Can Japanese Semiconductor Industry Rise in 2000 from the Brink of Crisis?
January 17, 2000 (TOKYO) -- The worldwide semiconductor market has been rebounding briskly. The world's output of semiconductors in October 1999 reached US$13.4 billion, an all-time high topping the US$13.2 billion output recorded in November 1995, according to a study released in mid-December 1999 by the Semiconductor Industry Association (SIA).
The SIA also revised up its original projection of the semiconductor market growth for 1999 from 14.7 percent to 15.6 percent.
The recovery was mainly attributed to semiconductor markets in Japan and the Asia Pacific, which grew 37.7 percent and 35.6 percent over the same period the previous year, respectively.
An executive of Hitachi Ltd. admitted to having been almost unable to meet demand from customers. Specifically, the demand for semiconductor chips for mobile phones is increasing rapidly, he added.
The number of subscriptions to the iMode service, a handy Internet access service provided by NTT Mobile Communications Network Inc. (NTT DoCoMo), reached three million . Multi-functional mobile phones, including iMode terminals, have been driving up demand for semiconductor chips.
An executive of Mitsubishi Electric Corp., which ranks high in its market share of flash memory chips for use in mobile phones, said that demand for flash memory chips with large storage capacities is increasing beyond anticipation.
Increasing data communications capacity to be handled over the Internet has been expanding the demand for semiconductor chips for use in information devices, such as modems. Semiconductor demand in 2000 is expected to continue accelerating incremental growth.
Major semiconductor manufacturers are quickly improving their business results, thanks to the recovery of the market.
NEC Corp.'s semiconductor business has gone into the black since September 1999. The company expects ballooning profits over the current fiscal year, company officials said.
NEC's semiconductor business unit slashed its deficit to 7.43 billion yen in the first mid-term (April-September) of fiscal 1999, from 23.823 billion yen over the same period the previous year. (105.66 yen = US$1)
Toshiba Corp.'s semiconductor business unit turned into the black in November 1999, even though it forecast a deficit of 50 billion yen in fiscal 1999, due to expenses incurred in terminating a joint venture with Motorola Inc.
Fujitsu Ltd. attracts much attention by improving its semiconductor device business. The business unit slashed its consolidated deficit drastically to 464 million yen in the first mid-term (April-September) of fiscal 1999, from 43.4 billion yen over the same period a year ago. The company expects it will stay in the black for fiscal 1999. That significant improvement is due to the concentration of its strategic resources into flash memory and system-on-chip businesses that started expanding, while scaling down its general-purpose DRAM business targeted at PCs from an early stage.
Current business results of major semiconductor manufacturers in Japan, however, cannot be compared with those of leading overseas makers.
Price Competition with Rivals' Breadth of Products: A Chief Cause of Having Lost Earning Power
ST Microelectronics, an European semiconductor maker with business sectors similar to those of major semiconductor firms in Japan, reported operating profit of US$322.6 million (about 350 million yen) and a ratio of operating profit to revenue of about 13 percent during the same period in 1999.
Texas Instruments Inc. (TI), the U.S.-based major semiconductor maker, posted an operating profit of US$977 million (about 100 billion yen) and a ratio of operating profit to revenues as high as 20 percent during the same period.
Even Motorola's semiconductor unit, which experienced a year of sluggish business results in 1998, reported an operating profit of US$140 million (about 15 billion yen) during the same period.
Why does the earning power of Japanese semiconductor makers remain so miserable in spite of market conditions that have already recovered? Although Japan's semiconductor business structure dependent upon DRAMs often has been blamed for that poorness, the real reason does not lie only in that business structure.
It is true that DRAMs really have been capable of having two opposite effects -- they can earn a profit of billions of dollars when the market is prosperous, while the situation becomes quite the opposite once the market deteriorates. But, the most basic problem consists in Japanese semiconductor makers' traditional dispositions to compete head-on with their rivals' breadth of products in a variety of sectors.
