Teri, sounds like you have a very strong gut feeling and intuition on this group. I'm off to get a home equity loan when the time feels right! However, the time is far from right! More anecdotal problems follow:
Is There Life After DRAM Crash For Japan's Chip Makers?
(12/08/97; 11:52 a.m. EST)
By Jack Robertson, Semiconductor Business News
Japanese chip makers have only one question these days: They want to know if there is life after the market crash in DRAMs.
Most of them were hit hard by the dive in DRAM prices during the past year. The outlook is made even grimmer by a sluggish home market for such chip-consuming products as PCs and consumer electronics and industry overcapacity due to the growth of competitors, such as the South Koreans and Taiwanese. On top of all that, the Japanese are falling behind in the capital investment race.
With memory prices still showing no signs of reversing course, it seems like nearly all the Japanese chip companies want to diversify out of DRAMs. But such a major switch is far easier said than done. First, expanding the output of logic chips will take a massive commitment in R&D and production equipment.
Even if the Japanese do spend the "Big Yen," it isn't at all clear that the resulting new chips -- systems on chips with embedded DRAM, microprocessors, multimedia devices, and single-chip wireless ICs<Picture>, among others -- can reach high enough volume to even begin to take up the slack caused by falling DRAM prices. DRAMs are now being turned out by the tens of millions a month at most Japanese vendors.
Japanese chip giants already are investing large sums of money on R&D and equipment. Each one of them spends an average of about $1 billion annually.
But they aren't keeping up with the rest of the world. Clark Fuhs, principal analyst for semiconductor equipment at Dataquest, in San Jose, Calif., said their South Korean, Taiwan, and U.S. competitors are all spending more now on capital spending.
And as Japan chip makers fall farther behind in capital investment, they continue to lose global market share, said Susan Billat, industry analyst for Robertson Stephens & Co.
The outlook for Japan doesn't look good. Hitachi is cutting its chip capital investment plan for the fiscal year ending March 31, 1998, to 140 billion yen ($1.1 billion), down 7 percent from a year ago. Fujitsu's semiconductor capital spending this fiscal year is expected to decline 6.5 percent to 180 billion yen ($1.45 billion).
The picture at Mitsubishi is even worse. It is cutting chip capital investment nearly 9 percent to 105 billion yen ($850 million). NEC and Toshiba are both trying to maintain last year's spending levels. NEC is budgeting 190 billion yen ($1.5 billion) for semiconductor capital investment, while Toshiba said it expects to spend 170 billion yen ($1.36 billion).
Hurting Japanese chip makers even more than lower capital spending, however, is the stop-and-start nature of their spending, maintained a top executive at one chip equipment supplier. When the DRAM market crashes, as it did early this year, the Japanese IC suppliers put a freeze on most capital spending allocations, he said. They have now resumed equipment buying, mainly for technology upgrades of their fabs. But this spring's sudden capital spending moratorium may have forced Japanese fabs into a "catch-up mode," the equipment executive said.
Japan is well aware of the capital spending gap. Seiichi Aratani, president of Oki Microelectronics, bemoaned the fact that his South Korean rivals often seem to have a "blank check" ability to invest massively in new fabs and equipment. "The Koreans just want to kill other companies," he added.
But it doesn't end with the Koreans. "Taiwan IC companies are also investing very aggressively, said Oki's Aratani, "and [they] will become a major threat."
"We look with envy on them," one top Japanese chip executive said.
Many a Japanese chip chieftain finds himself in a real dilemma now. "Japanese electronic companies are very large conglomerates, and when DRAMs were making lots of money in 1994-95, that covered lower earnings of other divisions in many companies," said Tsuyoshi Kawanishi, principal consultant for Toshiba and former senior executive vice president of the electronic conglomerate.
As a result, "executives of these other divisions then were very happy to approve large capital spending by the semiconductor division," Kawanishi said. "But now that DRAMs are in such poor financial straits, the other division executives don't want to go along with a larger capital spending budget for their semiconductor group."
