Tokyo Electron
Corporate History & Strategy

In 1963, Tokuo Kubo and Toshio Odaka, who would become the founders of Tokyo Electron Laboratories, were working at the general trading company Nissho (now Sojitz), handling the import and export of American electronic equipment. Kubo had been stationed in New York as a Nissho representative selling American-made semiconductor manufacturing equipment to Japanese companies, but was frustrated by the inability to provide adequate technical services from the trading company's position. At the time, the mainstream approach in electronic equipment trade was simply brokering products from one party to another, with equipment installation and maintenance left to the customers' own efforts.

Additionally, Kubo had firsthand experience of the vulnerability of OEM exports such as car radios and car stereos. As Odaka later recounted, OEM products were sold under Western companies' brands, creating a structure where 'you couldn't see the end consumer trends,' and when orders were suddenly cut off from the U.S., inventory piled up. Around 1960, 'The Wholesaler Is Unnecessary' became a bestseller, and it was an era when the raison d'être of trading companies was being questioned. Kubo judged that there was a business opportunity in a new type of business that incorporated technical services rather than being merely an intermediary.

During his New York posting, Kubo had closely observed trends in the American electronics industry and was convinced that semiconductors would become the growth industry of the future. The dramatic pay cut he experienced upon returning to Japan—losing his overseas posting allowance—also triggered his decision to start a business. Around 1959, Kubo had become acquainted with Minoru Yoshida, head of TBS's television engineering department, through a midsize computer sales negotiation, and this connection led to an introduction to TBS Vice President Junzo Imamichi. Prepared to 'become a taxi driver' if things failed, Kubo made the decision to leave Nissho.

In November 1963, Tokyo Electron Laboratories was established by Tokuo Kubo, Toshio Odaka, and just a handful of others. The capital of 5 million yen was entirely provided by Tokyo Broadcasting System (TBS). TBS Vice President Junzo Imamichi valued the founders' 'youthful ambition' and supported the startup with a policy of 'providing money but not interfering.' The office was a roughly 33-square-meter room borrowed within TBS's Akasaka headquarters—an unusual founding where an electronic equipment trading company was born inside a broadcasting station's building.

The business model designed by Kubo and Odaka was a category distinct from both trading companies and manufacturers: selling imported electronic equipment and semiconductor manufacturing equipment with organized technical services added. Director Masatoshi Ohama later wrote that it was 'the first company since the introduction of modern industrial technology from the United States to sell imported machinery with an organized service system attached.' The company recruited science and engineering university graduates and, in their first or second year, sent them to American equipment manufacturers for training stints of six months to a year, drilling them in the substance of the technology and support methods.

The first year's business had two pillars: OEM export of 2,000 car radios manufactured by Japanese makers to New York, and import sales of American electronic equipment in Japan. The fundamental management principle of 'conducting profit-oriented operations' was established from the founding period. Odaka preached to employees that 'the most important thing for a business person is the expansion of profits—always start your thinking from there,' and the philosophy of earning profits as compensation for providing high value to customers was established as the organizational foundation.

In the fiscal year ending September 1964, Tokyo Electron recorded revenue of 90.91 million yen against a profit of 260,000 yen—achieving profitability, albeit barely, from its very first year. Following car radio exports, the company took on U.S. exports of Victor Company of Japan's large educational VTR systems, broadening its revenue base. Then, just one year after founding in 1964, the company began importing and selling semiconductor manufacturing equipment, which was still in its infancy. In 1965, it became the sole distributor for U.S.-based Fairchild, beginning to supply products including the IC tester '4000M' to Japanese semiconductor manufacturers.

Fairchild's equipment was indispensable for launching Japan's IC mass production lines, and it was said that '80% of the equipment in Japan's first IC lines was delivered by Tokyo Electron.' Tokyo Electron not only sold equipment but established a system where its own engineers, trained in the U.S., provided end-to-end support from installation to maintenance. This depth of technical service was the differentiating factor from general trading companies and the source of competitive strength that enabled the company to maintain its distributorship agreements even when general trading companies subsequently entered the electronics market one after another.

