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NEC, Hitachi delaying Elpida plant

"In this industry, you have to be at least No. 2 to be profitable. They may as well scrap Elpida."

Yasuki Sumimoto, equity manager, UFJ Partners

NEC Corp and Hitachi Ltd, both of which will post annual losses, may scrap their joint venture that develops and sells computer memory chips, whose prices have fallen below production costs, investors said.

The two Japanese DRAM makers, the main memory in PCs, announced in September their intention to postponed memory production at Elpida Memory Inc to December next year from September this year. Elpida is owned 50-50 by NEC and Hitachi.

All memory-chip makers have lost money this year as sluggish demand for PCs and the continued effects of excess capacity caused an oversupply of the chips and a drop in prices.

Micron Technology Inc, the second-largest supplier, has agreed to buy Toshiba's DRAM plant in Virginia (US) and is in talks to buy the third-largest DRAM maker H?ix Semiconductor Inc.

"In this industry, you have to be at least No. 2 to be profitable," said Yasuaki Sumimoto, who helps manage about US$5.6 billion in Japanese equities at UFJ Partners Asset Management Co, which holds shares of NEC and Hitachi. "They may as well scrap Elpida."

Samsung Electronics was the biggest DRAM maker with 22.9 percent market share last year, according to market researcher IDC. Infineon Technologies AG is the fourth, followed by NEC, Toshiba and Hitachi in that order.

"Japanese DRAM makers are basically losers," said Masami Nagano, fund manager at Sanyo Investment Trust Management Co, which manages ?230 billion (US$1.75 billion) in securities, including shares of NEC and Hitachi.

The spot price of 128Mb DRAMs has almost doubled to US$1.98 since the start of November after slumping sliding 90 percent in the year to November.

Elpida Memory, founded in December 1999, rents land from its parent NEC, for its DRAM plant in Hiroshima, western Japan.

NEC and Hitachi together had planned to invest an additional ?30 billion yen in the venture next April. Elpida will spend the money on completing the building and installing enough chipmaking equipment for trial production, Elpida spokesman Fujio Okada said.

Thereafter, Elpida plans to raise ?108 billion through bank loans or other measures to buy enough equipment to be ready to start mass-production next December, Okada said.

Investors, though, likely won't be interested in Elpida's bonds.

"The outlook of Elpida is too poor," Tatsuro Suzuki, a fund manager in the bonds investment department at The Tokio Marine & Fire Insurance Co, which manages ?1.3 trillion of Japanese bonds.

"I wouldn't touch the bonds unless NEC and Hitachi promised financial support," he said.

Banks, which are struggling to pare bad loans, may not lend to Elpida because of the perceived high-default risk, Suzuki added.

The prospects for computer memory chips are grim, say analysts. Global sales of DRAMs will fall 61 percent to US$11.3 billion this year from US$28.9 billion last year, according to the World Semiconductor Trade Statistics.

Tokyo-based NEC, which expects its DRAM business to report revenues of ?80 billion, forecasts a ?150 billion group loss in the year ending March next year to account for costs to reorganize its chip business.

Also Tokyo-based Hitachi will lose about ?64 billion in the business for the same period. Hitachi, Japan's biggest electronics maker, will post a loss of ?230 billion for the period, the biggest since the year to March 1999.

Both companies are studying the pros and cons of staying in the money-losing business.

"We are studying whether we should delay the planned investment in Elpida next April," Shigeo Matsumoto, executive vice president in charge of investor relations at NEC, said at a dinner party with reporters. Hitachi is also considering every possible scenario, company spokesman Masanao Sato said.

Both companies reportedly plan to transform their own DRAM plants into facilities that produce non-volatile memory used in digital cameras and cellular phones.
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