COMBINED MANAGEMENT AND GROUP MANAGEMENT REPORT

This Management Report combines the AIXTRON Group Management Report and the Management Report of AIXTRON SE. In this report, we inform about the business development as well as the situation and the expected development of the AIXTRON Group (hereinafter also referred to as “AIXTRON”, “AIXTRON Group”, or “the Group”) and AIXTRON SE (hereinafter also referred to as “the Company). The information regarding AIXTRON SE is contained in a separate section in the report on economic position with disclosures in accordance with the German Commercial Code (HGB).

The Consolidated Financial Statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, pursuant to section 315e of the German Commercial Code (HGB). With the exception of the HGB disclosures in the chapter Management Report of AIXTRON SE, all financial figures contained in this Group Management Report, including the comparative figures for the previous year, are reported in accordance with IFRS.

Due to rounding, numbers presented throughout this report may not add up precisely to the totals indicated and percentages may not precisely reflect the absolute figures for the same reason.

Business Model
 

AIXTRON’s business activities include the development, production and installation of equipment for the deposition of complex semiconductor materials, the development of deposition processes on such equipment, consulting and training, customer support and service for such equipment. AIXTRON also provides peripheral equipment and services for the operation of its equipment.

AIXTRON supplies deposition equipment for volume production as well as equipment for research and development (R&D) and pre-series production.

The demand for AIXTRON equipment is  influenced by requirements for higher energy efficiency in power electronics, by the transformation towards electromobility, by increasing transmission speeds and volumes of data, as well as by the use of 3D sensor technology in consumer electronics and in the automotive sector, and last but not least, by the use of innovative technologies like micro LEDs in displays. The ability of AIXTRON’s technologies to deposit thin material films precisely, enables manufacturers to improve performance, yield and quality in the fabrication process of advanced power- and optoelectronic devices.

Organizational Structure
Locations and Legal Corporate Structure
 

The AIXTRON Group comprises the parent company AIXTRON SE with its registered office in Herzogenrath, Germany, and its subsidiaries. As of December 31, 2022, AIXTRON SE held direct and indirect stakes in 11 companies which are part of the AIXTRON Group, and which are fully consolidated: 

Management and Control
 

As a European stock company (Societas Europaea) the AIXTRON SE has a dual management and control structure consisting of an Executive Board and a Supervisory Board. The Executive Board is responsible for managing the Company at its own responsibility while being advised and monitored by the Supervisory Board. In 2022, there were the following personnel changes in the Company’s management and supervisory bodies:

At the Annual General Meeting on May 25, 2022, it was decided to expand the Supervisory Board from five to six members. Dr. Stefan Traeger, CEO of JENOPTIK AG, was elected as a new member of the Supervisory Board and Mr. Kim Schindelhauer, previous Chairman of the Supervisory Board, was re-elected as Chairman. The composition of the Executive Board has not changed compared to December 31, 2021.

Detailed information on the composition of the Executive Board and the Supervisory Board, the allocation of responsibilities between them, the operating procedures of the Supervisory Board committees and the Company‘s diversity concept can be found in the Corporate Governance Declaration, which is part of the annual report and also available on the AIXTRON website at Declaration of Corporate Governance. ¹

 ¹ The information in the Corporate Governance Declaration was made in accordance with the requirements of the German Corporate Governance Code 2022. They are to be classified as "not related to the Management Report" because they go beyond the legal requirements and are therefore not part of the substantive audit by the auditor.

Technology and Products
 

The AIXTRON product range includes customer-specific systems for the deposition of complex semiconductor materials. Here, substrates of different materials and sizes can be coated.

The MOCVD process (Metal-Organic Chemical Vapor Deposition) is used to manufacture components for power electronics or for optoelectronics from compound semiconductor materials.

Our systems in the field of power electronics are used for the production of gallium nitride (GaN) semiconductor components, which, for example, increase the performance of chargers in consumer electronics, enable energy-saving power supply for servers and data centers and efficient power conversion in the field of renewable energy. A second major field of application for power electronics are silicon carbide (SiC) components, which are used, for example, in the main inverters for electric vehicles, in their charging infrastructure, and also in inverters for renewable energies (solar and wind). These components are also manufactured by our customers using our CVD systems. Both GaN and SiC are material systems with a wide band gap (WBG) that are beginning to be increasingly used in various areas of power electronics. In doing so, they contribute to the decarbonization of our modern society and support climate protection.

On our systems in the field of optoelectronics, customers manufacture lasers for fast optical data transmission and for 3D sensors. The latter are increasingly used in applications that require recognition of the spatial context, e.g. in the environment detection of robots or in autonomous vehicles. Another area of application is the production of LED picture elements (pixels) for display applications of the next generation, so-called micro LED displays. Other applications of our systems include the production of special LEDs, such as red, orange and yellow LEDs (ROY) for automotive lighting and indoor farming, among others.