From the late 1960s, the company established a series of joint ventures with U.S. manufacturers, progressing to the stage of manufacturing equipment domestically in Japan. The business transformation from the stage of importing as a trading company and adding technical support, to the stage of involvement in manufacturing through joint ventures, and then to in-house development and manufacturing—this progression took over 20 years from founding. By the fiscal year ending September 1983, 20 years after establishment, the company recorded revenue of 82.8 billion yen and ordinary income of 9.9 billion yen, and in 1989, it became the world's top-selling semiconductor manufacturing equipment maker. The trading company that started in TBS's 33-square-meter room transformed into a pure manufacturer, passing through what Kubo had envisioned as 'a trading company with manufacturing capabilities.'

Tokyo Electron Laboratories was established in November 1963 with car radio exports and electronic equipment imports as its business. However, founders Tokuo Kubo and Toshio Odaka recognized that OEM exports were structurally unstable. Odaka later stated, 'Major manufacturers are entering the export of consumer electronics such as car stereos, and there is virtually no difference in technology or products. Small and medium enterprises simply cannot compete.' With major companies like Matsushita Communication Industrial launching full-scale car stereo production, the room for a small company like Tokyo Electron to continue surviving on OEM exports was narrowing.

Meanwhile, Kubo had closely observed the rise of the American semiconductor industry during his New York posting. In the U.S., Fairchild Semiconductor had begun mass production of ICs (integrated circuits), and semiconductor manufacturers were increasingly developing and producing their own manufacturing equipment in-house. Odaka urged within the company that 'the IC era is finally beginning. In America, the IC era has already started. Within two to three years at the latest, Japan will follow suit,' arguing that the company should shift its focus from car radio and VTR exports to semiconductor manufacturing equipment.

In the mid-1960s in Japan, major electronics manufacturers such as NEC, Hitachi, and Toshiba were just beginning to prototype and mass-produce ICs. IC mass production required specialized manufacturing equipment such as testers, lithography systems, and diffusion furnaces, but there were virtually no domestic manufacturers capable of supplying these. Import demand for American equipment was virtually certain, but merely purchasing and reselling products would make it difficult to differentiate from general trading companies.

In 1965, Tokyo Electron became the sole Japanese distributor for U.S.-based Fairchild Semiconductor. Fairchild was both a semiconductor manufacturer and a developer/producer of manufacturing equipment, and its IC tester '4000M' was called a legendary instrument in the industry. Tokyo Electron gained an exclusive position to supply Fairchild's full lineup of manufacturing equipment to Japanese semiconductor manufacturers. Behind the company's victory over general trading companies in the competition for the distributorship were the connections Kubo had built with Fairchild during his New York days.

What decisively distinguished Tokyo Electron from general trading companies was the addition of organized technical services to equipment sales. The company recruited science and engineering graduates and, in their first or second year, dispatched them to Fairchild in the U.S. for training stints of six months to a year. Engineers who had learned the equipment's structure and operating principles would handle everything from installation, adjustment, and maintenance domestically in Japan. Semiconductor manufacturing equipment consists of precision instruments, and without post-delivery technical support, customers cannot launch mass production lines. This depth of technical service became Tokyo Electron's competitive advantage that a mere trading company could not match.

Odaka was clear about the criteria for business decisions: 'It's a matter of efficiency. A large company can pursue self-driven technology development, but a small company like ours must think about making sure money from needs-driven technology and product development—otherwise it's not efficient.' Rather than basic research, the company deliberately chose the positioning of prioritizing immediate response to customer needs and bridging advanced American technology to the Japanese market.

The distributorship with Fairchild produced immediate results. When major Japanese semiconductor manufacturers built their IC mass production lines, Tokyo Electron supplied the majority of the manufacturing equipment needed. The dominance of Fairchild equipment on production floors was such that a senior executive of a major semiconductor manufacturer recalled, 'The IC production lines of that era were called the Fairchild Jungle.' It was said that '80% of the equipment in Japan's first IC lines was delivered by Tokyo Electron'—a small trading company in its second year became responsible for building the infrastructure of Japan's semiconductor industry.

