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. 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)
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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
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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.
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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.
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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
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7. The Next Small Thing – 4 September 2001
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