Thu, May 02, 2002 page17

• Japan's chip firms face more losses

  • BLOOMBERG
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  Toshiba Corp and other Japanese semiconductor makers may lose money for a second straight year because they have been slower to cut costs and move to more-profitable chips than competitors, analysts and investors said.

  Toshiba, the world's second-largest chipmaker, and its four largest domestic rivals -- NEC Corp, Hitachi Ltd, Mitsubishi Electric Corp and Fujitsu Ltd -- last week reported a combined loss of ?1.5 trillion (US$11.7 billion) for the fiscal year ended March 31. Chipmaking accounted for much of the losses.

  The companies are trying to recover from the industry's worst slump by spending billions of dollars to reduce staff and reorganize businesses. They have been tardy in making such moves, as well as in moving away from commodity-type chips to ones with higher profit potential such as those used in video-game consoles and digital cameras, analysts said.

  "Japanese chipmakers need a complete change in management to achieve real restructuring," said Fumiaki Sato, a Deutsche Securities analyst. "The current managers are afraid to cut jobs and make drastic changes to their organizations."

  Industrywide chip sales tumbled to their lowest level on record last year as sales of personal computers and mobile phones slumped, causing makers of those products to curb chip orders.

  While companies such as South Korea's Samsung Electronics Co and Germany's Infineon Technologies AG are faring better, Japanese companies are struggling to survive.

  Toshiba said last week its chip unit posted a ?120 billion loss for the year ended March 31 -- almost half the company's record full-year loss of ?254 billion. NEC's chip unit had a loss of ?100 billion. Hitachi said its chip business had lost ?133 billion.

  Fujitsu, Hitachi and Mitsubishi Electric say they expect smaller losses this year, while Toshiba and NEC predict their chip businesses will return to profit. That may be wishful thinking, an investor said.

  "Restructuring such as job cuts will help, but we cannot be optimistic" about the chipmakers' prospects, said Yoshiya Morimoto, who helps manage equities for Japan Investment Trust Management Co. "Total demand for chips depends on consumer spending, which is not growing significantly, especially in the US."

  When the recovery does come, Japanese chipmakers may not benefit as much as competitors from a recovery, analyst Sato said.

  "They haven't clarified which businesses they will focus on and how they will increase profits," he said.

  The Japanese companies are paying for their headlong rush into commodity-like memory chips, whose prices have plunged amid a supply glut. Now they are phasing out of memory chips to focus on so-called system chips, specialized devices used in video-game consoles and other appliances. Demand for such "designer" chips is relatively stable and easier to predict.

  Still, as more companies jump into specialized chips, profit margins in those businesses may narrow. "System chips will not produce enough profit because the big chipmakers are all opting for a similar direction, making competition fiercer," said Akira Minamikawa, an analyst at WestLB Securities Pacific Ltd.

  Japan's chipmakers also lag behind rivals such as Intel Corp, the world's biggest chipmaker, in gearing up production of the specialized chips.

  "To get profit from system chips the way Intel and Texas Instruments Inc does, Japanese chipmakers must make chips for products that will sell millions of units," said Satoru Oyama, a Lehman Brothers analyst.

  Chipmakers outside of Japan already are starting to get more orders. Samsung, the world's largest computer-memory-chip maker, last month reported record first-quarter profit on brisk demand for dynamic random-access memory chips and mobile phones.
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