However, dependence on Fairchild also harbored vulnerabilities. When Fairchild was later acquired by Schlumberger and stopped producing hit products, Tokyo Electron's IC tester business was put at a disadvantage. Domestically, Advantest developed a domestically produced IC tester in 1972, forming a competitive structure between Tokyo Electron with imported products and Advantest with domestic ones. In 1981, Tokyo Electron switched from Fairchild to U.S.-based GenRad, but continued to be pushed by domestic competitors in the tester field.

On the other hand, the technical service experience and customer relationships accumulated during the Fairchild era enabled expansion into equipment fields beyond testers. In 1968, the company established Tel-Thermco, a joint venture with U.S.-based Thermco, and entered domestic manufacturing of diffusion furnaces. Subsequently, the company expanded its product range to include ion implantation equipment, wafer probers, and plasma etching equipment, capturing high domestic market share in each. The distributorship with Fairchild was the starting point that drew Tokyo Electron into the world of semiconductor manufacturing equipment, and at the same time, the dependence on that contract became the pressure that drove in-house product development and diversification.

Since its founding, Tokyo Electron's business pillars had been OEM exports of consumer electronics such as car radios, car stereos, and calculators. As of 1975, these export divisions accounted for approximately 60% of revenue and constituted the core business. However, all OEM products were sold under Western companies' brands, meaning that end consumer trends were invisible to Tokyo Electron. The company perpetually carried the risk of being unable to control demand fluctuations—if orders from the U.S. were suddenly cut off, inventory would pile up.

The first Oil Shock of 1973 exposed this vulnerability all at once. Demand plummeted, inventory ballooned, and performance deteriorated. However, the Oil Shock was not the fundamental problem—the real cause was that consumer electronics exports were structurally a declining business. Major manufacturers led by Matsushita Communication Industrial were entering car stereo production in earnest, and the room for a small company like Tokyo Electron to continue competing in a market where technology and product differentiation was difficult was narrowing.

President Toshio Odaka's decision was clear-cut. Consumer electronics exports were not just failing to grow—continuing them would endanger the company's very survival. Tokyo Electron decided to withdraw from the consumer electronics export division accounting for 60% of revenue and redirect management resources to the growing semiconductor manufacturing equipment business. Since losing more than half of revenue all at once would create a cash flow crisis, a phased reduction rather than an immediate complete withdrawal was chosen.

In an unusual personnel move, top-performing employees were assigned to the withdrawal divisions. Normally, divisions slated for reduction or withdrawal tend to see thin staffing, but Tokyo Electron made the opposite decision. The reasoning was that executing the withdrawal in an orderly fashion, maintaining customer relationships without damage, and preserving internal morale required the most capable personnel. A business portfolio replacement proceeded, gradually reducing 60% of revenue while putting the remaining 40% on a growth trajectory.

The withdrawal from consumer electronics and concentration on semiconductor manufacturing equipment fundamentally changed Tokyo Electron's earnings structure. By 1984, at its 20th anniversary, the company was recording revenue of 82.8 billion yen and ordinary income of 9.9 billion yen, having transformed into a highly profitable company with an ordinary income margin of 12%. By specializing in semiconductor manufacturing equipment, customers were narrowed to Japan's major semiconductor manufacturers, increasing the density of technical service and equipment supply.

Tokyo Electron had made profit expansion its top management priority from the founding period, and the shift from low-margin OEM exports to high-margin manufacturing equipment was the practical implementation of this management philosophy. The option of maintaining revenue scale through OEM exports existed, but the decision to prioritize profit over scale became the starting point for the company's later high-profitability profile. In 1989, Tokyo Electron reached the position of world's top-selling semiconductor manufacturing equipment maker, and the 1975 withdrawal decision is positioned as a business structure turning point second only to the founding.