AIXTRON works continuously to improve its existing technologies and products. Last year, AIXTRON presented the G10-SiC, the first system of the newly developed generations. The G10-SiC is a system for the production of SiC components on both 150 mm and 200 mm SiC wafers. In this generation of systems, the focus is not only on continuously improving material performance, but also on further optimizing the systems for large-scale production through more automation with standard interfaces customary in the industry, for example through the efficient use of limited clean room areas in semiconductor factories.

Business Processes

Manufacturing and Procurement

AIXTRON produces its prototype and customer systems at its production sites in Herzogenrath and Cambridge. Production focuses on assembly, testing and qualification as well as commissioning of the systems according to standardized specifications.

The Group obtains the components required to manufacture the systems and the majority of the pre-assembled assemblies from external suppliers and service providers. 

The performance of our supply chains will be increased in order to cover the higher overall requirements and to compensate for fluctuating delivery capabilities. Based on a rolling forecast, the necessary measures to ensure material availability are taken in coordination between sales, purchasing and production. This also includes the early detection of bottlenecks in raw materials and components. Appropriate stock availability strategies are applied together with supply chain partners.

The assembly of the systems is carried out with the help of external service providers in our own or, if necessary, in rented nearby production facilities. The subsequent commissioning, testing and qualification of the systems is carried out by AIXTRON specialists. The planning, control and monitoring of production is the sole responsibility of AIXTRON employees, thus enabling quality requirements to be met throughout the entire production process.

In 2022 or early 2023, AIXTRON successfully completed the market launch of the products G10-SiC and G10-AsP in series production.

AIXTRON's production sites have a process-oriented quality management system certified according to ISO 9001:2015. In 2021, external auditors have certified the quality management systems of both AIXTRON SE and AIXTRON Ltd. confirmed without any deviation.

Employees
 

AIXTRON's leading position in the global market and its ability to continuously innovate are driven by the commitment and excellent knowledge of our employees. Our human resources management is therefore designed to create an inspiring, safe, and supportive environment, as well as to foster appreciative and cooperative interaction.

Attracting and retaining highly qualified and committed specialists and managers is a key success factor. Competing for the best talent, we are continuously enhancing our attractiveness as an employer brand. In addition to a comprehensive, informative careers site and other communication channels, we use a wide variety of target group-oriented recruitment channels, increasingly in social media. Personal contact with potential applicants at job fairs and similar events, as well as in the context of our close cooperation with universities worldwide, is also of great importance to us.

AIXTRON is working consistently to establish a modern corporate culture with a mature leadership culture and good teamwork. We attach great importance to supporting our employees competently and in a spirit of partnership, to promoting them individually, and to challenging them with future-oriented projects and tasks. As part of our company-wide personnel development concept, we offer our employees a wide range of measures for continuous training as well as individual advanced training measures and development opportunities.

Another central pillar of our corporate culture is AIXTRON’s commitment to diversity and equal opportunities, which form an essential basis for our innovative strength and competitiveness. We explicitly encourage collaboration in mixed teams and between different cultures and nationalities. We also attach great importance to an appropriate gender balance and a balanced age structure.

In the 2022 fiscal year, the number of employees in the Group increased significantly by approximately 25% from 718 at the end of 2021 to 895 as at 31 December 2022. The significant increase in the number of headcount is due to the continued strong growth of the Group's core business. As in previous years, the majority of employees are located in Europe.

Customers and Geographic Regions
 

AIXTRON's customers include the power electronics, optoelectronics and display industries. For example, they manufacture power semiconductor components for applications in IT infrastructure, in consumer electronics, in energy production and for use in the field of electromobility. In optoelectronics, they manufacture, among other things, lasers for data transmission, entertainment electronics and the automotive sector. Customers from the display industry, on the other hand, concentrate, among other things, on the production of new types of LEDs (mini and micro LEDs) in order to address displays of all sizes, from smartwatches to large-area display panels. The area of energy-saving, WBG-based power electronics is gaining in importance in many application areas and is defining new standards, e.g. in energy conversion in household appliances or consumer electronics.

Some of these customers are vertically integrated and supply the entire value chain all the way to the end consumer. Others are independent manufacturers of devices or of epitaxial wafers that supply products manufactured on AIXTRON systems to companies at the next level in the value chain, the electronic component manufacturers. AIXTRON's customers also include research institutes and universities, where research into novel materials and new fields of application is being promoted.

