Nikkei Weekly
January 14, 2002
Oh DRAM!
Japanese electronics firms are suffering as their core chip businesses dry up. Major players are branching out into fields such as system chip production and life sciences to compensate
MINORU NAITO
Staff writer
The glory days are over for Japanese electronics companies, at least for now. Fierce international competition along with a sharp drop in demand have dried up much of their DRAM businesses. Now they are struggling to find more reliable sources of earnings that can restore the luster of profitability.
The country's manufacturers made heavy investments in the volatile DRAM business, and they're paying the price. The five leading firms - Hitachi Ltd., NEC Corp., Toshiba Corp., Fujitsu Ltd. and Mitsubishi Electric Corp. - together expect over 1 trillion yen ($7.5 billion) in net losses in the fiscal year ending in March.
In 1990, Hitachi, Toshiba and NEC were among the top five leaders in DRAM sales, according to the Dataquest division of the U.S. research firm GartnerGroup Inc. Within a decade, only NEC was still on that list, and only just. In the meantime, prices of DRAMs have plunged. In 2001, DRAM prices for both 64- and 128-megabit chips dropped to just one-tenth of their peak the previous year.
Success in the DRAM business is unlikely to return to Japan anytime soon. Global competitors are picking up steam, particularly U.S.-based Micron Technology Inc. The company decided to purchase Toshiba's DRAM business in December 2001 and began tie-up talks with Hynix Semiconductor Inc. of South Korea. Samsung Electronics Co., the industry leader that controls roughly 25% of the world DRAM market, is planning to further expand its business.
Leaders of Japan's electronics companies realize they made a mistake by relying so heavily on one business, especially one so vulnerable to wild swings in prices and demand. "I admit our decision-making process was narrow, with a reliance on the development of one technology," said Kazuo Kumagai, executive vice president and representative director for Hitachi.
Hitachi is trying to make up for its mistakes. It is slimming down its business structure in an effort to harmonize a wide variety of technologies and turn them into value-added products, instead of mass-producing relatively simple items like computers and cell phones, which are becoming less profitable.
Researchers at Hitachi's life science department conduct gene analysis at laboratories in Kawagoe, Saitama Prefecture.
Hitachi spun off its home electronics business last April and formed an alliance with Matsushita Electric Industrial Co. It also integrated its DRAM operations into a joint venture with NEC. Now, the company is shifting to investments in life science businesses, everything from genome drugs to environmental issues to the health problems associated with Japan's aging society. The company has tied up with the medical department of the University of Tokushima to develop DNA chips to measure stress in the human body.
"Japanese electronics companies have been hit extremely hard by the worldwide slump in two major applications on which they relied for demand - cellular phones and personal computers," said Michito Kimura, senior analyst at IDC Japan. "The time is ripe for them to genuinely move on to create synergies with the technology used for semiconductors."
They don't have much choice. Their core DRAM-dependent businesses show no signs of improving. According to Kimura, total shipments of cell phones were expected to reach 500 million units worldwide last year. Instead, they reached less than 400 million.
Other electronics giants are also rushing to find businesses to stem their losses. "Our business model was technology-oriented, especially with regard to DRAMs. Arrogantly, we used to think the only thing we had to do was to develop a technology and customers would just buy it," said Kanji Sugihara, executive vice president of NEC, who also serves as president of the electron devices company. "To compete globally, however, we must pay more attention to investment efficiencies and earnings."
During the peak period, nearly 30% of semiconductor sales at NEC came from its DRAM segment. But when the company failed to reduce excess capacity, it wound up with over-investment and excess stock. While continuing to develop DRAM technology, they are eager to vie for dominance in the third-generation cell-phone market, where Japan has the potential to take the lead.
Iwao Shinohara, NEC's executive vice president in charge of international sales, said NEC is looking at China as a major base for production and consumption of next-generation phones. The company hopes to sell 70-80% of its made-in-China products within that giant market, Shinohara said. But more significantly, company officials said, they want to use China to produce system chips.
System chips have become a buzzword for company executives desperate to find a path to recovery. They believe that microscopic technologies - system chips, flash memory chips and diodes - will have high potential in the broadband era.
Said Tadashi Okamura, president and chief executive officer of Toshiba: "Speaking of this year, I don't think demand in the DRAM market will see a hike. Instead of clinging to our focus on quantity, we want to build a more solid business structure by March."
This year, Toshiba is turning its attention to personal digital assistants as a key application for system chips. The company plans to invest in developing technologies for use with the Internet. One area of interest to the company is establishing electronic services for governments, including local municipalities, according to Okamura.
Despite the changes Japanese firms want to make, many analysts are skeptical whether they will be able to smoothly transform themselves. Prices of microscopic products, for example, are also under pressure amid rising competition, particularly from Asian newcomers who, thanks to labor costs one-tenth of those in Japan, are enjoying success in the global market.
Masahiko Ishino, senior analyst for Tokyo-Mitsubishi Securities Co., said, "Even if Toshiba is able to shift its focus to system chips, the company will tread a rocky path again as its faltering DRAM business once did."
Given the fierce competition, according to Ryoji Yamawaki, senior analyst for Shinko Securities Co., most electronics firms are likely to have a tough time in the new businesses. For the industry to survive, serious management reshuffling needs to take place.
"For Asian semiconductor firms, it would probably not be in their interest to join hands with the sluggish Japanese makers. The domestic firms will need to seek other means to drastically help themselves, and in particular reconsider their management structures," said Yamawaki.
Last year, new legislation overseeing company divestitures took effect. Its purpose is to prod companies to spin off divisions to improve operations and balance sheets. Many companies are indeed doing that, but Yamawaki said many firms have not done enough to narrow their focus. Many electronics manufacturers, for instance, are still in businesses ranging from semiconductors to home appliances to heavy electrical equipment.
Some companies such as Fujitsu are trying to change. The company said it wants to increase the ratio of its software service business to 50-70% by the end of fiscal 2003, from 37% as of fiscal 2000. Fujitsu last month unveiled plans to invest some 30 billion yen in new Tokyo operations as early as October 2003. By this March, Fujitsu aims to convert three key plants into centers for software development and information services for companies and local governments.
This year, Fujitsu, which recently announced plans for an alliance with Sony Corp. in the information-technology arena, is paying particular attention to its outsourcing business, in which it expects to see double-digit growth. To reach that goal, the company has equipped its Internet data center and network infrastructure for broadband. |
