Memory Chips: A High Bar for Qimonda

Under Malaysian-born CEO Loh, the German chip giant is struggling to make its products stand out in a brutally competitive business

Few businesses are as unforgiving as the one in which Kin Wah Loh has spent his career: computer memory chips. Makers of so-called dynamic random-access memory (DRAM) have a difficult time differentiating their products from those of competitors, and the winner is usually the company that can deliver the most performance for the lowest price in the shortest period of time.

"If the speed is not there, you are punished," says Loh, Malaysian-born chief executive of German chipmaker Qimonda (QI), which may not be a household name but whose products are present in most households.

Spun out in 2006 from Infineon (IFX), the former chip unit of German engineering giant Siemens (SI), Qimonda is the world's third-largest DRAM maker behind Korea's Samsung Electronics (SSNHY) and Hynix Semiconductor (HXSCF). It supplies memory chips used in Microsoft (MSFT), Sony (SNE), and Nintendo (7974.T) game consoles, as well as Hewlett-Packard (HPQ) and Lenovo (LNVGF) PCs and other products such as mobile phones and TV sets.

Plunging Sales

Yet Loh seems surprised when asked why anyone in his right mind would want to spend his life in the rough-and-tumble DRAM industry. Rather, he seems pleased to find himself in the corner office, one of the few foreigners to achieve that status at a German company. "I don't believe I am cleverer than others," he says over lunch at Qimonda's headquarters in a Munich suburb. "Somehow or other I'm always at the doorstep of opportunity."

Loh is obviously being modest. No run-of-the-mill manager lasts for long in the chip business, which has been especially brutal in the past year. Because of oversupply, memory prices plunged industrywide throughout 2007, including a 29% drop in the fourth quarter alone, according to market watcher Gartner (IT). As a result, Qimonda sales plunged 56% from a year earlier, to $810 million, in the quarter ended Dec. 31, the company's fiscal first quarter. Qimonda clocked an operating loss for the quarter of $932 million, more than total sales.

In the boom-or-bust DRAM business, such huge losses are offset by massive profits during upswings—if all goes well. Still, investors are clearly concerned. Qimonda shares on the New York Stock Exchange have fallen more than two-thirds, to 4, since their 2006 initial public offering.

Qimonda also faces severe competitive pressure. The company is the largest maker of memory chips for games, and in 2007 it clung to its No. 3 position among chipmakers, with a 12.6% market share, according to Gartner. But it faces a stiff challenge from Tokyo's Elpida Memory (ELPDF), which bumped Qimonda to fourth place in the overall market in the fourth quarter of 2007. "Qimonda's current position is delicate. That's the best way to put it," says Andrew Norwood, semiconductor industry analyst at Gartner.

The 53-year-old CEO is taking the pressure in stride. "I enjoy the challenge," says Loh, who began his career at the Malaysian operations of Siemens in 1978. Loh, who studied chemical engineering at the University of Malaya in Kuala Lumpur, worked at a Siemens components plant in Malacca, where he got his first exposure to the memory chip business.

Painstaking German Engineers

In 1991, Siemens transferred Loh to a components plant in the Bavarian city of Regensburg as part of an effort to promote managers from outside Germany. There he gained valuable experience in dealing with the German mindset. Loh found German engineers more likely to question their superiors, and also prone to plan extensively before taking action. He says he grew to appreciate the questioning. But he learned that he sometimes had to cut short the planning process and insist on action.

Siemens sent Loh back to Asia in 1992 as general manager of the components business in Singapore. When Siemens spun off its semiconductor unit in 1999 to create Infineon, Loh became president of the new company's Asian operations. He joined Infineon's management board in 2004 and became of head of memory products in 2005. That position made him the logical choice to head Qimonda when Infineon, in an effort to reduce exposure to the volatile memory business, spun off a stake in the unit in 2006. "They all pointed at me," Loh recalls. (Munich-based Infineon remains Qimonda's majority shareholder.)

The IPO in August, 2006, came only months before the industry entered the latest cyclical decline. The current year also will be tough, Gartner says, because of lower-than-expected demand for computers with Microsoft's new Vista operating system.

Loh has responded by delaying construction of a new factory in Singapore and cutting spending on research and development. At the same time, Qimonda is rolling out a new memory technology known as "buried wordline," which uses less power and generates less heat. The technology, which will extend battery life in portable applications, could help Qimonda products stand out in what is considered a commodity business. "We see some light at the end of the tunnel," Loh says, noting that prices show signs of stabilizing.

Gartner analyst Norwood says industry watchers are impressed with Qimonda's technology plans for the next several years. "On paper, it looks like a compelling long-term road map," Norwood says. "All they have to do is demonstrate that they can get it to work."

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