Wed, Sep 18, 2002 page11

• Investors expect more Japanese chipmakers to reduce their goals

  DELAYED RECOVERING Continued weak demand for personal computers and mobile phones, coupled with a stronger yen, is hurting Japan's flagship chipmakers

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  Hitachi Ltd, the first of Japan's top five computer chipmakers to cut its first-half profit target, may not be the last, investors said.

  The reason -- demand for personal computers and mobile phones, especially in the US, is proving weaker than Hitachi, Toshiba Corp, NEC Corp, Mitsubishi Electric Corp and Fujitsu anticipated. In addition, a strong yen is making Japanese products pricier overseas.

  Hitachi's move underlines a growing consensus among global chip industry executives that their hopes for a second-half recovery were unfounded. Japan's flagship chipmakers, which lost ?1.5 trillion (US$12.6 billion) last year as chip sales tumbled by a third, may now have to cut more jobs and shut factories.

  "There is definitely a possibility that other Japanese chipmakers will lower their forecasts," said Nobuaki Kurisu, who helps manage ?7 billion of Japanese stocks at Sumisei Global Investment Trust Management Co. "It looked like a US economic recovery was underway, but obviously that has not been the case."

  Hitachi, Japan's No. 3 chipmaker, said last week it probably broke even in the six months ended this month, reversing an earlier prediction of a ?5 billion profit. The Tokyo-based company expects a ?20 billion loss in the first half at its semiconductor business, which accounts for a 10th of revenue.

  For Japanese chipmakers, "there's only bad news," said Sei-ichiro Iwamoto, who helps manage ?100 billion at Fuji Investment Management Co.

  Executives at Japan's top five chipmakers expected a rebound in demand this fiscal year. After closing plants and cutting jobs, most of them predicted a recovery.

  Fujitsu, Hitachi and Mitsubishi Electric said in April they expected smaller losses from their chip busi-nesses this year than last. Toshiba and NEC predicted their chip businesses would return to profit.

  It hasn't turned out that way.

  Rather than weaken after falling 1 percent against the US dollar between January and March, the yen added to its gains, rising 12 percent in the three months ended June. It has fallen 3.2 percent since then.

  It's not just a fluctuating Jap-anese currency and bloated workforces the country's chipmakers must deal with.

  Keener competition from chipmakers in Taiwan and South Korea is also presenting a challenge.

  No other company symbolizes the threat more than Samsung Electronics Co, which is currently one of the world's only profitable memory-chip makers and which continues to come up with innovations unmatched by its rivals.

  Earlier this week, Samsung said it had developed a new flash-memory chip with double the capacity of those currently available.

  To regain market share, Toshiba, the world's No. 2 chipmaker and NEC have agreed to jointly develop memory chips designed to cut power consumption in personal computers, mobile phones and other electronic devices.

  Similar measures by other chipmakers can be expected if they hope to remain competitive, investors say.

  "Japanese chipmakers can't compete [with foreign rivals] unless they get together," said Katsuaki Furutachi, who helps manage about ?150 billion in Japanese equities at Asahi Life Asset Management Co.

  Among Japanese manufacturers, Hitachi is particularly vulnerable to fluctuations in the value of the yen since overseas sales account for 34 percent of total revenue.

  "Hitachi is definitely the most affected by the strong yen" because of their reliance on overseas sales, said Koichi Fujimoto, an analyst at Okasan Securities, who rates Hitachi stock "neutral minus."

  Chipmakers, notably Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), cut spending plans for new equipment and plants. In addition, the Semiconductor Industry Association expects chip sales to grow just 3 percent in 2002.

  Reflecting the slowdown in chip sales and PC demand, Advantest Corp, the world's biggest maker of equipment to test memory chips, widened its first-half loss forecast by almost two-thirds last week to ?4.8 billion.

  Reinforcing IDC's gloomier outlook for PC sales, TSMC said some customers asked to delay delivery on their orders.
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