AIXTRON's products are sold worldwide. The market segments and the product mix are regionally different. Many large component manufacturers mainly produce in Asia. Therefore, the majority of AIXTRON's revenues are generated there. However, semiconductor manufacturers are also increasingly expanding their production capacities outside of Asia, which can lead to corresponding changes in the regional distribution of revenues.

The "Development of Revenues" chapter contains a detailed breakdown of revenues by region.

Objectives and Strategies

With the development, manufacture, sale and maintenance of systems for thin-film deposition of complex materials, AIXTRON addresses growing future markets along many end-use fields, such as consumer electronics, IT infrastructure, the automotive industry, telecommunications and power generation.

In the area of these complex deposition processes, AIXTRON's strategy is to develop the technology and products with a clear focus on its core competencies in such a way that they address as many end applications as possible. Above all, it is about increasing productivity and thus a high level of competitiveness in the specific requirement profile of the respective application. In this way, AIXTRON is addressing the fast-growing end markets in order to generate income for the development of other promising future applications.

Technology Portfolio for Complex Material Deposition

Our goal is to secure our market position in the focus markets in the long term through innovation and technological leadership, as well as to expand the addressable end applications and expand to adjacent markets by applying our core competencies. Our strategic planning focuses on the ecological and economic sustainability of the business, increasing revenues and increasing profitability.

The core of AIXTRON's strategy lies in tailoring the products to the requirements of the respective application areas while maintaining the focus on using AIXTRON's core competencies. This targeted addressing of the applications and markets that are attractive for AIXTRON in terms of size, growth, profitability and differentiation potential is currently very successful. Because these applications from different areas such as consumer electronics, IT infrastructure and electromobility are subject to growth dynamics that are largely independent of one another. AIXTRON is not only dependent on a single segment, but strives to be robust against fluctuations in individual application markets across the range of applications and the broadly diversified customer base. For this purpose, AIXTRON is actively developing a broad technology portfolio through its own or funded developments, through cooperation or targeted acquisitions. The maintenance and development of technology ecosystems in close cooperation with customers and, if necessary, their customers or technology partners allows AIXTRON to establish new technologies and develop new applications.

The focus is on markets in which the use of AIXTRON technology enables differentiation from the competition and is intended to offer customers decisive added value. This is achieved, among other things, by the homogeneity of the physical properties of the deposited layers and thus a high yield on the wafer with simultaneous high throughput and low material and maintenance costs. An important differentiating factor is the high productivity and cost-effectiveness of our systems, e.g. due to the high throughput of the systems thanks to the so-called batch reactor, in which several wafers can be produced at the same time. This allows our customers to allocate the direct and indirect system costs, such as costs for clean room space, to high production volumes. In many applications, the high efficiency of the use of materials due to the reactor architecture is another important cost factor. In markets that do not offer sufficient technical differentiation potential for the use of AIXTRON technologies, such as in the market for the production of blue and green LEDs, primarily in China, only low margins can be achieved.

AIXTRON is pursuing a platform strategy with its system families based on the planetary principle. With a high proportion of identical parts, the systems can be customized. As outlined in the previous section, this enables broad diversification and the use of numerous applications. In addition to the planetary systems, which address customers with high production volumes, AIXTRON sells systems based on the showerhead principle in university and niche markets. AIXTRON makes this possible, e.g. to be involved early in the development of newly emerging applications and to understand the emerging customer needs in new markets at an early stage.

Control System
 

Since numerous business activities within the group are largely integrated at the operational level, the Executive Board of AIXTRON SE controls the group at the level of the overall group. The developments forecast for the Group by the Executive Board therefore also apply to AIXTRON SE.

Key Financial Performance Indicators
 

The most relevant performance indicators for the AIXTRON Group are order intake, revenues, gross margin and earnings before interest and taxes relative to revenues (EBIT margin). They are determined monthly in the AIXTRON reporting system and made available to management in a comprehensive report. This enables the Executive Board to identify growth drivers at an early stage, to analyze developments during the year and take prompt countermeasures in the event of any discernible deviations.

AIXTRON aims to achieve organic revenue growth, exchange rate effects are excluded when setting revenue targets. Order intake, as explained below in the section “Development of Orders”,  reflects the investment behavior of the customers and thus serves as an early indicator for revenues. The period between receipt and delivery of an order for an MOCVD system is currently between nine and twelve months. 

Gross margin, which expresses gross profit in relation to revenues, provides information on the profitability and return on investment of AIXTRON’s operating business. The EBIT margin is used as an additional important indicator for operational management and analysis of the earnings situation.

Non-Financial Performance Indicators

Since the introduction of the new Executive Board remuneration system in fiscal year 2020, AIXTRON has defined annual sustainability targets for the Executive Board as part of the Long Term Incentive (LTI), which are to be achieved over a three-year reference period, and includes corresponding non-financial performance indicators in the Group management.

