United States
                                          Comment                                                 Technology...
The Next Small Thing – 4 September 2001

The Next Small Thing – 4 September 2001

nanomachines makes them impossible. He refers to the            sees products re...
The Next Small Thing – 4 September 2001

the speculation about nanotechnology was nothing but
The Next Small Thing – 4 September 2001

Intel believes these advances will produce 8X the              n Medium Term (3-...
The Next Small Thing – 4 September 2001

Information Sources
There is already an overload of nanotech information on
The Next Small Thing – 4 September 2001

      [AOL, CSCO, SUNW, NTAP, TSM] MLPF&S was a manager of the most recent pub...
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Intro To Nanotechnology Merrill Lynch

  1. 1. United States Comment Technology Strategy 4 September 2001 Steven Milunovich, CFA First Vice President The Next Small Thing (1) 212-449-2047 Steven_Milunovich@ml.com An Introduction to Nanotechnology John M.A. Roy, Ph.D. Director (1) 212-449-6456 Reason for Report: Tech Trends John_Roy@ml.com Highlights: Industr y • We believe nanotechnology could be the next growth innovation. Nanotech is the science of fabricating things smaller than 100 nanometers (a nanometer is one-billionth of a meter). Like the Internet, nanotech risks being overhyped, but also like the Internet where there’s smoke there’s fire. • We believe selected nanotech applications will become real over the next few years, including enhanced materials, hard drives, optical networking, computer chips, medical drugs, and genomic testing. • Contrary to dire predictions, nanotechnology won’t end life as we know it. Concerns of self-replicating horrors should be replaced by more realistic possibilities, such as disk drives 40X times smaller or DNA-testing chips that can detect life-threatening diseases. • We see five markets forming and focus on the first two: 1. Instrumentation. In any new technology the first winners are the tool makers. 2. Physical. Examples include denser hard drives, smaller and faster chips, and better optical switches. 3. Biological. Applications look promising with DNA, viruses, and proteins the standard vocabulary here. 4. Materials. Nanotechnology in materials development is already a significant business. 5. Futuristic. Outlandish implications for the application of nanotech are interesting but beyond investors’ interest. • IBM, HP, and Intel are large tech companies involved in nanotech research. Nanophase Technologies is a public pure play. Private nanotech names include Coatue, Molecular Electronics, NanoInk, Nanosphere, Nantero, ZettaCore, and Zyvex. Merrill Lynch & Co. Merrill Lynch, as a full-service firm, Global Securities Research & Economics Group has or may have business relationships, Global Fundamental Equity Research Department including investment banking relationships, with the companies in this report. RC#30224705
  2. 2. The Next Small Thing – 4 September 2001 Nanotechnology is the science of precisely fabricating The Next Growth Innovation? objects smaller than 100 nanometers. By comparison, current MEMS technology doesn’t qualify as it is 1,000X In our TechStrat initiation report last October, we outlined too large. Ten nanometers is the thickness of a cell economist Norm Poire’s idea of growth innovations membrane. One nanometer is ten hydrogen atoms in a (Figure 1). He argued that growth innovations drive the row. We segment the nanotech market into five areas: economy and the stock market. It takes about 28 years for a new technology to become widely accepted, which then 1. Instrumentation. Special tools are required to fuels a period of rapid growth lasting about 56 years. develop, manipulate, and detect objects in the nano Some 112 years after invention the innovation reaches market. They are also needed to build the next maturity and grows in line with population increases. generation of tools. Some see a variant of Moore’s Law taking hold. NanoInk Inc. has a pen that With the computer maturing around 2025, Norm says the precisely deposits reagents that are one molecule next innovation should be arriving on the scene shortly. thick. His favorite candidate is fuel cells. We’re fans of distributed power, and he might be right. But another 2. Physical. Mechanical, electrical, and optical systems possiblity is nanotechnology. Unlike previous can be built with very small parts. IBM’s Millipede innovations, nanotech is less a product than a process. hard disk drive is an example. Dr. Ralph Merkle of Nevertheless, it could affect products in multiple Zyvex says that “Nanotechnology will replace our industries. entire manufacturing base with a new, radically more precise, less expensive, and flexible way of making Figure 1: Growth Innovations products. 1853 1913 1969 2025 2081 3. Biological. While living things are physical, the applications and investors are different from the physical group. Here, DNA, viruses, and nucleotides are the standard vocabulary. Quantum Dot and Nanosphere’s nano-sized tags for drug development 1800 1853 1913 1969 2025 could make waves in pharma. 