The number of orders received by semiconductor makers already has recovered since 1998. Leading semiconductor makers in the United States and Europe are reporting significant increases in their operating profits thanks to the recovery. Japan's major semiconductor makers, however, cannot secure profits, because they have to compete with each other in various fields, for which they embrace a wide range of products to compete head-on.
Japanese semiconductor makers are forced to reduce prices to keep customers from turning toward their rivals. And thus, these makers have been suffering prosperity without profits, the same executive of Mitsubishi lamented. If they had been successful to establish a system to obtain a large share in a specific sector with high profitability, they would not have been in such a tight corner.
But, at last on second thought, Japanese semiconductor makers have started making strenuous efforts to revamp their "comprehensive" disposition to rise from the brink of crisis.
NEC and Hitachi will integrate their DRAM businesses and establish a joint venture company at the end of March 2000.
Since they initially agreed to a broad cooperation in June 1999, the two companies have worked their way through critical difficulties to announce the details of the new company in the end of November 1999. Both parties agreed that it is indispensable to form a specialized company that has a business scale comparable with that of worldwide competitors with leading DRAM market shares, after having held meetings more than 100 times with personnel, including working level staff members, NEC officials said. Both parties signed an agreement to form a company that includes consolidated production of semiconductor chips.
Japanese semiconductor makers will continue accelerating turbulence for "selection and concentration" in the course of recovered market conditions. Major semiconductor makers still are embracing a wide range of products from microprocessors for use in communications, home electronics and automobiles to application-specific integrated circuits (ASICs) that compete head-on with rivals' products in various sectors. They have kept these businesses going, not withstanding poor market share and profitability.
Top management, however, started recognizing that only a strong specialty maker dedicated to special semiconductor chips with a high market share and profitability will be able to survive.
A Mitsubishi executive, for example, said that the company is talking with its rival makers about acquisition and sale of business units, on a product basis, to raise their mutual market shares.
Leasing Equipment is Better Than Owning It
Hitachi has defined its products having a top market share as flagship businesses. And it has started taking a resolute stance that it will strengthen those businesses by all means, including acquisitions of companies, while it will retreat from businesses without a bright future.
Its semiconductor design departments were notified that business units having no flagship products would be dissolved within a half year, an executive of Hitachi said. Hitachi aims at getting 70 percent of its revenues in the semiconductor business from these top-share products.
As another trend in 2000, Japanese makers are likely to raise their leasing ratio for semiconductor manufacturing equipment from the current levels. Toshiba, for example, plans to invest 70 billion yen in its plant in Virginia in the United States to switch its products from DRAMs to flash memory, while 40 billion yen worth of equipment will be leased, company officials said.
Also, NEC decided to lease back the newest equipment for its plant in Tsuruoka city, Yamagata prefecture, from Comdisco Inc., a major U.S.-based leasing company of semiconductor manufacturing equipment, while having sold the equipment to Comdisco for 28 billion yen.
Japanese semiconductor makers, which once tended to own equipment too excessively, have started adopting that lean strategy, because they have found that there is a great deal of equipment that they do not necessarily need to own by themselves. The leading-edge memory test equipment, for example, becomes out-of-date and unnecessary quickly every time technologies are innovated. Also, efficient use of leasing systems is spreading in the industry, because it can improve companies' financial figures, reducing their depreciation amount and improving cash flow.
Major semiconductor makers in Japan are embarking on restructuring measures, although it appears that they started too late.
Industry analysts have been pointing out for years that semiconductor makers in Japan should be more efficient by segmenting the market and focusing targeted businesses.
In the meantime, the Japanese semiconductor industry has started to show some light of hope in the offing leading to the recovery in 2000 by means of their insatiable efforts to fortify profitability, without contending with the recovered market conditions these days.
(Ryohei Yamazaki, Staff Editor, Nikkei Business)
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