Capital spending lags as Japan restructures
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Story posted 7 p.m. EST/4 p.m., PST, 6/11/99
By Anthony Cataldo
TOKYO ( ChipWire/EET) -- Several major Japanese semiconductor makers are in the midst of management shakeups after weathering some of the worst revenue and profit declines in their histories. In many cases, new divisional heads will inherit a chip business hobbled by a domestic recession and a memory market that has failed to live up to any predicted recovery.
While the new executives will have more decision-making authority than their predecessors, they must face the task of restructuring their own ranks, playing catch-up with global competitors and making a case to strengthen their businesses to top executives weary of losses.
NEC, Fujitsu and Toshiba are expected to ratify new top managers overseeing semiconductor and component operations by month's end at their annual shareholders' meetings. For Fujitsu and Toshiba, the new bosses are already known, awaiting a ceremonial shareholder approval. In NEC's case, it is still uncertain who will lead the world's second largest chip maker as it struggles to reorganize, shift to a new 0.18-micron process technology and recapture lost share in the memory business.
Most of the new department heads will be hobbled by capital spending plans that generally are flat to down compared with last year, at a time when competitors in South Korea and the United States are boosting investments and plotting a transition to 300-mm wafers. In some cases, however, the official figures underestimate what Japanese manufacturers are actually spending. Consider these companies:
Toshiba Corp., which has lowered its capital spending projection from about $1 billion to $917 million, will benefit from a $417 million investment by Sony Computer Entertainment in Toshiba's Oita fab for a joint production line to make the 128-bit processor for the next Sony Playstation.
Hitachi Ltd. will keep semiconductor capital spending relatively flat at $583 million, vs. $558 million last year. But the figure does not include $333 million the company plans to invest in its joint-venture fab in Singapore, in which it holds a minority stake. That's more than double the $125 million Hitachi spent last year on the facility, which produces 0.25- and 0.18-micron DRAMs.
NEC Corp.'s semiconductor capital expenditures will fall from $1.23 billion last year to $1.07 billion. But much of the decrease is because NEC has finished its 0.35-micron joint-venture fab in China. NEC still plans to raise domestic fab spending from last year's $508 million to $828 million, to increase production of 128-Mbit DRAMs and to finish its 0.18-micron logic fab in Yamagata, Japan, two months ahead of schedule.
Even so, Japanese manufacturers in general are in danger of falling behind the rest of the world if they don't make a stronger case to up their capital budgets, some observers said.
"My impression is that the big five Japanese companies are being pretty conservative and intend to stay that way," said Richard Kaye, an analyst with Merrill Lynch Japan.
Indeed, South Korean manufacturers such as Samsung are expected to significantly boost capital spending in DRAMs this year. Meanwhile, companies like Intel and Motorola in the United States and Infineon in Europe are looking to take the lead in development of 300-mm wafers.
That leaves Japan's new chip chiefs in a pickle. On the one hand they have been given an edict to stem the losses that had so many companies wallowing in red ink last fiscal year. On the other hand, they realize that the industry is bouncing back, and to stay competitive means having the will to match or beat competitors' spending on new fab equipment and facilities.
"They all know they need to spend more," said Scott Foster, an analyst with ING Barings Japan, who has been briefed by semiconductor manufacturers in recent weeks. "The problem they now have is getting the authorization to spend what they want to spend. They're losing a lot of money and senior management doesn't like it."
Indeed, the losses touched off a wave of structural and management reforms that is replacing top executives at money-losing divisions, such as semiconductors, with new blood. In many cases, those new managers have been granted more decision-making powers, with expectations they will return their division to profitability in a hurry, reorganize the work force to respond more rapidly to market demands and make the most out of their paltry capital budgets.
The management shuffle hasn't always meant promotion for next-in-line executives. When NEC's Hajime Sasaki was promoted to chairman of NEC Corp. last month, many expected the nominal No. 2 man, Shigeki Matsue, to step into his shoes as head of the semiconductor group, which last year lost about $948.6 million. Matsue, a 35-year NEC veteran who is known as a frank-talking manager, headed up NEC's memory technology in the 1980s and early '90s, and last year finished a two-year assignment as chief of NEC Electronics in Santa Clara, Calif.
Instead, Matsue was moved to oversee the company's electronic-components group, which is responsible for LCDs, batteries and discrete components. The former head of that group, Iiroshi Shiba, was moved over to the top job in semiconductors.
