Asia's memory chip makers play a game of "Survivor"
By Michael Kramer
TAIPEI, Aug 29 (Reuters) - If the global memory chip
industry were a reality TV programme, the contestant likely to
be voted off the island could be any one of Asia's biggest
chipmakers.
A number of Asian players are weathering what looks to be
the worst-ever year for dynamic random access memory (DRAM),
the standard memory chip for personal computers, waiting for
the game of "Survivor" to turn back into "Who Wants to be a
Millionaire?."
The financial woes of Korea's cash-strapped Hynix Semiconductor (dropped 6% today)
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the world's third largest DRAM maker,
grabbed headlines again this week when it refused to honour
$315 million in maturing bonds, hoping to force investment
trusts to roll over almost $1 billion in debt.
Japan's Toshiba Corp <6502.T>, another world top-five DRAM
maker, has also been in the spotlight, saying it has approached
both Korea's Samsung Electronics <05930.KS> and Infineon
Technologies <IFXGn.DE> of Germany to take over its memory chip
unit after posting a record loss.
The bad news comes as research firm Gartner Dataquest has
estimated that worldwide revenue from DRAM will shrink 55.5
percent to $14 billion in 2001, compared with $31.5 billion in
2000, marking the industry's worst annual decline on record.
DRAM makers' woes are hardly surprising as spot prices of
the "commodity" chip -- where one company's product is little
different from another's -- have plunged more than 90 percent
in a year.
Prices of the benchmark 64 megabit, PC 133 DRAM have
steadily fallen to around $1 from levels above $9 last summer,
according to online microchip broker ConvergeTrade.
....Analysts say few DRAM makers can make money at prices below
$3.00, but everything above that mark is pure profit -- and the
price can easily spike on extraordinary events. After Taiwan's
devastating 1999 earthquake, DRAM prices briefly surged to over
$20.
SAMSUNG TOPS THE LIST
Hands down, analysts say the Asian firm best positioned to
survive the downturn and thrive in the upturn for the highly
cyclical industry is Hynix's local rival, Samsung.
"By focusing on specialty DRAM, they are positioning
themselves well for an upturn and tending to drive down costs
by shrinking (circuitry), and they are probably the only DRAM
company that still made money on DRAM in the second quarter,"
said Johnathan Ross, Goldman Sachs' semiconductor analyst for
the Asia-Pacific Region.
Samsung is already neck-and-neck with Micron Technologies
<MU.N> of the United States for the title of largest DRAM
maker, and only began to show a loss in June on 64 megabit
DRAM, the industry benchmark.
Samsung's focus on specialised DDR (double data rate) and
Rambus's <RMBS.O> DRAM for high-performance PCs as well as EDO
(extended data out) DRAM for servers has helped it avoid the
commodity nature of lower-end chips.
The memory chip giant is also packing more memory power on
to each chip by shrinking line widths of circuitry, and a
profitable mobile phone operation also brings in an ample
supply of cash.
TAIWAN, THE PRICE KILLER
Unlike Samsung, Taiwan's handful of five second-tier DRAM
makers thrive on low prices, and with some reservations,
analysts say the downturn may help some firms break into the
big leagues.
"I think Taiwan is a marginal player, and I think in this
downturn Taiwan probably plays as a pricing killer," slashing
production costs with measures such as reduced testing times,
said Chris Hsieh, semiconductor analyst at ING Barings in
Taipei.
Their cost advantage is leading many Japanese firms, who
license technology to Taiwan manufacturers, to outsource their
DRAM production, said one analyst at a European securities
house.
"Taiwan should benefit. I think that (outsourcing) is a
long-term trend," he said. "I'm not negative on them."
However, a seismic shift would have to happen before a
Taiwan firm breaks into the front ranks of DRAM players.
Analysts are waiting to see if Toshiba actually sells its
memory chip unit to Infineon, 33 percent owner of Taiwan's
ProMOS Technologies <5387.TWO>.
ING's Hsieh says ProMOS is on track to start mass
production early next year as one of the world's first
semiconductor plants using 12-inch silicon wafers, which save
money by yielding more chips per wafer than the standard
eight-inch discs.
"I think the Infineon and Toshiba company, if there's any,
is likely to rely on ProMOS in a very big way," Hsieh said.
ProMOS currently claims about five to six percent of global
DRAM market share and sells its entire output to the German
semiconductor firm, which markets the chips under the Infineon
brand.
On the losing end of that potential deal is Taiwan's
Winbond Electronics <2344.TW>, which cooperates with Toshiba on
technology.
Fears that Winbond could lose its source of technical
innovation knocked Winbond shares down the seven percent daily
trading limit to T$18.90 on Wednesday.
HOW LONG TO WAIT?
DRAM downturns have come before, and they have always been
followed by a dramatic upturn. The question is, how long must
companies languish at the bottom?
Although personal computer sales continue to look weak,
Microsoft's <MSFT.O> upcoming Windows XP operating system will
make high demands on existing PCs, encouraging users to buy
more memory for their systems.
Increasing demand for Intel's <INTC.O> high-speed Pentium 4
processor may also stoke DRAM sales, analysts say. Goldman
Sachs estimates that DRAM prices may stabilise in the the next
two to three months.
ING Barings, however, forecast that the DRAM slump will
extend into the second half of 2002, when double-digit
oversupply in the market diminishes to mere single digits.
So, in the meantime, it may be best to reach for
the D-Ramamine to
dull the pain.
((Taipei newsroom, +886 2 2508-0815 fax +886 2 2508-0204,
taipei.newsroom@reuters.com))
REUTERS
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