Sun, Nov 16, 2008 page8

• EDITORIAL: DRAM firms: To save or not to save

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  The question of whether the government should rescue manufacturers of dynamic random access memory (DRAM) chips is generating mixed responses.

  The issue attracted attention last week when lawmakers across party lines urged the government to create an immediate bailout package, adding that without action, the DRAM industry would collapse and consequently damage the nation’s economy.

  Figures show that the nation’s top four DRAM makers posted combined losses of NT$36.6 billion (US$1.1 billion) in the third quarter and NT$90.83 billion for the first nine months of the year, making the sector the biggest loser among local industries.

  With the industry still in a trough and market demand weak, experts expect the four companies — Powerchip Semiconductor Corp (力晶半導體), Nanya Technology Corp (南亞科技), Inotera Memories Inc (華亞科技) and ProMOS Technologies Inc (茂德科技) — to incur combined losses of NT$112.5 billion this year.

  Making matters worse is the fact that these companies have borrowed an aggregate NT$420 billion (US$12.7 billion) from local banks over recent years, according to Ministry of Economic Affairs statistics, in addition to a significant roster of overseas convertible bond payments that are due next year.

  The combination of global credit crunch and economic slowdown has discouraged banks from lending to avoid bad loans, and this has made it impossible for chipmakers to borrow more money to ease capital shortages and honor bond payments. Under these circumstances, some may bow out of the industry before the market recovers — possibly in the second half of next year, as many in the industry expect.

  Some say the government should save the DRAM industry because a sector collapse would not only create a financial crisis for local banks but also trigger a chain reaction in the tech industry, with flat-panel displays very likely to be the next victim.

  The economic repercussions of bankruptcies in the DRAM industry, even if just one chipmaker were allowed to fail, would also be far-reaching and hard to predict, as would the socioeconomic impact of a spike in job losses.

  However, others say that saving the DRAM industry would pose a greater threat to banks because no one knows how much cash would be needed to see DRAM makers through this difficult time.

  There is also an argument that the government should let the weaker players go to the wall. Though painful in the short term, this would allow the survivors to grow stronger, with bigger economies of scale and more cost-efficiency, which would raise the industry’s long-term competitiveness.

  Given the complexity and massive risks associated with a collapse of the DRAM industry and its implications for the economy overall, however, the government is expected to come to the rescue.

  So far, the government is considering an adjustment of payment terms and emergency loans. It is also looking into injecting public funds into DRAM companies and securing stakes in the companies, eventually facilitating mergers or other consolidation within the industry. But the task will not be easy in view of the different production technologies and various partnerships involved.

  Whether or not a bailout is on the way, the government must make its position clear, and soon. This would enable DRAM makers to seek funding from other investors or negotiate mergers while there is time left.

  In the meantime, the companies must make deep cuts in production capacity and change corporate strategies given the unfavorable and inevitable market obstacles that lie ahead.
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