Since its founding in the 1960s, Tokyo Electron had grown on a business model of importing American semiconductor manufacturing equipment and providing sales and technical support to Japanese semiconductor manufacturers. Domestically, it had established 22 field engineering stations and stationed 500 engineers near the main factories of semiconductor manufacturers, building a system capable of 'responding within one hour of a problem occurring.' This meticulous support network underpinned trust with Japanese semiconductor manufacturers, with domestic market share for its four main products reaching 60% and nearly 40% for equipment overall, establishing itself as the largest domestic player.

However, in the 1990s, the center of gravity of the semiconductor industry began to shift. In DRAM mass production, Samsung Electronics of South Korea and TSMC of Taiwan were rising, while in the MPU field, U.S.-based Intel held the initiative. Nikon's Toyohisa Kuramoto, Director and Precision Equipment Division Head, pointed out that 'the demand for miniaturization is more stringent for MPUs than for DRAMs,' and signs were appearing that the cutting edge of manufacturing technology was shifting from memory to logic. For equipment manufacturers, the geographical advantage of developing alongside cutting-edge customers was the source of competitiveness, and the risk of being unable to obtain the information needed for next-generation equipment development from the Japanese market alone was becoming apparent.

Tokyo Electron's overseas sales relied on local distributors in each region. However, going through distributors made it difficult to accurately grasp customer requirements and complaints, and caused delays in information transmission. Around 1994, the company received a notice from its customer Texas Instruments demanding direct dealings rather than through a distributor, warning that transactions would be terminated if the company did not comply. The overseas sales ratio for the fiscal year ending March 1995 stood at only 34%, and the European/American market share for its main products was 14%—a large gap from the domestic 60%. Even if overseas expansion continued under the distributor model, it was structurally difficult to replicate the competitive advantages built domestically.

In October 1994, Tokyo Electron fundamentally transformed its sales structure for semiconductor manufacturing equipment in Europe and America. It made the decision to completely abolish distributor-based sales and switch to direct sales through wholly owned local subsidiaries. In the U.S., the subsidiary TEL America, which had served as an import/export gateway, was reorganized into Tokyo Electron America, with headquarters relocated from California to Austin, Texas. A 200,000-square-meter site was secured in Austin, and the company's first overseas technology center, equipped with cleanrooms equivalent to semiconductor factories, was built.

In Europe, Tokyo Electron Europe was established on the outskirts of London as the European headquarters, with a local subsidiary also set up in Germany. Subsequently, the company expanded into South Korea in 1995 and Taiwan in 1996, gradually building a direct sales network in regions where semiconductor manufacturers were concentrated. The cleanrooms in Austin could reproduce the same environment as actual semiconductor factories, enabling equipment performance evaluations and operator training with customers present. Since equipment is built to order with specifications varying by customer, having a facility where target performance could be verified on actual machines before delivery was of decisive importance in winning orders.

All overseas subsidiaries adopted a policy of placing local personnel at the top, with Japanese staff serving in support roles. At the U.S. subsidiary, Mitsuru Onozato was dispatched as vice president in October 1994 to lead the setup, but once the organization was established, Barry Lapozo, an American, assumed the presidency in April 1997. Lapozo had previously stayed in Japan from 1987 to 1989 as an executive of a former joint venture partner company and understood both Tokyo Electron's products and culture. Existing distributors were paid appropriate compensation for amicable contract termination, and the migration of engineers who had handled the company's products during the distributor era was facilitated to minimize disruption to sales channels and personnel.

The construction of the direct sales system produced rapid results. The overseas sales ratio rose from 34% in the fiscal year ending March 1995 to 70% in the fiscal year ending March 2000, completely reversing. U.S. market revenue expanded tenfold during the same period from approximately 13 billion yen to 130 billion yen, Europe also increased tenfold to approximately 42 billion yen, and Taiwan reached 140 billion yen, a 9.5-fold increase. U.S. market share rose from 8% at the end of 1995 to 34% at the end of 1999. Lapozo set a goal of making all of the top eight U.S. semiconductor manufacturers his customers and steadily expanded from the two existing accounts at the time of his appointment.

