Update: NEC, Hitachi join forces; but can new DRAM venture stop the losses?
By Andrew MacLellan
Electronic Buyers' News
(06/25/99, 12:57:37 PM EDT)
Japan has finally succumbed to the merger mania sweeping the DRAM industry, as control of the sector's manufacturing might continues to consolidate into the hands of fewer, more megalithic players.
After silently watching large-scale acquisitions in the past year in Korea and the United States, NEC Corp. and Hitachi Ltd. say they will create a DRAM joint-venture company dedicated to next-generation memory design.
The deal is of the same scale as Hyundai Electronics Industries Co. Ltd.'s recent merger with LG Semicon Co. Ltd., and is comparable in size to Micron Technology's 1998 acquisition of Texas Instruments Inc.'s DRAM business. When officially created, the new NEC-Hitachi venture will join Hyundai, Micron, and Samsung Electronics Co. Ltd. in sharing as much as 80% of the DRAM market, according to estimates from Dataquest Inc., San Jose.
Japan's beleaguered DRAM makers had long been expected to consolidate their design, manufacturing, and sales operations to rescue profits from the glutted memory segment. Across-the-board fiscal 1998 losses, combined with a false start in the Direct Rambus DRAM market earlier this year, seemed destined to push Japan's memory-chip makers into cooperative efforts to keep pace with rivals.
But of all the possible combinations, the marriage of the DRAM businesses of NEC and Hitachi is a bit of an odd couple, according to some observers. “It makes sense of course for Hitachi, [but] I'm grasping as to why NEC would do this,” said Jim Handy, a Dataquest analyst. “You have to wonder what is the attraction of Hitachi to NEC.”
An NEC spokesman said Hitachi has DRAM with a “similar device structure” and possesses a competitive 0.18-micron process capability, as well as advanced high-speed and low-power DRAM and proprietary packaging technology.
“Our primary interest for establishing this company is to speed up the technology development of DRAM, and by sharing some of these technologies we can reduce development costs ... and enlarge our development resources,” the NEC spokesman said.
NEC is Japan's largest DRAM manufacturer, with 11% of the market in 1998 according to Dataquest. Hitachi held a 6.2% market share. NEC reported a $1.3 billion fiscal 1998 loss, while Hitachi posted a $2.8 billion shortfall.
To curb their slide, the companies say they will form a new company later this year. While neither side was long on detail, the plan includes a pooling of development resources and about 1,000 employees, whose first joint task will be to build a 256-Mbit DRAM for a 0.15-micron manufacturing process. The companies would not say how much they intend to spend on the new venture, but confirmed that together, DRAM R&D spending totaled about $400 million last year.
The collaboration differs from Micron's purchase of TI's DRAM operations, which were quickly absorbed by the new parent. So, too is it different from Hyundai's recent takeover of LG Semicon, which created a single DRAM company that will maintain two sets of production lines for the next year or so.
Rather, the joining of interests by NEC and Hitachi will proceed slowly, giving the former rivals time to get used to working together.
“What makes sense, particularly in a Japanese environment, is that you merge the [operations] incrementally, and the easiest first step is to pool the design and development resources,” said Ron Bechtold, vice president of the DRAM division at Hitachi Semiconductor (America) Inc., in San Jose. “Once we've established the structure of the joint venture-who are the people, what is the capitalization, and what is the ownership-we can begin to work on common manufacturing, a common brand, and a common sales channel.”
But Handy was skeptical the pairing would bolster either company's market position. “It makes sense for a couple of companies to get together on a new fab [for example],” he said. “But you don't have to merge your two companies and come up with a new name. It's difficult to say what this will accomplish that hasn't been tried before.”
Other analysts said the joining of interests will help the companies better manage their risk and investment levels. “It sounds like a really good move by both companies,” said Sherry Garber, an analyst for Semico Research Corp., Phoenix. “There has been such a severe pullback in capital spending in the last couple of years that it makes sense for [NEC and Hitachi to form] one company rather than having two companies competing against each other.”
Bechtold said the companies will work closely to develop a single brand and marketing campaign, and said the merged businesses will operate under an new but as yet undetermined corporate name.
“The intention is not to have NEC sell a DRAM and Hitachi sell a DRAM, and therefore have multiple qualifications and support structures,” he said. “The intention is to have a single product, a single brand, and a single organization.”
The new venture will be financed jointly by NEC and Hitachi, although how much of a commitment each company is expected to make was not disclosed. One thing is certain, Bechtold said: Hitachi and NEC both have a long-term stake in the DRAM market.
“DRAM is extremely important,” he said. “It's a fundamentally necessary part of being in the semiconductor industry. Hitachi and NEC will continue to support the technology as part of their process development. ... This is not a spin-off of our DRAM operations, this is a merger of two strong entities to build a company that can compete in this new DRAM world.”
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