.
We're more concerned with our ability to meet the demand much, much more than we're worried about if in fact we have to do any kind of write-downs, because the risk-reward is just a no-brainer.
Absolutely.
It really connects with our platform strategy.
Yes.
Yeah.
Yes. It's definitely enabled by platform strategy.
Thank you. How does this supply chain transformation translate into real value for customers and business partners?
I think it actually provides huge value to the ecosystem, because we're so closely connected with our partners, and partners really meaning customers as well as suppliers.
Which both, basically our customers benefit from our ability to provide them with systems when they need them, so we're ready. Also, our supply base benefits from participating in this industry and supporting it and enjoying really the joint success that we can generate in this ecosystem together. Really, what the foundation is this partnership at executive level, strategic partnerships to maintain long-term relationships and a high level of trust amongst those companies that together we really can move this industry forward.
Yeah. I would say too that we've worked very hard to earn a high level of market share, both in SOC and in memory. Really, customers actually prefer, in most cases, to have a single supplier because it's very efficient for them for engineering resources, managing the fleet of assets out there, so long as they can get their testers, so long as they can get high capacity. So, we don't ever want to give an excuse of why they should look elsewhere. The real value to those customers, it's real efficiency dollars that they get by having a single vendor that they can rely on. We've earned that trust, and that's why you've seen kind of market share continue to go up for the company.
So, there have been some questions recently around the sustainability of AI investment and what that could mean for demand going forward. With that in mind, as we wrap up today, what is the key message you'd like investors to take away from our discussions?
You want to go first, Richard? I can go last.
Sure.
No, why don't you start?
Basically, my thought on this is we've been through so many cycles in the industry, and what we can tell, technology prevails. We had the dot-com. Everybody's on internet today. We had the mobile phone cycles. Everybody uses them. It's there. It consists of cloud. We've been there. We as a company have also proven that over the many years, we've been able to cope with these cycles and prepare ourselves to do the same in the future. It's factored in all our strategies that we just discussed today to make sure that we can also sustain really through the next wave of cycles.
You hit most of the main points. I think we have, again, experienced a management team who's been through five or six big cycles in our careers. We really know how to handle down cycles. That's kind of the scar tissue is still there for us. We know how to leverage our variable cost models. We know how to scale back. That's the easier part. It's the scaling up that we really focus on, because again, that's the only thing that can really stop the march that we're on as a company. We have a huge willingness to be very aggressive, and I think that's something everybody should recognize about our company. We're unlike a lot of other companies in that we have this kind of long-term conviction. I always told my kids, "No risk it, no biscuit.
There's part of that that is ingrained in the company. We're really excited about the future. We think this upward trend is going to continue well into the future, and we're going to be ready.
Thank you very much. I think today's fireside chat, many fruitful and insightful points you share to the investors.