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UMC gets outsourcing from Oki

Oki Electric Industry Co.'s shares surged as much as 5.4 percent after the chipmaker said it will farm out more of its semiconductor production to United Microelectronics Corp. (UMC, 聯電) to cut costs.

Oki's shares rose as much as 12 yen to 234. They ended trade on Japanese stock exchanges up 4.5 percent at ?232, the highest one-day gain since Aug. 7.

UMC's shares fell 0.4 percent to NT$26.80 at the close of trading on the Taiwan stock exchange.

Tokyo-based Oki will outsource some production of chips for communications equipment and consumer electronics to UMC, the world's second-largest supplier of made-to- order chips, the two companies said yesterday.

Farming out production saves Oki money, which the Japanese chipmaker would otherwise spend on its own plants. Oki said it will design chips requiring advanced production technology, which United Microelectronics has, while it keeps older factories that don't require high spending to maintain.

Oki's old- fashioned approach to a newfangled industry may pay off for investors.

Tokyo-based Oki is the No. 1 maker of memory chips for printers, radios, tape recorders and minidisk players, devices with 1/32nd the storage of those in most personal computers. In a market all but abandoned by rivals like Samsung Electronics Co., Oki can squeeze profit from factories that rivals call obsolete.

The chipmaker isn't profitable, and a 55 percent decline in its stock price this year makes its shares the third-worst performer on the Nikkei 225 stock average. Yet its focus on a neglected market means its prospects are bright, investors said.

Makoto Kikuchi, who manages ?500 billion (US$4.2 billion) at PCA Asset Management Co., said he's looking to buy Oki shares after dumping his stake when the company cut its earnings forecast in February. ``It won't be long until Oki shares become attractive again,'' he said.

Oki's approach is as low-tech as it is low cost. By making only 4-megabit dynamic random-access memory chips, which are used in printers made by Canon Inc. and Hewlett-Packard Co., it doesn't need to keep investing money in cutting-edge technology.

This year, Oki plans to spend ?17.2 billion on plants and equipment, two-thirds less than larger rival Toshiba Corp. Even with the relatively small investment, the company managed to boost its share of the low-capacity chip market to 55 percent between April and June from 40 percent in the previous quarter.

Oki is also cutting costs by farming out production to chipmakers such as Taiwan's UMC.

Yesterday, Oki extended that agreement, saying UMC, the world's No. 2 supplier of made-to-order chips, will produce more of Oki's communications and consumer- electronics chips. Oki's shares today rose as much as 4.1 percent to 231 yen, their biggest one-day gain in nine days.

Oki expects to keep expanding market share as Hynix Semiconductor Inc. and others reduce or withdraw from production, the company's executives insist.

``There's no doubt that we keep winning,'' Kunihide Otomo, a senior manager in the company's public relations department, said.

``No one wants to spend money to enter this market.'' Even so, Oki didn't sidestep the plunge in memory-chip demand. Customers pressured Oki to lower chip prices after 128- megabit prices began their decline earlier this year, the company said in February. The price cuts contributed to Oki's 34.1 billion yen loss last year. Oki expects to break even this year.

Among Nikkei 225 companies, Oki's shares outperformed only those of NEC Corp, which is also a memory-chip maker, and Furukawa Electric Co., the world's No. 2 optical fiber maker.
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