Comprehensive industry-wide summary found in EETimes today:
Posted: 5:30 p.m., EDT, 9/4/98
DRAM map redrawn by merger, closures
By David Lammers and Anthony Cataldo
TOKYO - South Korean and Japanese semiconductor giants, gripped
by the twin forces of the Asian financial crisis and the spindown in the
DRAM market, have announced major operational upheavals that leave
an industry in recession wondering what it will look like when the dust
settles.
In South Korea, an industry group said Hyundai's and LG Semicon's
chip operations will be merged as part of a broad restructuring of the
country's ailing industrial conglomerates. In Japan, Hitachi Ltd. predicted
a staggering, $1.8 billion loss for its current fiscal year and restructured
its U.S. operations. Mitsubishi Electric Corp. and Fujitsu Ltd. also
broached significant retrenchments last week in moves that affect
operations in Europe, the United States and Asia.
Analysts expressed concern that the cutbacks, along with the past
week's stock-market gyrations, were just the latest manifestations of
what could be a lingering economic malaise. "What's really freaking
investors out now is the big-picture thing," said Mark FitzGerald, a
semiconductor and semiconductor-equipment analyst for Merrill Lynch
in San Francisco. "Our people are talking about recession in the U.S. in
'99."
The merger of LG Semicon Co. and Hyundai Electronics Industries Co.
was announced by the Federation of Korean Industries as part of a
nationwide reshuffling of assets owned by the largest chaebol, or
conglomerates, in seven major industrial segments. Hyundai and LG
agreed to merge first and to work out the restructuring details later,
leading analysts to wonder whether the combined entity will indeed boost
efficiency. Hyundai, the larger of the two companies, has argued that it
must exercise managerial control if the new entity is to compete
successfully against Samsung.
Samsung, for its part, announced it would close its memory fabs for eight
days to help reduce the glut of DRAMs on the worldwide market.
The Hyundai/LG merger creates a DRAM producer with a combined
market share of about 15.7 percent, compared with about 18.8 percent
for Samsung, according to the Korean Semiconductor Industry
Association. That compares with the roughly 14 percent market share
held by Micron Technologies, which took over the DRAM operations of
Texas Instruments in June, and the 12 percent held by NEC.
The merger calls into question the future of two planned U.K. fabs that
the companies recently put on hold. LG Semicon mothballed plans for a
large fab in Newport. Hyundai suspended construction of a nearly
completed plant in Dunfermline.
Fujitsu, meanwhile, has decided to shutter a 16-Mbit DRAM plant in
Newton Aycliffe, England, at the expense of 600 jobs. Closure of the
fab, which was started in 1991 with an estimated investment of $830
million, comes just six weeks after Siemens announced plans to stop
manufacturing DRAMs in England.
U.S. operations are also suffering. Hitachi last week shut down an aging
fab in Irving, Texas, that made SRAMs and 4-Mbit DRAMs, laying off
500 people. Hitachi also laid off 130 people in design, sales, and
marketing who had worked largely in California, and it consolidated its
design subsidiary, Hitachi Micro Systems, with the larger semiconductor
subsidiary, Hitachi Semiconductor (America). Total employment at
Hitachi Semiconductor (America) went from 1,000 to 370.
Additionally, both Mitsubishi Electric and Oki Electric said they would
shift assembly and test operations from the United States back to Asian
plants.
Mitsubishi is closing its Durham, N.C. fab, which was in the process of
being switched to back-end assembly and test. About 230 people were
laid off in Durham; 100 design engineers kept their jobs but now will
report to Mitsubishi America's Sunnyvale headquarters.
The June 18 announcement that Micron Technologies would take over
TI's DRAM operations has not resulted in any fab closures, though the
fates of TI joint ventures in Italy, Japan, and Singapore are in question.
Analysts said the retrenchments will do little to reduce the industry's
overcapacity situation, since few leading-edge fabs are expected to
close. Indeed, they indicated, the irony is that the weak financial position
of many of the DRAM makers may spur a shortage of Rambus DRAMs,
SL DRAMs, and double-data-rate SDRAMs.
"The result will be that the PC-100 synchronous DRAMs will be used
for much longer than intended," said Mario Morales, director of
semiconductor research at International Data Corp.
Jim Handy, who heads memory-IC research at Dataquest Inc., said Intel
Corp. has a "semiconductor industry enabling" group that may
recommend some action to guard against that. Already, Intel has taken a
minor stake in Samsung's Austin DRAM fab, and Intel may shore up the
supply of Rambus DRAMs in other ways, Handy said.
Dataquest is predicting that "a shortage of all flavors" of DRAMs will
develop by 2001, followed quickly by a swing toward oversupply by the
next year. PC-100 SDRAMs currently sell for about $11 each, or
roughly a dollar more than a standard DRAM, largely because a tighter
process is needed to meet the speed spec.
