I've been contemplating the worldwide DRAM over capacity issue the past couple of months in horrified amazement, looking at this as the signal for future recovery of the rest of semiconductor business. Competition, so the theory goes should allow for "best of breed" to win the economic war and displace the lessor competitors. The problem being that massive national subsidization by the supportive governmental entities continues to exacerbate the situation. DRAMs hit the world market from all the major technical contributors - US, Japan, Korea, Taiwan, Germany. Firms in these major countries receive localized subsidization, depending on the local strategic importance to economy. That overcapacity exists is not the point, economic disincentives must be responded to, in order for oversupply to decrease. Consider a couple of examples:
Korea; Samsung, Hyundai, and LG. These companies have recently slashed capital spending budgets, and started periodic factory shutdowns to weather the storm, the goal being able to survive into the future to continue delivering DRAM products. Korea is already a beneficiary of IMF funding, and continues to reel under the pressure of the Asian meltdown. These companies are benefiting from international devaluation, meaning their export based products are being purchased largely in US denominated currency, giving them a profit boost at home as the pay their bills in devalued currency.
Germany: Siemens recently announced a major bookkeeping bloodbath, I've read both 600 and $700 million lost in the first 9 months of their fiscal year. Management says they are "studying" the situation, and shifting their focus towards increasing 64 Meg output, while decreasing their 16 Meg. Clearly they are hoping to continue to build units and drive competitors into the ground.
In the early 1980s, during another economic turndown, Intel coined a name for this sort of response - The 125% Solution. It was Andy Grove's and Gordon Moore's view that the smart approach at that time was to increase production and product innovation in response to an economic downturn while competitors turned their factory lights out temporarily, to come out of the slump ahead of competitors. In those days, Intel product base was dispersed with P&L centers producing a wide variety of EPROMs, Microcontrollers, Microprocessors, and other products. They were largely successful in that initiative. Will this same mentality work for Siemens today ? Perhaps, but until the smoke clears, it means continued oversupply of DRAMs, with profit killing low unit prices, and continuing raining on the parade of the rest of the industry. Here's an article regarding Siemens approach in its entirety from CMP Publications:
businessjournal.netscape.com
<< Semiconductors Story >>
DRAM angst hits Siemens
July 29, 1998 Source: CMP Publications
ELECTRONIC BUYERS NEWS via NewsEdge
Corporation : Reeling from $600 million in losses,
Siemens AG's Semiconductor Group is counting on its
manufacturing muscle to power-lift its chip operations to
profitability, a top executive told EBN last week.
In an exclusive interview, Andreas von Zitzewitz, president
of the group's memory-products division, said Siemens
will accelerate its 64-Mbit DRAM production efforts to
push past global memory competitors and continue to
exploit its lead in the race to sub-0.25-micron chip
processing.
And despite the red ink that Siemens has spouted so far
this year, von Zitzewitz vigorously denied published
reports that the group will close any DRAM fabs or sell its
memory operation.
Still, reiterating earlier comments made by Siemens
president Heinrich von Pierer, von Zitzewitz confirmed that
the Semiconductor Group is making an extensive
operations review to stop the DRAM business from
draining revenue further.
Siemens has invested several billion dollars over the past
two years to build four leading-edge sub-0.25-micron
processing fabs. That huge cost, concurrent with a
profit-killing nosedive in DRAM pricing, was blamed for
much of the $600 million the company lost in its
nine-month fiscal period ended June 30.
To bolster its bottom line, Siemens said it is trimming
oversupply by scaling back production of 16-Mbit DRAMs
at fabs in North Tyneside, England, and Dresden,
Germany. The company is also delaying second-phase
DRAM expansion at its fab in White Oak, Va., which it
owns with Motorola Inc., and its ProMOS joint venture with
Mosel-Vitelic Inc. in Taiwan.
Like other DRAM makers struggling with large losses,
Siemens hopes to regain profitability by significantly
increasing its non-memory chip business. So far,
non-DRAM semiconductor sales have increased 20%
over year-ago levels, and internal documents indicate the
company would like to boost that to a 30% annual growth
rate.
While new construction has placed an enormous strain on
Siemens' resources, von Zitzewitz said the fabs will
enable the company to move all its DRAM manufacturing
to line widths below 0.25 micron by the end of the year,
and drive down DRAM production costs to less than those
of U.S. and Asian rivals.
"That should give us yields well ahead of the South
Koreans to make us far more cost-effective." he said.
South Korean memory makers, whom von Zitzewitz
blames for igniting the DRAM pricing firestorm, have
become Siemens' competitive nemesis as it moves to
lower production costs.
"The Korean companies now don't have the money to
make the large capital investment to convert totally to new
[sub-0.25-micron] production technology, " von Zitzewitz
said.
Top executives at both Samsung Electronics Co. Ltd. and
Hyundai Electronics Industries Co. Ltd. earlier confirmed
that their companies had already installed
sub-0.25-micron equipment as part of their 1996-97
capital investments. Although both companies scaled
back capital spending sharply this year, they claim to have
the needed equipment in place to continue to drive down
DRAM costs and remain competitive.
Fanning the flames of rivalry, Siemens has also been
adamant that no International Monetary Fund contributions
or government subsidies be made available to allow
South Korean chip companies to upgrade their fabs. "
Siemens finances its capital expenditures out of our own
earnings," von Zitzewitz said. "We should not have to
compete against subsidized companies."
Siemens hopes a new DRAM dumping case filed with the
European Commission, as previously reported, will
dissuade overseas rivals from selling chips below cost.
The company is also skeptical of claims by Samsung and
Hyundai that they are periodically shutting down DRAM
production lines to ease the global glut of memory chips.
"I'm a semiconductor guy, and I know that you can screw
up whole factories by constant disruption of production
lines," von Zitzewitz said. "I think this is a fake by the
Koreans."
Copyright - 1998 CMP Media Inc.
<<ELECTRONIC BUYERS NEWS -- 07-27-98, p. PG1>>
[c1998, CMP Publications] |
