Dark Days for Japan's Chipmakers

Things are looking grim for the world's top chipmakers these days. Last week, it was German memory chipmaker Qimonda filing for bankruptcy and Korea's Samsung Electronics reporting its first-ever quarterly loss. This week, it was the Japanese chipmakers' turn: On Jan. 29, Toshiba (6502.T) and NEC Electronics (6723.T) posted quarterly operating losses and revised their annual forecasts to reflect a gloomier outlook.

Part of the problem is that the economic downturn has sharply undercut demand for new flat-screen TVs, laptops, video-game consoles, and cars—all of which rely on microprocessors and memory chips. A glut of chips in recent months hasn't helped, either, weighing on prices. That's doubly painful for big chipmakers because of the capital-intensive nature of the business. They spend billions every year for state-of-the-art factories and equipment just to maintain an edge over rivals.

Few analysts expect a market rebound anytime soon. Last month, market researcher iSuppli revised downward its outlook for the global semiconductor industry, forecasting a 9.4% fall in revenues, to $241.5 billion, this year, from 2008, instead of a 6.8% gain. "We expect the current chip market conditions to continue through the next fiscal year," Toshiba President Atsutoshi Nishida told journalists at a news conference in Tokyo.

Layoffs and Spending Cuts

Toshiba, the world's second-largest maker of NAND flash memory chips for iPods and cell phones, said operating earnings swung to a loss of $1.8 billion in the October-December quarter, from a $467 million profit in the same quarter a year ago, and sales fell 21%, to $16.5 billion. The company warned that it now expects an operating loss of $3.1 billion this fiscal year through March—its biggest loss ever—instead of the $1.67 billion profit it had previously predicted.

To curb spending, Toshiba plans to lay off temporary and contract workers, ban overtime, and institute a policy that shortens workers' shifts. It's also slashing money for research and development and new factories, focusing on fewer projects, and shifting some production overseas where labor costs are lower and a surging yen wouldn't hammer earnings as it has. Nishida said the company would cut research funding by 20% next year and capital expenditures—which are down 30% from earlier plans to $5 billion this year—by 50% next year. One casualty of the spending cuts: A memory-chip plant that the company was scheduled to break ground on in the western Japanese city of Yokkaichi later this year will be delayed until some time in 2010.

Toshiba isn't just hacking away at costs. It's channeling resources into its nuclear power division and into research for new technologies such as rechargeable batteries for cars and industrial equipment, light-emitting diodes, and fuel cells that power portable gizmos.

Cash Burn

Meanwhile, NEC Electronics, which supplies chips for Nintendo's (7974.T) Wii gaming machine and Toyota (TM) cars, chalked up a $180 million operating loss for the quarter and expects the loss to reach $611 million by the Mar. 30 fiscal yearend. The company had previously forecast an annual operating gain.

Of the two, Toshiba has the broader portfolio of products, ranging from flat-screen TVs and washing machines to nuclear reactors. But Toshiba's thriving power generation business has only slightly blunted the sharp drop in its earnings. Toshiba's other problem: It's bleeding cash. In the first nine months of the fiscal year, the company reported free cash flow of minus $4.4 billion, from minus $2.8 billion the previous year. At the same time, its short-term borrowing shot up $5.6 billion.

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