thread,
This WSJ article might spread the word today.
October 19, 1998
Intel Investment in Micron Technology
Will Provide a Boost to Chip Industry
By DEAN TAKAHASHI
Staff Reporter of THE WALL STREET JOURNAL
Intel Corp.'s $500 million investment in Micron Technology Inc. raises the prospect that American chip companies could become leaders in a $13 billion industry that was once considered lost to Japanese and Korean rivals.
Intel's investment, announced Friday, makes it likely Micron will shoot ahead of market-share leader Samsung Electronics Co., which lacks capital to expand because of South Korea's currency crisis. In addition, Intel also is positioning a small Silicon Valley engineering company, Rambus Inc., to become the dominant player in the licensing of memory-chip designs.
"It's a big vote of confidence for Micron and it positions it to be No. 1," said Jonathan Joseph, an analyst at NationsBanc Montgomery Securities in San Francisco. "Intel also wants to promote Rambus as an industrywide standard."
Intel, of Santa Clara, Calif., says it is primarily investing in Micron, of Boise, Idaho, to ensure there is no shortage of dynamic random-access memory, as the industry recovers from overcapacity in the next year. DRAM are the most popular kind of memory chips and a major component in personal computers. Intel fears sales of Intel microprocessors, the brains of PCs, might be constrained if there is a DRAM shortage, said Patrick Gelsinger, a vice president at Intel.
"We're happy it is a U.S. company, but we also have relations with [foreign] companies," he said. "The entire industry has had a rough couple of years, and we wouldn't be doing this if we didn't think it was necessary to make the industry move forward. Our actions show our discomfort." The Micron deal, he said, doesn't preclude other deals.
End of Pricing Blood Bath
Many analysts believe a three-year pricing blood bath in DRAM eventually will end, though they are uncertain of the recovery path. Prices first collapsed 60% in late 1995, and in each year since, they have come down significantly faster than companies have been able to reduce costs.
Most big memory-chip companies have closed plants or scaled back investments in the past year, though it isn't clear if supply still exceeds demand. Mr. Joseph believes DRAM makers will have losses of $11 billion this year, in which case "being No. 1 is a Pyrrhic victory because it means you're the last company to bleed to death."
But Micron spokeswoman Julie Nash said prices for the mainstay 64-megabit DRAM have been stable for two months, with the highest speed chips in short supply. Intel's investment gives it the right to acquire 6% of Micron in a new class of nonvoting common stock. In return, Micron will invest in production of a new kind of extremely fast DRAM that is being pushed by Rambus.
Micron announced Friday it will begin shipping Rambus in high volumes for the PC market as early as the third quarter of 1999. Intel believes the Rambus-based DRAM chips are essential to ensure memory chips keep up with the speed of its microprocessors.
Rambus, of Mountain View, Calif., has an important position because it has patented the designs it uses to provide a four-fold improvement in memory speed. DRAM makers are trying to come up with alternative designs because they don't want to pay Rambus a 1% to 2% royalty, and they don't like the fact Rambus chips are more expensive to make. But with Intel's support, Rambus has been able to sign licensing deals with almost every DRAM maker, lining itself up to become a several hundred million dollar company based on royalties alone, analysts say.
An Emotional Investment
Intel's investment in Micron is an emotional one, since Intel was forced to sell off its DRAM business in 1986 in the midst of a withering assault by Japanese chip makers. That turned out to be a landmark decision because Intel's subsequent investment in its microprocessor business led it to become the world's largest chip maker.
Micron survived the 1980s battle, as did other U.S. chip makers Texas Instruments Inc., Motorola Inc. and International Business Machines Corp. But since then, Korean chip makers duplicated Japan's tactics and further devastated the market. Motorola has decided to pull out, IBM has reduced its dependence on DRAM through joint ventures, and TI sold its DRAM business to Micron on Sept. 30, leaving Micron as the last independent U.S. DRAM maker.
The TI deal gave Micron enough market share to take the lead from Samsung, according to several analysts. A Samsung official contends, however, that by the year 2000 the market leadership will be held equally by Samsung, Micron and LG-Hyundai. In the TI deal, TI sold its factories to Micron and provided financing in exchange for a 16% stake in Micron valued at $880 million. With the Intel investment, Micron has nearly $1.5 billion to invest in its chip-making technology, which analysts say already is superior to the leading Korean chip makers. Mr. Gelsinger at Intel didn't rule out making investments in other DRAM makers as well.
"The Japanese and Korean rivals have a shortage of cash, and this gives Micron an advantage," said Dan Niles, an analyst at Bank Boston Robertson Stephens in San Francisco.
Micron has been vociferous in arguing that it is the last big bastion for American jobs in the DRAM business. Intel invested a smaller amount for a minority stake in Samsung's factory in Texas, but it stopped short of rescuing the Koreans during this year's financial crisis.
The International Monetary Fund was poised to inject fresh capital into the Korean conglomerates, but Steve Appleton, chief executive of Micron, traveled to Washington to oppose U.S. support for what he said were anticompetitive Korean practices of selling chips below costs in order to drive competitors from the market. The federal budget passed by Congress last week won't allocate IMF funds for the Korean semiconductor companies.
--Michael M. Phillips contributed to this article.
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