International -- Asian Business: Semiconductors
Asia's Chipmakers: The Dragons Bulk Up (int'l edition)
An overdue wave of mergers is reshaping the industry
In the Darwinian West, the solution is simple: When a market slumps and manufacturers are glutted with capacity, the industry consolidates and a few strong players emerge. But in the East, the weak just soldier on, bleeding red ink, cutting prices, and making life miserable for everyone else.
Now, the law of the jungle is finally spreading to Asia's overbuilt electronics industry. In Japan, South Korea, and Taiwan, major semiconductor producers are forging alliances to stay in the game. In the biggest deal yet, the presidents of Japan's NEC Corp. and Hitachi Ltd. on June 24 announced that their money-losing chip operations will join forces to develop the next generation of dynamic random access memory (DRAM) chips. The idea is to slash costs, speed up development, and boost global marketing clout. Japanese chipmakers have tied up with Western giants in the past. But such alliances between leaders in Japan are new. Declared NEC President Koji Nishigaki: "It's the only way to survive."
And it's long overdue. The three-year slump in DRAM prices caused by overexpansion in the boom years has deeply damaged Asia's chipmakers. DRAMs accounted for half of the $830 million loss at Hitachi's semiconductor division in the year ended Mar. 31, the group's worst performance ever. NEC didn't fare any better: It lost $290 million in chips during the past fiscal year. The world's No. 2 chipmaker in 1997, NEC has since tumbled to fourth place.STOCK BOOST. Those losses drove NEC and Hitachi into each other's arms. So did the crushing cost of financing the next generation of chips, the 256-megabit DRAMs with superthin 0.15-micron line widths. NEC and Hitachi, which together control 16% of the $14 billion market, hope to gain on leaders Samsung and Hyundai of South Korea and Micron Technology of the U.S., which also are expanding.
News of the deal sent the stock prices of electronics conglomerates sharply higher in Tokyo, where investors figure these lumbering giants may finally be paying attention to the bottom line. "It's the first time any of these troubled firms has merged mainstream businesses," says chip analyst Shigeru Yoshinaka at Commerz International Capital Management in Tokyo. Adds Tokyo Research Director Yoshiharu Izumi of Warburg Dillon Reed: "The feeling is that if a blue chip like Hitachi can change, there's hope for the others."
Many analysts still doubt these moves are enough. NEC plans to cut only 10% of its 150,000 workforce over the next three years, for example, and Hitachi is moving even more slowly to cut back. But clearly, the most sweeping shakeout in a decade is under way in the DRAM industry, a capital-hungry commodity business dominated by East Asia.
Late last year, Toshiba Corp. and Fujitsu Ltd. formed an alliance to develop 1-gigabit DRAMs. In South Korea, the government has forced the marriage of the chip operations of LG Semicon Co. and Hyundai Electronics Industries Co., part of its drive to force debt-laden chaebol to vacate unprofitable businesses. And in one of many shake-ups in Taiwan, Acer Inc. has sold 30% of its DRAM plant to Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest chip foundry. TSMC plans to use half of the capacity to make specialty chips ona contract basis for outside firms, a booming industry.
Driving the urge to merge is the deteriorating economics of memory chips. The problem hasn't been demand: The need for DRAMs has actually surged in the past few years as personal computers require ever-greater memory to handle new multimedia applications. But an influx of upstarts and feverish expansion in the mid-1990s, combined with the usual technology advances that allow chipmakers to produce more DRAMs from a slab of silicon, have sent prices tumbling far more than expected. "There was a quantum leap in supply, and demand couldn't support it," explains Robert Hsieh, financial vice-president for Taiwan's Vanguard International Semiconductor Corp.STEEP HILL. As a result, after hitting $40.8 billion in 1995, global DRAM revenues dwindled to just $14 billion in 1998. The financial bloodletting has continued even as manufacturers have had to lay out billions to advance into new generations of DRAMs and to build plants capable of making wafers with even thinner line widths. Normally, they can rely on such transitions to make fat profits.
The DRAM market finally seems ready to firm up, with global revenue expected to rise by up to 25% this year, according to the Semiconductor Industry Assn. But with new wafer-fabrication plants, or "fabs," costing upwards of $1.5 billion, only the strongest players can stay in the race. One likely survivor, industry leader Samsung, plans to invest $2.5 billion to boost capacity in Korea and the U.S. But many others are getting out of DRAM production altogether to focus on more profitable semiconductors, such as specialty chips used for cellular phones and digital cameras.
Or they are outsourcing to low-cost suppliers in Taiwan, which now accounts for 8% of global DRAM output. "Running fabs in Japan is not very cost-effective," says Ron Norris, TSMC's senior vice-president for worldwide marketing. Thus, in mid-June, Vanguard, a TSMC subsidiary, said it will buy Mitsubishi's 11% stake in Taiwanese DRAM producer Powerchip Semiconductor. As part of the deal, Mitsubishi will have Powerchip and Vanguard make its memory chips. That will let Mitsubishi shift to higher-end chips.
More deals are likely. United Microelectronics Corp., Taiwan's No. 2 foundry, plans to use part of its $1.1 billion war chest to acquire plants from rivals. "The DRAM fabs in Taiwan are all in trouble, so they can be bought at a very low price," says semiconductor analyst Chris Hsieh of Nomura Securities International Inc.
Signs indicate that consolidation is spreading to other segments of high-tech electronics. A number of Japanese companies are teaming up to develop new computer-display panels, where risk and capital costs also are high. Fujitsu and Hitachi agreed in April to work on large-screen plasma displays, while Toshiba and Canon are joining forces to develop a new flat panel. Some analysts see these moves as the precursor of wholesale restructuring of Japan's electronics behemoths. It has taken the worst economic crisis of the postwar era, but the time when Asian conglomerates prized bulk over profits may be drawing to a close.By Irene Kunii in Tokyo and Jonathan Moore in Taipei, with Jennifer Veale in Seoul and Otis Port in New YorkReturn to top