Fri, May 30, 2003 page11

• Neighbors put the pinch on Japanese chipmakers

  FALLING When memory chips were innovatory, Japan monopolized the market; now they are commoditized and giants like Toshiba have failed to stay ahead

  • BLOOMBERG
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  A decade ago, Toshiba Corp commanded almost 100 percent of the world market for the flash memory chips now used in digital cameras. Japan's biggest chipmaker has since let its share slide to about 40 percent -- and lost the rest to South Korea's Samsung Electronics Co.

  Toshiba's failure to stay ahead in the US$2.3 billion market for so-called NAND flash memory chips, which it invented, is one example of why Japanese companies' share of the global semiconductor industry has fallen by more than half in 15 years.

  Toshiba, NEC Corp and other Japanese chipmakers have failed to translate past technology advances into profits as they keep channeling cash into money-losing products such as flat screens and computer memory chips. To stem record losses, investors say the companies need to exit those areas altogether and focus on more sophisticated products such as chips for consumer electronics, where they can still dominate.

  "These companies must restructure, which means giving up most of their businesses and focusing on areas where profit margins are high and where they might have an advantage," said Edwin Merner, president of Atlantis Investment Research Corp in Tokyo, which manages US$600 million in assets and owns no shares of Japan's five biggest chipmakers. "What they're doing is too little, too late." Japan's top five semiconductor makers -- Toshiba, NEC, Hitachi Ltd., Mitsubishi Electric Corp and Fujitsu Ltd. -- reported a record combined loss of US$13.8 billion in the past two years. In the same period, Intel Corp and Samsung, the world's No. 1 and No. 2 chipmakers, earned about the same amount.

  In their heyday in 1988, Japanese chipmakers commanded a 59 percent share of the global semiconductor market. They forced US rivals such as Santa Clara, California-based Intel and Texas Instruments Inc. out of the computer memory-chip business by mass-producing the devices and selling them more cheaply.

  By last year, Japan's share of the worldwide chip market had shrunk to 24 percent, according to market researcher Gartner Dataquest.

  Japan's chipmakers lost their edge when Samsung and Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) entered the memory-chip market in the 1990s, using lower labor and production costs to undercut Japanese prices. Today, Chinese chipmakers such as Semiconductor Manufacturing International Corp are also becoming a threat.

  "Now, everyone can produce commodity-type chips," said Shigemi Nonaka, chairman of Polestar Investment Management Co., which manages the equivalent of US$38.5 million in Japanese equities, including Toshiba and Hitachi shares. "If the Chinese use the same chipmaking equipment as the Japanese, they can make the same things at a much lower cost. No wonder the Japanese are losing." Shares of Toshiba have slid 36 percent in the past 12 months, and NEC's have dropped 48 percent. Hitachi is down 50 percent, Mitsubishi Electric has lost 48 percent and Fujitsu has fallen 60 percent. That compares with a 11 percent decline for Samsung and a 28 percent drop for Intel.

  Toshiba stopped making computer memory chips in 2002, and Mitsubishi got out of the business earlier this year. The two Japanese chipmakers still making computer memory -- NEC and Hitachi -- lost money on the devices last fiscal year, according to Elpida, an NEC-Hitachi venture that produces them.

  Toshiba says it's shifting its focus to more profitable chips used in devices such as mobile phones and game consoles instead of PCs, even if that means losing a bigger share of the overall semiconductor market.

  "We don't care about market share," said Toshiba spokesman Makoto Yasuda. "Our focus is profitability." The company, which has licensed its NAND chip technology to Samsung for 11 years, posted its first profit in eight quarters in the January-to-March period and said it expects earnings to improve this fiscal year.

  While Japanese chipmakers have slashed a combined 54,000 jobs in two years to cut costs and pare losses, downsizing hasn't been enough to keep pace with richer overseas rivals. Samsung, for one, surpassed Toshiba and STMicroelectronics NV to become the world's No. 2 chipmaker last year by investing in new factories that cost less to run.

  To cement that position, Samsung is spending 61 percent of its 6.78 trillion won (US$5.7 billion) budget this year on new chipmaking equipment and plants.

  Japanese companies, by contrast, have shrinking piles of cash to invest -- and they're spreading it among dozens of products spanning from memory chips and telecommunications equipment to factory machinery and vacuum cleaners.
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