The nosedive in DRAM prices is already hurting the giant Japanese electronics companies. Down more than 60 percent in the past nine months, DRAM prices are blamed by most Japanese companies for a drop in total net profits forecast for their consolidated operations for the fiscal year ending March 31, 1998. None of these companies report semiconductor division profits separately, but U.S. financial analysts said they believe the majority of Japanese chip operations are losing money now.
Even NEC, which already has one of the most diverse semiconductor product lines among the Japanese companies, said it expects net income to drop 13 percent this year to 80 billion yen ($650 million). Mitsubishi Electric is forecasting a 10 billion yen ($80 million loss), Toshiba is looking for a drop in net profit of 6 percent to about 63 billion yen ($500 million), and Hitachi is predicting a pretax operating profit drop of 11 percent to 75 billion yen ($600 million).
Fujitsu, so far, has managed to escape much of the red ink, thanks largely to having a greater percentage of its semiconductor business in telecommunications devices where prices and margins have held up better due to growing markets. But despite all their efforts and spending to diversify, most if not all the Japanese DRAM vendors are going to have to stick it out with the price-bludgeoned memory devices no matter how bad the market turns.
"Once a billion dollar DRAM fab is turned on, a company must continue to turn out as many chips as possible, no matter what the price, to pay back the very high depreciation cost," said A.A. LaFountain III, an analyst with Dominick & Dominick, in New York. Other analysts said the memory makers are stuck with their margin-squeezed storage chips until alternative parts can ramp up to volumes comparable to DRAMs. And that could take awhile.
One way Japanese chip makers are trying to cope with the flow of red ink from their DRAM operations is to shift as much DRAM production as possible offshore, making more alliances with Taiwan foundries. Their new partners usually are lower cost producers and can help by sharing the high capital costs.
Mitsubishi's Semiconductor Group is typical. Its joint venture with PowerChip Semiconductor in Taiwan is already turning out nearly half of the company's 16-megabit DRAMs, and will start up production of 64-megabit devices for the Japanese company in the first half of 1998. In 1999, the Taiwan joint venture expects to be producing nearly half of Mitsubishi's 64-megabit DRAMs.
About 40 percent of Fujitsu's DRAM output comes from Taiwan Semiconductor Manufacturing Co. Hitachi is already getting DRAMs from a joint venture with Texas Instruments, called Twinstar Semiconductor in Richardson, Texas, and it is building another fab in Singapore that is jointly owned with Nippon Steel Co.
The Japanese are also jumping belatedly into the DRAM shrink race to cut their costs. They were shocked earlier this year by Micron Technology, when the Boise, Idaho, company roared past them this year in DRAM volumes and earnings by shrinking its DRAM die size by shifting to 0.35-micron production lines, thus doubling the number of chips from a wafer.
But the Japanese will have to play catch up. Micron said it expects to get another 50 percent increase in the number of DRAM die on a single wafer when it goes to a 0.3-micron process by the end of this year.
Most of the Japanese chip makers had slowed their push to quarter-micron processing and were working on the new technology only for the next-generation 64-megabit lines. This meant many of their mainstay 16-megabit fabs were running on 0.5-micron lines that were highly vulnerable to the shrink efforts at Micron and other competitors. But now Japanese vendors are rushing to catch up by using newer processes and even quarter-micron lines to turn out lower cost 16-megabit DRAMs.
Japan's domestic market hasn't helped chip makers either. The pump-priming strategy by "Japan Inc." for the home market was judged to be a failure for chip makers. The consumer electronics market driver is stalled now.
And the market that Japanese IC makers were really counting on this year -- domestic PCs -- went into a tailspin in May. "The PC market in Japan dropped sharply" said Kazunari Shirai, president of Fujitsu's LSI Manufacturing Group. "This caused a sudden decline in domestic demand for DRAMs and other PC components." <Picture: TW>
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