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Strategies & Market Trends : Sharck Soup -- Ignore unavailable to you. Want to Upgrade?

To: DaiTN who wrote (36458)	10/9/2001 8:18:12 AM
From: puborectalis	Respond to of 37746

Japan's Electronics Titans Turning Away From Chips By Edmund Klamann TOKYO (Reuters) - With shares in Japan's beleaguered chip and electronics conglomerates sliding toward rock-bottom valuations not seen since the downturns of the 1990s, analysts say it may be time they turned their backs on the chip business. Indeed, they add, manufacturing mammoths such as Hitachi Ltd and NEC Corp seem to be doing just that. ``The integrated electronics makers are not semiconductor companies anymore,'' said Credit Suisse First Boston analyst Noriya Nishi. ``They say they're getting out of chips, so their future valuations will be completely different.'' When Japan's five chip and electronics conglomerates issued profit warnings over the past few months, as the global chip industry struggled with its worst slump ever, they also unveiled plans to shut chip production lines, trim payrolls, spin off operations and shelve expansion projects. The companies are now promising to focus on areas where they can expect steady profits, mainly by beefing up software and computer services while withdrawing from many of their chip operations or tossing them into joint ventures with other firms. ``We think industrial electronics makers, already outsourcing DRAM (dynamic random access memory) production, are hastening their departures from the semiconductor business,'' Nikko Salomon Smith Barney analyst Hiroshi Yoshihara said in a note to clients last week. Although semiconductors account for only a fraction of revenues at the conglomerates, which also produce computer, communications and electronic equipment and provide software and computer services, the volatile chip sector has a heavy influence on their bottom line. LET THE CHIPS FALL The five companies' recent profit warnings included hefty projected operating losses in semiconductors ranging from 35 billion yen ($292.3 million) to 95 billion yen as well as sizeable chip-related restructuring charges. All but Mitsubishi Electric Corp forecast a consolidated net loss of more than 100 billion yen for the business year to next March. The poor earnings outlook has weighed heavily on the conglomerates' share prices. NEC, the world's third-largest chipmaker, saw its shares tumble to 900 yen last week, down 57 percent since the start of the year, while Toshiba Corp, Fujitsu Ltd and Mitsubishi Electric fell about 45 percent over the same period. Hitachi, Japan's biggest electronics manufacturer, slid a more modest 22 percent. In Tuesday trade, it ended 3.31 percent higher at 904 yen, up from a trough of 775 yen in late September and defying declines of 0.6 to 5.6 percent in the other four. Hitachi's resilience was a testament to restructuring efforts that analysts said would likely halt the slide in sector share prices before they reach the grim price-book ratios (PBRs) seen in the chip sector downturns of 1998 and 1992. ``Currently they are slow (in restructuring), but they have improved somewhat compared with when (PBRs) were at an extremely low level of 0.6 for Hitachi and 0.7 for Mitsubishi,'' said Nikko Salomon's Yoshihara. ``For the past 20 years Hitachi's profits have been declining, so it should be a long-term sell, but I have rated them neutral given their stance toward reform,'' he said. The company this year caught the market's attention with dramatic growth in its data storage services business, helping to cushion its shares. EXIT VIA ALLIANCES Hitachi has also entered into a slew of chipmaking joint ventures, while all five conglomerates have forged cooperative arrangements in semiconductors with consumer electronics and game machine makers. ``The approach will not be simply to quit the sector, but to form alliances,'' CSFB's Nishi said. NEC and Fujitsu, he added, have already been focusing on software and services operations in recent years, and both still looked cheap based on valuations for 2002/03 earnings forecasts. Several analysts noted mounting concerns, however, about prospects for Toshiba, the world's second-largest chipmaker. Nikko Salomon's Yoshihara said Toshiba was the only one of the five whose PBR seems to risk a slip below lows from the 1990s, although this could spur the company to adopt badly needed reforms that were sidestepped during prior downturns. CSFB's Nishi also said expectations were rising that Toshiba would make a bold move such as an equity tie-up with a chipmaking partner or the sale of a major division. The model for many of these firms is International Business Machines Corp -- the company they eyed when they built up computer mainframe operations several decades ago. This time, they hope to emulate the U.S. computer giant's success in reinventing itself as a software and services company and putting behind it the heavy losses of the early 1990s. But it may take them some time to catch up. In a speech in Tokyo last week, IBM chief executive Louis Gerstner said his company built up its service organization to 150,000 employees from 4,000 over the past eight years. ``We looked at every process in our company and fundamentally changed them. And it took eight years,'' he said.