Thu, Oct 11, 2001 page21

• Chipmakers play last man standing

  MEMORY WARS As the spot price for a DRAM chip continues to stay below production costs, chipmakers are suffering not only from faltering demand but also from competitors who are trying to force them out

  • BLOOMBERG
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  Feet on his desk, chin on his chest, Chang Song-hwan is startled awake by a customer entering his computer-memory chip store.

  "No one is buying" even though prices have fallen, said the 40-year-old owner of Dong Sin Semiconductor, a cubicle in the basement of a building in Seoul's Youngsan electronics market. "This is the worst slump ever. I'm ready to give up."

  Chang's plight is mirrored by makers of the chips such as Hynix Semiconductor Inc and Winbond Electronics Corp who are suffering not only faltering demand but competitors who are trying to force them out of the industry.

  

  A clean room at Hynix Semiconductor Inc in South Korea. In the saturated semiconductor industry, memory-chip firms are suffering not only from faltering demand, but also from companies trying to force them out.

  PHOTO: BLOOMBERG

  Putting on the pressure

  Take Samsung Electronics Co and Micron Technologies Inc for example. The two chipmakers are maintaining industry-wide production at a level which is forcing makers to sell chips for less than they cost. That has raised suspicions the two are intent on forcing smaller rivals from the US$30 billion industry and expanding their market share, which already stands at 40 percent.

  "A couple of months ago, when there was talk about global supply reduction, Micron and Samsung were the only ones that didn't want to participate," said Keon Han, an analyst at Bear Stearns in Hong Kong. "They wanted to put the pressure on and it is now beginning to work."

  Hynix, the second-largest maker, is trying to find buyers for its facilities as it waits for a decision from creditors on whether they will provide it with a second bailout in less than four months. Taiwanese makers are talking about how they might merge or form partnerships to weather a slump they expect to continue well into next year.

  Sales of DRAM chips, which provide the main memory for personal computers, are forecast by International Data Corporation to fall 40 percent this year. Spot prices for the chips have been below the estimated cost of production since May.

  Shunning production cuts

  The DRAM market has always been cyclical. This time around, the trough may prove deeper as makers refuse to use the traditional solution: production cuts. Samsung and Micron both bemoan the lack of demand and give little sign of scaling back.

  "Until some consolidation takes place it will continue to be difficult," said Sean Mahoney, a spokesman for Micron. Asked what role his company will play, he adds: "we have no plans to reduce production capacity in any of our plants worldwide."

  Similarly, Samsung Electronics Spokesman James Chung says "all companies are just trying to survive right now" and then adds that "we expect to increase our market share when the next rebound comes along." And far from reining in, both companies continue with upgrades and research advances that will make their facilities more productive.

  Samsung said it will begin upgrading production to 0.12 micron technology this year. Reducing the gap between lines in the circuits allows makers to squeeze more chips from a piece of silicon, increasing production capacity and cutting costs. Micron will also open a test line using 0.11 and 0.10 technology this year, much narrower than the 0.15 or larger technology used by most manufacturers.

  Tough times for taiwan

  While Hynix is the highest profile DRAM maker to hit trouble this year, Taiwanese manufacturers, who inherited technology mostly from Japanese companies who have already exited the industry, are also concerned about their ability to continue alone.

  "Hynix is still on shaky ground," said Kim Young-joon, who manages 400 billion won (US$30 5 million) in equity at Samsung Investment Trust Management Co in Seoul. "We don't know if whatever measures the creditors come up with will be enough for Hynix to survive."

  Supply will continue to exceed demand by about 15 percent for as many as three more quarters, said Michael Tsai, president of Powerchip Semiconductor Corp which makes chips for Japan's Mitsubishi Electric Corp.

  "We need more consolidation in the industry," said Tsai. "The strategy of our company is based on this assumption."

  Taiwanese companies, which account for about a fifth of production, depend on partnerships with overseas companies that shoulder most of the research expenses necessary to develop cheaper, smaller chips with more memory capacity.

  Winbond Electronics Corp (華邦電子), a partner of Toshiba Corp of Japan, has cut DRAM production to one-third of its total output as Toshiba prepares to exit the memory-chip business.

  "Anyone smaller than Samsung or Micron is headed for consolidation," said Tseng Hui-min, the chief financial officer for Winbond, Taiwan's biggest computer memory chipmaker.

  Winbond yesterday said September sales plunged 65 percent as terrorist attacks in the US hastened a slump in personal computer sales and the chips that run them.

  Every major manufacturer, with the exception of Samsung, lost money making DRAM chips in their most recent financial quarter.

  Even Samsung, whose profit fell in the second quarter, has sounded a note of caution, saying it will try to stem losses for the remainder of the year.

  While makers grapple with their own problems, most admit they can do little about demand.

  No demand, no dice

  "This is the difference with downturns in the past -- there usually always was demand," said Micron's Mahoney.

  This year is the first since 1985 that personal computer shipments have declined. Though a worldwide economic slowdown has played its part in slowing sales, Chan Chang-ho, who works in a glitzy computer showroom three floors above Dong Sin's Chang says there's a more fundamental reason.

  "If you bought a computer in the last two years you shouldn't expect much of an improvement from a new model," he said. Chan recommends customers consider upgrading their current machines before purchasing a new one.

  In the past, the introduction of new software and operating systems from Microsoft and others meant more demand for faster computers requiring ever-greater memory capacity to handle larger programs. Not so this time around.

  The latest attempt by Microsoft to stimulate demand with a new product has so far fallen flat. Personal computer manufacturers say the introduction of Windows XP, the latest Microsoft operating system, has had little impact on personal computer demand ahead of its official introduction this month

  "The recovery may be pushed out until the second half of next year," said Jonathan Ross, an analyst with Goldman Sachs Asia Llc in Hong Kong.
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