"Some people argue that it takes 0.25-micron or better technology to
make PC-100 DRAMs. A lot of fabs with 0.3-micron and above
capacity have been closed, but only two state-of-the-art fabs have been
closed thus far: the Twinstar fab, owned by Hitachi and TI, and Siemens'
North Tyneside [England] facility," Handy said.
Some vendors foresee further consolidation of the DRAM vendor base.
"Only major players will survive," said semiconductor analyst Saturo
Oyama of ABN Amro Securities Japan Ltd. "There will be two or three
in Japan, such as NEC and Toshiba. I'm not very sure about the others,
like Mitsubishi or Hitachi.
"I used to think Hitachi would be a winner company, but it's quite
doubtful right now. It's going to be quite difficult for them to catch up."
Hitachi said much of its projected losses for the fiscal year were related
to DRAMs. As a result, the company has frozen capital spending and
has stopped purchasing wafers for 16-Mbit DRAMs, Oyama said.
Fujitsu has outsourced its 16-Mbit DRAM production to Taiwan
Semiconductor Manufacturing Co. (TSMC) and may have to consider
doing the same for 64-Mbit DRAMs. And Fujitsu's volumes may be too
low, Oyama said, to allow it to compete effectively with the newly
formed giants of the industry: Hyundai/LG and Micron.
But Masahiro Suzuki, a senior analyst with Dataquest Japan, said it's
unlikely that any of Japan's top five chip manufacturers will pull out of the
market. "It should be impossible for them to quit the DRAM market,
because the technology is necessary for their ASIC products. They may
shrink capacity for DRAM, but they won't give up," Suzuki said.
Though fab construction of has slowed to a crawl, the industry continues
to add bit capacity by moving to tighter design rules. Morales of IDC
said that most DRAM manufacturers cut 250 to 325 64-Mbit DRAMs
from each 8-inch wafer. That will increase to 400 to 425 chips as
Micron, NEC, Samsung and others bring up more advanced processes,
he said.
Overall, the DRAM industry has been able to supply 50 percent to 100
percent more bits per year without investing in brick and mortar,
Morales said.
On the logic side of the fence, Bob Payne, vice president of strategic
technology at VLSI Technology Inc. (San Jose, Calif.), observed that
the average ASIC die size has shrunk steadily over the past four years.
Logic designers, he said, do not have the design methodologies in place
to design more complex chips that can command higher prices. VLSI
Technology's share price took a hit in the last week after the company
said revenue in the third quarter would be 5 percent to 10 percent lower
than in the previous three months.
This past week, the Electronic Industries Association of Japan said the
worldwide capacity utilization rate for semiconductors dropped in the
April-June period by 3.8 percentage points, to 86.4 percent. The
Hyundai/LG merger is expected to do little to change that. Given the
merged company's a mountain of debt and little chance of turning an
immediate profit, no one was predicting last week that it would close
many fabs, especially since semiconductor exports earn badly needed
foreign currency.
"To have to slam together LG and Hyundai - bitter rivals for years and
years - shows you what things have come to," Merrill Lynch's
FitzGerald said.
"Things" aren't expected to turn around anytime soon. With the
economies of Japan and other Asian nations in dire straits, and with the
personal computer industry's fourth-quarter revenue performance a
question mark, the semiconductor demand may slip further, Morales
warned. "We have been advising our clients to keep a close eye on the
demand side of the business for the rest of this year," he said.
Ironically, some executives and analysts in technology had begun
preaching that a recovery was imminent. Intel Corp. and others
reportedly have ramped production in hopes of stimulating a strong
fourth quarter of sales.
"There's some evidence that people are at least building the product for
fourth-quarter sales," said FitzGerald of Merrill Lynch. "There's this kind
of collective will to make it happen. But they're doing it in a very strong
headwind."
Fred Zieber, founder of Pathfinder Research (San Jose), who was
among the first to adopt a bearish outlook earlier this year, pegged the
problems to both short-term cycles and long-term trends in
manufacturing worldwide.
While the overcapacity will work itself out eventually, there is also an
"overcapacity" of sorts among companies. "You have just a lot of
companies out there: You have 20 guys in DRAMs and 115 public
[technology] companies in the United States and about 150 startups,"
Zieber said. "It's natural to expect a certain amount of consolidation."
Zieber noted that the downturn has been particularly hard on Japan,
which 10 years ago held more than 50 percent of the world's market
share in semiconductors but this year will claim only half that. Part of the
problem, he said, is that vertical integration has kept the design
imperatives among Japanese semiconductor divisions in lock-step with
the strategic goals of their system-level corporate parents.
"Vertical integration is a tremendous albatross that hangs around the
neck of the Japanese computer companies. If there's any industry in the
world that needs to restructure, it's the Japanese keiretsu," Zieber said.
But whenever the rebound comes, the industry - "what's left of it" -
should be positioned well, Zieber said.
"The semiconductor industry really hasn't grown for three or four years,
but you are getting tremendous progress on the cost side," he said.
"You"re going to have larger markets and much lower-cost product."
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