New non-financial performance indicators were defined for the LTI reference periods beginning in the 2022 and 2023 fiscal years. Essentially these are:

• Percentage of ecologically sustainable revenues, capital expenditures (CapEx) and operating expenses (OpEx) as defined by the EU Taxonomy Regulation
• Strategic executive and personnel development, measured using defined quotas

Research and Development (R&D)
 

In addition to the R&D center at its headquarters in Herzogenrath, AIXTRON also operates a R&D laboratory in Cambridge, United Kingdom. These in-house laboratories are equipped with AIXTRON systems and are used to research and develop new equipment, materials and processes for the production of semiconductor structures.

Focus on Innovation
 

The Group's R&D activities in 2022 again included development programs for future technologies and new products, as well as continuous improvement of AIXTRON's existing products. In order to increase industrial maturity, products were optimized along the entire value chain, e.g. through design improvements of externally supplied components or through improved data analysis. In addition, AIXTRON is working on customer-specific development projects and researching new technologies, often in the context of publicly funded projects.

The Group’s R&D expertise remains of great strategic importance to AIXTRON, as we believe it ensures a competitive, leading edge technology portfolio and supports the future business development. AIXTRON invests specifically in research and development projects in order to maintain or expand the Company’s leading position in MOCVD equipment for applications such as lasers, Micro LEDs, specialty LEDs and for the production of wide-band-gap materials for power electronics. In addition, the Group is working on novel 2D-nanostructures, which are currently seen as having great potential in research.

For the consistent technological evolution of our product portfolio, we have invested EUR 57.7 million, or 12% of revenues (2021: EUR 56.8 million, 13% of revenues), in research and development (R&D) in 2022. At year-end 2022, 254 of AIXTRON Group’s total 895 employees were engaged in research and development activities (2021: 223 of 718 employees).

Technology Protection through Patents
 

AIXTRON aims to secure its technology by patenting and protecting inventions, provided it is strategically expedient for the Company to do so. As of December 31, 2022, the Group had 252 (thereof AIXTRON SE: 237) patent families available (December 31, 2021: 274 patent families). For 8 patent families (AIXTRON SE: 8), patent protection was applied. Usually, patent protection for inventions is applied for in those markets relevant to AIXTRON, specifically in Europe, China, Japan, South Korea, Taiwan and the United States. AIXTRON's patent portfolio is evaluated annually and adjusted accordingly. The individual patents expire between 2023 and 2042. In addition, AIXTRON continuously performs a worldwide patent analysis in order to identify and assess changes in the competitive environment at an early stage.

Research Projects 2022
 

Together with our project partners, we again worked on promising research projects in the reporting year. Here, too, we operate on a global scale and focus on areas with attractive growth potential. 

The project "GIMMIK" aimed at increasing the production suitability of our technology for the deposition of graphene and other 2D materials. In this project, we achieved an improvement in MOCVD technology for graphene. In this way, we meet the international requirements of a versatile, highly flexible key technology with frequently changing customer requirements, processes and products. The project was successfully completed in 2022.

We also successfully completed the research project "UltimateGaN" (Research for GaN technologies, devices and applications to address the challenges of the future GaN roadmap) in 2022, achieving all key project objectives. The successful testing and evaluation of the solution approaches took place in a near-production environment. AIXTRON's primary goal was to increase the production viability of MOCVD technology for power electronics and microwave applications in the energy, mobile communications and electromobility markets. 

Examples of the Group's research work in 2022 include the "YESvGaN" and "Transform" projects:

The project "YESvGaN" (Vertical GaN on Silicon: Wide Band Gap Power at Silicon Cost) is developing a new class of gallium nitride (GaN)-based power transistors that will be both affordable and highly efficient. This will be achieved through so-called vertical GaN (vGaN) diaphragm transistors, which are suitable for conversion at voltages up to 1200 volts and for currents up to 100 amps. The development of these new transistors will involve innovations in several parts of the semiconductor process chain, such as low-cost substrates for thick epitaxial layers, vertical membranes as active layers, or transistors with multiple parallel channels.

The aim of the project "TRANSFORM" (Trusted European SiC Value Chain for a greener Economy) is to establish a complete and competitive European supply chain for power electronics based on silicon carbide (SiC) power semiconductors. It includes research and development activities along the entire value chain, from SiC substrates to power converters, to provide European market players with a reliable source of SiC components and systems. The project consortium will use the G10-SiC AIXTRON Planetary Reactor® for SiC epitaxy on multiple 200mm substrates and develop advanced industrial-grade processes.