1771 1825 1886 1939 1997 4. Materials. Nanotechnology in materials development Textiles Railroad Automobile Computer Nanotech? is already a significant business. Chemist Richard Smalley won the 1996 Nobel Prize for discovering fullerenes, a nanosized structure part of many nano- D ˆ ‡…vh q † y T p  ÃD r ‚ q s‚ S ‰ yˆ  r ‚ ‡v‚ S ‰‚ ‡v‚ r yˆ  materials. Nanophase Technologies (NANX, not rated) is one of the few companies in this field that is Sources: Norman Poire, Merrill Lynch publicly traded. It produces nano-size zinc oxide particles for sunscreens, making the usually white- Nanotechnology Defined colored cream transparent because the tiny particles don't scatter visible light. The market for Physicist Richard P. Feynman established the vision in his nanostructured materials in volume is estimated to be talk on December 29, 1959 entitled There’s Plenty of Room $5-20 billion and could displace many conventional at the Bottom. Ever since, scientists have dreamed of what materials. can be built if matter could be manipulated on the nano- 5. Futuristic. With manipulation on the nanoscale, one scale. In the last two decades nanotechnology has become can ponder devices for both the betterment and demise feasible with the invention of the scanning tunneling of mankind. These big thoughts are needed, but microscope. Eric Drexler published the first journal article investors will want visibility into products and cash in September 1981 popularizing the field. flows. Quantum computing is one of the more Nanotech is close to commercial products, and the media realistic technologies in this category though it has has taken notice with the covers of Scientific American, major theoretical holes as all quantum theories do. Forbes, and Red Herring all featuring nanotech in recent Although the futuristic market is fascinating, it is not months. A study by Lux Capital found that the word investable. Nor do we agree with Sun Chief Scientist Bill “nanotechnology” was mentioned in 1,800 articles in Joy’s statement that, “Our most powerful 21st-century 2000; the Internet had a similar number of mentions before technologies-robotics, genetic engineering, and it took off in the mid-1990s. Neither IDC nor Gartner nanotech—are threatening to make humans an endangered have yet published on the subject. Is nanotechnology the species.” Self-replicating consciousness will likely elude next big (or small) thing? Probably. Is it too early to us. invest? We think nanotech is closer than Wall Street and Sandhill Road recognize; examples include IBM’s In this month’s Scientific American, Richard Smalley Millipede drive and Intel’s 90 nanometer chips. explains that the sizes involved in self-replicating (Continued) 2
  3. 3. The Next Small Thing – 4 September 2001 nanomachines makes them impossible. He refers to the sees products ready in a year with the first deal cut in two problems of fat and sticky fingers. In order to manipulate years. an atom, the manipulator needs to get all atoms in the NanoInk is looking to commercialize the professor’s pen region in the right spots. There is not enough room in the technology in the chip space. Photomasks look to be a low nanospace to get in there and control all those atoms. In hanging fruit. According to Griff Resor of Resor addition, the atoms of the manipulator will adhere to the Associates, the increased resolution requirements for atom being moved. photomasks are “driving mask makers to the brink, they While the materials and biological markets are here and desperately need new tools.” NanoInk’s pen investable, they are better left to non-tech experts. We will nanolithography process could create photomasks at a focus on the closely aligned physical and instrumentation lower cost and higher resolution than current technology. markets. We believe nanotechnology will initially be most useful augmenting existing technologies. Instrumentation Market Physical Device Market Professor Chad Mirkin, director of the recently-formed Institute for Nanotechnology at Northwestern, has created Smaller is better in tech. The end of silicon’s dominance a nanosized pen that uses an atomic force microscope is perhaps 15 years away with a new technology likely to (AFM). replace silicon. We believe nanotechnology will produce that new technology. Hewlett-Packard (HWP, B-3-2-7, Figure 2: The AFM Tip, Key to the Nanotech Kingdom $23.21), IBM (IBM, B-3-1-7, $99.95), and Intel (INTC, B- 3-2-7, $27.96) are racing to apply nanotechnology to computing. IBM just built a computer circuit from a single strand of carbon, the first time nanotubes have been able to carry out logic operations. n Too Aggressive At the urging of David Packard, Quantum Science Research (QSR) was founded as part of HP Labs in 1995 to pursue long-term research in the physical sciences. QRS has focused on the fabrication and measurement of nanometer-scale structures and the fundamental physics of molecular electronics switching. QSR’s work with UCLA has gotten the attention of the nanotech community. The 2000 Feynman Prize in Nanotechnology (experimental) went to the multidisciplinary QSR team of chemist R. Stanley Williams and computer scientist Philip Kuekes along with Source: Scientific American chemist James Heath of UCLA. They were cited for building a molecular switch, a major step toward their goal The pen works because the ink is an organic substance that of creating entire memory chips that are just a hundred flows off the probe and onto the gold paper in an orderly nanometers wide, smaller than a bacterium. fashion. When we met with the professor, “registration” As the leading figure at QSR, Professor Williams can was highlighted as critical to repeatability. This mixing of sometimes get ahead of the technology. In 1999 he said it chemistry (the atomic structure of gold) and mechanical would take two years for the HP/UCLA/UC Berkeley team engineering (registration of a tool to the underlying object) to perfect a molecular memory capable of holding 16 bits illustrates the interdisciplinary requirements of of data. The memory would consist of nano-scale wires nanotechology. Professor Mirkin formed a team of laid out in a grid with molecular "switches" at the points chemists, physicists, biologists, and material scientists in where the wires cross. The switches would determine how the hope of accelerating the research and the commercial information is stored and routed on the grid. The best part, spin-offs. Two Mirkin/Northwestern spin-offs are already said Williams, is that the memory could be created by making the rounds for private funding: Nanosphere and throwing the tiny wire grids and the switches together in a NanoInk. chemical soup. The switches would attach themselves to Nanosphere is going after the biological market with the grid, eliminating what would otherwise be a costly nanoparticle DNA probes, sequence tests, and gene array manufacturing process. indicators. Its focus on biodiagnostics fits the Not everyone was that optimistic. Donald Eigler, a instrumentation and tools trends that are often the first researcher at IBM's Almaden Research Lab, said much of successes with a new technology. COO Vijaya Vasista 3
  4. 4. The Next Small Thing – 4 September 2001 the speculation about nanotechnology was nothing but Figure 4: VLSI Techniques Produce Millipede’s Legs hype. "I'm the last person to discourage someone from dreaming about what could be," he said, “but right now if somebody tells you about nanotech and really small computers, that's fantasyland." Figure 3: Dysprosium Disilicide, Not Yet A Nano-Computer Source: IBM Zurich Research Laboratory IBM believes this thermomechanical technique is capable of achieving data densities in the hundreds of Gb/in² range, Sources: HP QSR, Doug Ohlberg, and Yong Chen well beyond the expected 60–70 Gb/in² limit for magnetic recording. Massive parallelism boosts the throughput Today QSR builds parallel dysprosium disilicide wires since the legs (actually cantilevers) can be mass fabricated grown on a silicon surface. The wires are six atoms wide on a single silicon chip using VLSI microfabrication and are separated on average by nine nanometers. Figure 3 techniques (Figure 4). This system could produce ultra- has been "colorized" to more clearly define the different small hard drives capable of holding a few gigabytes and materials and textures. The original images cannot be would have aerial densities 40X the state of the art. captured in color because the actual structures are Vettiger believes these "nanodrives" could surpass the generally less than 1/40th the size of the shortest limits of magnetic storage devices while consuming less wavelength of visible light. This picture demonstrates the energy. Products based on these techniques could be amazingly small wires that can be built, but it is not even available in 2-3 years. close to being a nano-computer. In an overlap with the biological market, advances like the QSR’s statements, like many made in 1999, were overly Millipede could merge with patterning/writing tools like optimistic but hold a kernel of truth. Just last month QSR those being developed by NanoInk. This merger could announced a joint effort with MIT for quantum computing. result in instruments capable of fabricating ultra-high With the experience of the last consortium, the HP press density arrays for the genomics markets. release last month was a less ambitious: n Moore’s Law Fights Back Quantum information systems, including quantum computers and molecular electronics, represent a Moore’s Law is far from dead. This summer Intel fundamentally new approach to processing information. researchers built a 20-nanometer transistor, saying they Within the next ten years, molecular electronics is “have demonstrated that there are no fundamental barriers expected to begin to become available as a replacement to extending Moore's Law for another decade.” Intel sees for silicon-based computing technologies. these transistors allowing it to build microprocessors So ten years is a more realistic schedule. We believe in containing a billion transistors, running at speeds more limited uses of nanotechnology for computing. approaching 20 gigahertz and operating at less than one volt in approximately 2007. n Millipede in Storage Dr. Gerald Marcyk, director of Intel’s Components IBM Zurich Research Lab is taking a realistic approach to Research Lab, sees Moore’s Law scaling for at least nanotech computing in focusing on storage. IBM engineer another three chip generations. Given the size of the Peter Vettiger has build a 1,024 “leg” millipede for storing transistors, Intel’s claim that silicon and nanotechnology and retrieving high-density data. Each leg is a are complementary looks right. The transistors are based micromechanical component based on the atomic force on Intel's 45 nanometer (0.045-micron) process generation microscope. Tiny depressions melted by an AFM tip into due out in 2007, one-third the size of the current leading- a polymer medium represent stored data bits that can then edge processes of 0.13 micron. be read by the same tip. 4