The true value of this structural transformation was tested in the fiscal year ending March 1999. The semiconductor downturn caused equipment orders to dry up, and consolidated revenue shrank to 313.8 billion yen—two-thirds of the previous year—while operating income fell to one-fifth at 6.4 billion yen. Senior Managing Director Tetsuo Tsuneishi reflected, 'If not for the decision six years ago, the company might have gone under.' Had it remained dependent on the domestic market, the downturn would have been fatal, but the expanded overseas customer base dispersed the damage. From the following year onward, riding the recovery in global PC and mobile phone demand, the company was projected to achieve record highs in the fiscal year ending March 2001 with revenue of 690 billion yen, operating income of 102 billion yen, and an operating margin of 15%.

The U.S. subsidiary's workforce expanded from approximately 200 at establishment to 1,200 by 2000, of whom only 50 were Japanese. Simultaneously with the progress of localization, the ratio of proprietary products also rose from 55.8% in the fiscal year ending March 1994 to 94.9% in the fiscal year ending March 2000. The transformation was complete—from the era of importing and selling American equipment as a trading company to a system of directly selling proprietary products worldwide as a manufacturer. The connections with the American semiconductor industry and technical expertise that Tokyo Electron had accumulated over decades since its import trading company days were the foundation that made rapid overseas expansion possible in a short period, and it would have been difficult to build a global direct sales system in six years without this accumulated knowledge.

Entering the 2010s, semiconductor manufacturing equipment increasingly required more advanced microfabrication technologies, including adaptation to three-dimensional structures. Development costs per equipment unit were rising year by year, and the burden of R&D expenses was becoming a management concern for Tokyo Electron. Additionally, memory manufacturing had become a global oligopoly of a few companies, and challenges in pricing power against a small number of major customers were also becoming apparent.

In this context, in December 2012, the chairman of U.S.-based Applied Materials approached Tokyo Electron with a merger proposal. Beginning with a meeting at a French restaurant in the Imperial Hotel, Tokyo Electron commenced deliberations with a three-person team of chairman, president, and vice president. The concept was to share escalating development costs between the two companies and complement each other's product lineups to strengthen competitiveness in the semiconductor manufacturing equipment market.

In September 2013, Tokyo Electron formally announced a merger with U.S.-based Applied Materials. A preparatory subsidiary, TEL-Applied Holdings B.V., was established in the Netherlands, and the company outlined a plan to proceed with the integration of the two culturally different companies gradually over 3 to 5 years. An IMO (Integration Management Office) was established centered on 110 executives from both companies, and the practical work of PMI (Post-Merger Integration) commenced.

However, the merger of the world's No. 1 and No. 3 semiconductor manufacturing equipment companies raised concerns about market monopolization, and the U.S. Department of Justice expressed doubts from an antitrust perspective. The merger plan was postponed in December 2014, and uncertain conditions persisted for a year and a half. While CEO Tetsuro Higashi said there was the option of fighting in court, he was concerned about the disruption to customers and operations that a prolonged legal battle would cause, and in April 2015 decided to completely withdraw the merger plan.

With the withdrawal of the merger plan, Tokyo Electron continued as an independent semiconductor manufacturing equipment maker. CEO Higashi stated, 'Employees had become truly committed to the great goal of the merger. The urgent task is to redirect the heightened energy of employees toward a new direction,' and in July 2015 formulated a medium-term management plan, steering toward concentrated investment in R&D.

Had the merger been realized, sharing R&D costs would have been possible, but choosing the standalone path meant that the company's own R&D investment needed to be expanded even further. The decision to invest a total of 1.5 trillion yen in R&D over the five years from FY2024 to FY2028 illustrates how the abandonment of the merger paradoxically drove the strengthening of in-house technology development.