Japan's Big 5: Chip Recovery By Summer
(05/04/01, 12:05 p.m. ET) By Edmund Klamann, Reuters
TOKYO—Japan's chipmaking conglomerates were unanimous in predicting in their latest earnings reports that a much-awaited recovery from the semiconductor slump would start this summer.
Global chip sales have been in the doldrums since last fall, with excess inventory and the slowing U.S. economy hitting production and jobs. The Semiconductor Industry Association said on Wednesday that worldwide sales of chips by member companies dropped seven percent in March from February.
Despite lock-step forecasts of better times by Japanese chipmakers, analysts were quick to point out that prospects for the five behemoths—and the opportunities they present for investors—will likely diverge sharply this year.
Indeed, the market already seems to be poring over the differences and rewarding the more promising prospects: Shares in NEC Corp. and Hitachi Ltd. have bounced more than 50 percent from lows set in March.
By contrast, Toshiba Corp., Japan's biggest chipmaker by revenues, is up a little more than one-third, while Fujitsu Ltd. and Mitsubishi Electric Corp. have gained a more modest 25 percent to 30 percent.
Over the same period the benchmark Nikkei 225 average has risen nearly 20 percent.
There are few signs of divergence, however, in the companies' forecasts for semiconductor revenues in the current business year to next March; four of the five said the figures would be flat or up about 1 percent.
The standout was Fujitsu, which targeted a nearly 10 percent rise in chip revenues as it grabs for market share in flash memory.
Fujitsu makes NOR flash memory, about half of which ends up in cell phones, but analysts questioned whether that market is ready for a big influx of new supply. They also doubted the company's assertion that prices of the chips would not fall substantially during the year.
“The problem for cell phones is first that unit production is not going to rise that much this business year, and second, except for Japan, the amount of memory loaded into each handset won't rise very much,” said ABN Amro analyst Satoru Oyama.
Lehman Brothers analyst Scott Foster said Fujitsu's plans, which include boosting flash memory production capacity by two-thirds this year, may also deal a heavy blow to rivals in the sector such as Mitsubishi Electric.
“Flash memory is one product where I think the aggressiveness of suppliers can keep margins under pressure for some time,” he said. “Fujitsu is arguably the most efficient producer so they can take a lot of market share, but it'll be pretty rough on their competition.”
But analysts widely questioned Fujitsu's claim that flash memory prices would hold relatively firm and that its chip-related profits would fall only 15 percent in 2001/02 from the year before—the smallest drop of the five conglomerates.
For Japan's other big chipmakers, flash memory is not just a neither-NOR situation.
Toshiba plans to ramp up production of NAND flash memory, which is smaller but more expensive than the NOR variety. The company expects to sell some of the chips to cell phone makers this year, but analysts warn that high prices remain an obstacle in this still immature sector of the flash market.
NEC, Japan's second-biggest chipmaker after Toshiba, is staying out of the flash fray, but hopes to see its fortunes rebound after last autumn's tumble in commodity DRAM prices battered its bottom line. NEC's chip-related operating profits in 2000/01 were the lowest of the five conglomerates.
With much of its DRAM production already heading to a joint venture with Hitachi, NEC is also switching to more expensive Rambus DRAM, which will be used in chipsets with Intel Corp.'s new Pentium 4 processor.
“NEC is effectively a non-memory company now,” said Lehman's Foster.
Analysts also point to good prospects for NEC in the market for LSI (large scale integration) chips, which account for about half the chip revenues at each of Japan's chip conglomerates. The category consists largely of application specific integrated circuits or logic chips used in consumer electronics.
NEC will supply LSI graphics chips for Nintendo Ltd.'s next-generation Game Cube console engine control chips for Toyota Motor Corp. cars.
“In digital consumer electronics, games, automobiles, communications, set-top boxes, all these fields, we want to make use of our design capabilities... and process technology to move our LSI operations forward and become the world leader,” NEC president Koji Nishigaki said last week.
Although the chip sector accounts for only a fraction of revenues at the conglomerates, whose operations range from computer services to communications equipment to electronic components, Merrill Lynch analyst Hitoshi Shin said in a recent report that semiconductors tend to define the bottom for the companies' share prices.
At the same time, he said, it's the non-chip businesses that tend to create upside opportunities, citing Hitachi's storage systems and NEC's communications equipment as promising areas that could fuel share price appreciation. He recently raised his long-term rating on Hitachi to “buy” from “accumulate.”
At the same time, analysts cite Mitsubishi Electric's exposure to the recently sluggish cell phone market and Toshiba's reliance on PCs and DRAMs as factors currently weighing on their share prices |