  5. 5. The Next Small Thing – 4 September 2001 Intel believes these advances will produce 8X the n Medium Term (3-5 years) performance of today’s Px60 process. The big win for Intel, however, would be to stave off other nanotechnology IBM’s carbon nanotubes could see some application in the approaches while using the same physical structure and next 3-5 years. The trick will be to marry the specialized materials in today's computer chips (though a new oxide nanotubes with more generic computing elements to form material will be needed). We believe more powerful a hybrid. Memory chips, with their regularity and techniques, which fundamentally change the way materials simplicity, look ripe for the picking. interact, will generate greater advances. Companies such as Nantero and Coatue should have organic semiconductors in the market in the next 3-5 years. n Startups Work the Fringes By targeting memory they have chosen a more achievable The fathers of molecular electronics, Mark Reed and goal than, say, the ASIC market. James Tour of Rice University, started the aptly-named n Long Term (5-10 years) Molecular Electronics Corp. (MEC) in 1999. MEC is researching the use of individual molecules acting as HP/UCLA’s bottom-up quantum systems are a ways off switches. ZettaCore is another startup looking at using though they have been making progress. The fundamental individual molecules, particularly porphyrin molecules. communication and control issues of bottoms-up Porphyrins can store more than two bits of data in each nanotechnology will require significant advances and molecule. These techniques would allow construction of applying the technique to computing in a way vastly electronic devices that are far less expensive, consume less different (a major issue for adoption). power, and are thousands of times smaller. The construction of nanometer-scale logic circuits is at least n Extended Term (10-50 years) seven years away though. Molecular electronics (devices that compute with We have heard of angel investors funding start-ups that molecules) have both manufacturing and communication might pressure the DRAM and flash memory makers. issues. Although a nano-processor could fit into existing Nantero, Inc. is “developing advanced semiconductors computational models (programming languages, using nanotechnology” per a recent press release. Coatue compilers, and I/O), the fundamental issues of working Corporation is another stealth company working on the with molecules for computation are many. We believe that next generation of memory chips. It is using the material this is achievable but more than ten years away. properties of organic semiconductors and is replacing over Quantum computing with qubits looks far off as well. We 90% of the complex transistors with an organic compound. have not covered the technique of using the quantum instabilities in electron states. While researchers at IBM Nanotech Timeline and AT&T have been making progress using nuclei spin and nuclear magnetic resonance spectrometers, we believe The keys to nanotechnology are manufacturability and their estimate of 5-10 years is a little optimistic. communication. If you can’t build it in volume, there is not much you can do with it. Self-replication could be the n Never (50+ years) answer to manufacturability, but we agree with Richard Smalley that self-replicating nanomachines have Self-replication on the nanoscale is unlikely ever. The fundamental hurdles to overcome. Similarly, the limits of manipulation will require new forces of nature to communication of instructions to strand of DNA for be discovered. Artificial consciousness on any scale is computation has barriers that appear insurmountable. We another farfetched idea. Having worked in artificial provide some timing estimates for instrumentation and intelligence in the 1980s, we believe that consciousness is physical nanotechnology market ideas. like real numbers, the closer you look the more you understand and the more you see that you do not n Short Term (0-2 years) understand. IBM’s Millipede will likely impact the disk drive market in the next two years. It could create ultra-small drives with massive storage for the mobile market. Speed will have to be increased, however, possibly with more heads. Intel will breach the 100 nanometer (0.10 micron) barrier with its next generation. This approach is not an application that uses nanophysics but could exploit the capabilities of the nano dip pens to build or repair photolithographic masks. 5
  6. 6. The Next Small Thing – 4 September 2001 Information Sources There is already an overload of nanotech information on the web. Chart 1 lists sites we’ve found valuable. Chart 1: Nanotechnology Websites Organization Web Site URL Northwestern Institute www.nanotechnology.northwes for Nanotechnology tern.edu MIT Technology www.technologyreview.com/na Review Magazine notech.asp Institute for Molecular www.imm.org Manufacturing Foresight Institute www.foresight.org (non-profit nanotech organization) Nanotech Investor www.nanotechinvesting.com Zyvex (nanotech www.zyvex.com/nano research company) Smalltimes (on-line www.smalltimes.com nanotech newspaper) Nano Investor News www.nanoinvestornews.com (on-line nanotech newspaper) Red Herring www.nanotechnologybriefing.c Nanotechnology om Source: Merrill Lynch 6
  7. 7. The Next Small Thing – 4 September 2001 [AOL, CSCO, SUNW, NTAP, TSM] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years. [INTC, MSFT, CSCO, ORCL, SUNW, DELL, ERICY, NTAP, QCOM, YHOO, EBAY] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company. Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 - Reduce, 5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend. Copyright 2001 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been prepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by SFA; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are regulated by the Monetary Authority of Singapore. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). MLPF&S and its affiliates may trade for their own accounts as odd-lot dealer, market maker, block positioner, specialist and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. MLPF&S, its affiliates, directors, officers, employees and employee benefit programs may have a long or short position in any securities of this issuer(s) or in related investments. MLPF&S or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. 7