Chip recovery may come slowly

Miin Wu (吳敏求), chairman of Macronix International Co (旺宏電子), looks out his office window at the empty plant the nation's fourth-largest chipmaker built just as the semiconductor industry's boom turned to bust early this year.

"We hope to move production equipment in sometime next year," Wu said in an interview. "We're just not sure when."

Macronix, as with other chipmakers, wants to time any increase in production to a rebound in the industry from its worst slump after demand for chips that power personal computers, phones and electronic games plummeted, leaving a glut. The industry shrank by a third from a record US$200 billion last year. While Asia's chipmakers are preparing for a recovery, their gains may be capped by idle capacity, investors said.

"The year 2000 was a bubble," said Ernie Tam, who helps manage US$2 billion at Baring Asset Management (Asia) Ltd in Hong Kong. "It will take a long time for sales to recover to that level."

In the meantime, profit will be dragged down by unused production equipment, investors said.

"The capacity that resulted in 2001 came from the perception that demand would grow forever," said Magdalene Miller, who manages US$2 billion in Asia for Standard Life Investments in Edinburgh.

As demand fell, many of the industry's biggest manufacturers were forced to operate at a fraction of their capacities.

Hsinchu, Taiwan-based Taiwan Semiconductor Manufacturing Co.

(TSMC, 台積電), the largest maker of chips for other companies, and its nearest rival United Microelectronics Corp (UMC, 聯電), cut capacity use to below half. Singapore-based Chartered Semiconductor Manufacturing Co, the third-largest made-to-order chipmaker, said it's using about a quarter of its production equipment.

Those companies, which had more orders than they could meet during most of last year, will at best use 70 percent of their capacity by the second half, analysts said.

Makers of dynamic random-access memory chips, or DRAMs were the worst-hit segment of the industry. All DRAM makers reported losses after sales worldwide fell two thirds to US$10 billion. Prices of the benchmark 128-megabit chips fell to a record US$0.99, less than half the US$2 apiece it costs to make them. While spot prices have recovered to a recent US$1.98, according to DRAMeXchange.com Corp, a clearinghouse for the chips, they're still below cost.

"The DRAM industry will probably recover in the second half as production cuts reduce inventories, but PC demand may not pick up until later," said Sadaji Shibata, general manager at Daiwa Asset Management Co, which manages about ?1.5 trillion (US$11.7 billion) in Japanese equities.

That's small comfort to Japanese memory-chip makers, which once commanded more than 90 percent of the market. Now accounting for less than 10 percent, companies such as Toshiba Corp and NEC Corp are exiting parts of the business. Last week, Toshiba sold its US DRAM business to Micron Technology Inc, the second-largest supplier.

Japan's four biggest chipmakers are cutting thousands of jobs and idling plants after posting combined losses of ?439 billion (US$3.4 billion) in the six months to Sept. 30. The worst may not be over, according to some investors.

Losses, Exits Toshiba, the second-largest chipmaker, expects to post a loss of

50 billion in its chip business in the year ending March next year and will gradually phase out DRAM production at a plant in Yokkaichi in western Japan.