But at NEC's end-of-year earnings announcement, it was announced that Shiba would soon retire, leaving the position officially vacant. One possible front-runner is Keiichi Shimakura, who headed NEC's manufacturing subsidiary in Livingston, Scotland, until the early 1990s and is now in charge of production technology. An NEC spokesman said the final decision won't be made public until the shareholders' meeting at the end of the month.
NEC's semiconductor business strategy and capital-spending plan should not change once the new chip boss is appointed. "I think it is understood at the board level and at the semiconductor-group level that this is what the plan is, and also I think that the successor to the head of the group will come from within and is therefore already party to the planned investment," an NEC spokesman said.
Meanwhile, Koichi Suzuki, who presided over Toshiba's semiconductor division, will be transferred to subsidiary Toshiba Ceramics. Replacing him is Yasuo Morimoto, a senior vice president in charge of corporate planning who several years ago headed Toshiba's international sales arm for semiconductors and picture tubes.
Morimoto will inherit a division that has lost $689 million, but recently got a boost by tying up with Sony for joint development of the main CPU for the next-generation Playstation. In DRAMs, Toshiba decided to cut its losses by slashing 64-Mbit DRAM production 90% by year's end. It also struck a deal with Fujitsu to jointly develop 1-Gbit DRAM technology and is increasing its reliance on outsourcing production.
Fujitsu Ltd. is also expected to ratify later this month the appointment of senior vice president Kazunari Shirai to head its semiconductor division, replacing Takamitsu Tsuchimoto, who will become a senior adviser at a subsidiary company. Fujitsu lost $15.5 million in semiconductors last fiscal year, and has decided to remove itself from the fierce commodity-DRAM market while shifting more production to outside foundries.
As a result, Shirai will have to reinvent the chip business, relying on more third-party partnerships --whether with EDA companies, intellectual-property providers or equipment makers -- to make the best of a budget pared to $541.6 million, a 19% drop from last year.
All the new appointments are symbolic moves as much as concrete steps to infuse a new way of thinking in those corporations. "I don't think any of these are escalator appointments. These companies have big problems and they want to solve them by upgrading management," said Foster of ING Barings.
Like Toshiba, Hitachi has adopted the internal company system whereby each division is being held to meet its sales and profit targets. Under Tadashi Ishibashi, the company has laid out plans to strengthen system-on-chip development at its Naka plant, boost analog chip production and invest more in back-end processing equipment.
"He's considered the president and CEO and is responsible for investment and recruiting, and will be evaluated on return-on-investment and profitability," a Hitachi spokesman said.
Mitsubishi Electric, too, is in the throes of restructuring. It is expected to spend $375 million, or about half of what it spent two years ago, on capital equipment. About three-quarters of that will go toward developing its system-on-chip technology, including embedded DRAM and new cores, which is a 32% increase over last year. Much of the emphasis will be placed on rolling out its 0.18-micron DRAM process in coming months. The spending rise, however, comes at the expense of cutting back the R&D budget by half.
The decisions these companies make on capital spending reflects the kind of manufacturing business model they are pursuing. According to Hitoshi Shin, an analyst with Merrill Lynch Japan, Japanese chip makers have three options when it comes to determining their "process drivers": securing sufficient volumes of system-on-chip, perhaps more than 1 million per month; using DRAM as the technology driver, perhaps by forming alliances with other chip makers; and relying on logic devices as the main source of revenue; or expanding volume production of DRAMs in an effort to be one of the top five global manufacturers.
Armed with their technology agreements with Sony for system-on-chip development, Fujitsu and Toshiba are gravitating toward the first two approaches. Mitsubishi and Hitachi are leaning toward the second, while NEC "seems open to all three," according to Shin.
In each case, costs for materials, equipment and engineering know-how are getting higher, and there are signs that Japanese companies are concerned they are spending too little compared with their rivals abroad. Foster of ING Barings said many executives are looking to spend more than half their budgets in the first year, then lobby their boards for additional resources in the second half.
To press their case, they may point to an uptick in spending in South Korea or the United States, and show that without a beefed-up investment plan they risk falling further behind. Management teams may push for more spending if consumer sales pick up steam, as early indications show, observers said. But with no immediate end in sight to the DRAM supply glut, those managers may be hard-pressed to convince their bosses to shell out more yen. And so far, the expectation that putting more functions on one chip will lead to better profits has fallen flat.
"The belief that if you throw money into semiconductors that more will come back is quite damaged in Japan," Foster said.
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