On Thursday, in a bid to overhaul the nation’s struggling memory chip industry, the Ministry of Economic Affairs announced a plan to form a dynamic random access memory (DRAM) company called Taiwan Memory Co within six months, naming a semiconductor czar to head the new firm.
In the face of a record net loss of at least NT$120 billion (US$3.45 billion) for the nation’s five major DRAM companies last year, with aggregate debt totaling NT$341 billion as of Sept. 30, restructuring the industry makes sense, especially now that the companies are battling serious oversupply in the market.
Under the ministry’s blueprint, Taiwan Memory would first seek a partner in either US chipmaker Micron Technology Inc or Japan’s Elpida Memory Inc. The government wants to expand Taiwan’s intellectual property and enhance the local DRAM industry’s competitiveness in the global arena.
The cruel fact is that none of the local DRAM companies is willing to capitulate despite increasing calls for industry consolidation. The attempt to combine existing players into a single entity is not just time-consuming. It’s impossible.
Restructuring the companies’ debt burdens and creating a combined shareholding structure that will appease the various interests involved will likely prove too difficult to bring about.
At first glance, the creation of Taiwan Memory is laudable. Indeed, it was crucial that the government fire the first shot and introduce a merger catalyst.
The plan assumes that companies will agree to combine with the new firm, after a technological alliance with Micron or Elpida is finalized, in exchange for much-needed government funds.
This assumption would be fine if Taiwan Memory formed an alliance with Elpida — a scenario that would likely bring in partners Powerchip Semiconductor Corp, Rexchip Electronics Co and ProMOS Technology Inc under the new firm.
But not so for Nanya Technology Corp and Inotera Memories Inc, because the two subsidiaries of the financially sound Formosa Plastics Group have said they have no intention of merging and that they never considered exiting the DRAM business. In other words, Taiwan would end up with two DRAM camps, with Micron controlling one and Elpida the other.
But this distracts us from the issue. What the industry needs now is for weaker players to leave so that prospects for profitability are improved.
Even if Taiwan Memory succeeded in integrating industry players, there is no guarantee that its formation would protect taxpayers’ money. This is because the government’s intervention could end up being a bailout of non-performing DRAM companies in the guise of the birth of a state-controlled company.
Forget the intentions of the new enterprise. Past experience has seen the government propping up unprofitable companies in a worsening industry environment and facing considerable financial bloodletting before eventually winding down the weakest players.
The worst-case scenario is if Taiwan Memory one day becomes so big that it cannot afford to fail.
The ministry didn’t say on Thursday how the new firm would be financed, nor how it would address existing debt problems after a round of mergers.
With the industry’s prospects still gloomy, losses and debts for local DRAM companies continuing to pile up and investment in new technologies requiring even more capital, the government finds itself staring into a financial abyss on this issue.
The ministry must have on hand an exit strategy for its investment. And, at the very least, before the ministry commits itself, taxpayers deserve to know how it plans to spend their hard-earned money.
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