Japan's DRAM-Makers Could Break Even Next Yr on Price Gains, Analysts Say
Bloomberg News
October 20, 1998, 7:08 p.m. PT
Japan's DRAM-Makers Could Recover Next Year: Industry Spotlight
Tokyo, Oct. 21 (Bloomberg) -- Japan's five largest microchip-
makers could break even again on their chip businesses by the
middle of next year if a rebound in prices holds steady through
year-end and the first quarter of 1999, analysts said.
NEC Corp., Toshiba Corp., Hitachi Ltd., Fujitsu Ltd. and
Mitsubishi Electric Corp. stand to gain from signs of a recovery
in prices of the 64-megabit dynamic random-access memory chips
used in personal computers, they said.
DRAM prices, which had collapsed for two years, began to
pick up in July largely because Samsung Electronics Co. of South
Korea, the world's largest maker of memory chips, cut its monthly
output 25 percent since June, tightening global supply. That's
prompting analysts to consider raising their ratings.
''We expect the DRAM supply demand balance to tighten in the
second half of 1999,'' said Noboru Sasaki, an analyst at
Schroders Japan Ltd. Sasaki last month raised his recommendation
for Toshiba, Japan's second largest chipmaker, one notch to
''outperform.''
The slump in DRAM prices, the result of global oversupply,
brought heavy losses on microchips for the companies in the year
ended March 31, and they project wider chip losses for the six
months ended Sept. 30. Hitachi, Japan's largest electronics-
maker, forecasts its first full-year group loss.
While average prices are half what they were in January,
tighter DRAM supply has caused the spot price, or price for
immediate delivery, for the most commonly used synchronous 64-
megabit DRAMs to rebound to about $9.30 since falling below $8 in
July, analysts said.
''The DRAM market has been recovering since a turning point
in July, and we're quite bullish about it,'' said Hideki
Wakabayashi, senior analyst at Dresdner Kleinwort Benson (Asia)
Ltd. Wakabayashi has a ''buy'' recommendation on Toshiba stock.
64-megabit DRAM prices will probably average about $10
during the October-December period ''and won't fall from that''
significantly, Wakabayashi said.
It's ''possible'' that NEC and Toshiba, Japan's two largest
chipmakers, could return to profitability on microchips in the
six months through March 1999 if prices remain stable and the
companies achieve further efficiencies in the manufacturing
process, Wakabayashi said.
Toshiba shares have rebounded 20 percent the past month on
hopes it'll be the first Japanese maker to regain microchip
profitability, erasing its declines for the year thereto.
Even if year-end PC sales disappoint and chipmakers are
forced to sell off inventory in the January-March period, ''we
won't see anything like the price drops we've seen until now,''
Wakabayashi said.
That's because ''the overall supply-demand relationship is
improving,'' said Yoon-Woo Lee, president of Samsung Electronics'
semiconductor business. ''We think prices will remain stable
through the end of the year.
Bumping Near The Bottom
Oversupply of DRAM chips, and the concomitant collapse in
DRAM prices and profitability, forced Japan's five largest makers
to cut their spending on their microchip businesses 31 percent in
the current fiscal year to 510 billion yen ($4.26 billion), the
second straight year of cuts.
''We're bumping up and down near the bottom, but with all
the cutbacks in capital spending, which eventually are going to
work out to a slowdown in supply, things have to start
improving,'' said Peter Wolff, an analyst at ING Baring
Securities (Japan) Ltd.
''I don't know if people are going to go profitable, but the
red ink is gong to shrink and they're probably going to break
even some time around the second or third quarter next year,''
said Wolff.
Recovery can't come soon enough for the companies. NEC,
Hitachi and Mitsubishi Electric's shares have all plunged about
40 percent the past six months on concern at the companies'
exposure to DRAMs.
Another potential boost for the DRAM market is that
worldwide makers only have the capacity to meet about 80 percent
of demand for the high value-added ''Cas Latency 2'' 100
megahertz-compatible 64-megabit DRAMs favored by Intel Corp., the
world's largest chipmaker, said Dresdner Kleinwort Benson's
Wakabayashi.
Toshiba, Samsung Electronics and Fujitsu are among the few
companies capable of supplying such chips, he said.
A third source of comfort could lie in the proposed merger
between South Korea's second- and third-largest chipmakers -- LG
Semicon Co. and Hyundai Electronics Industries Co. -- which
analysts say is bound to lead to a drop in DRAM supply.
The merger, driven by the Korean government, is ''very
positive for the consolidation of the market,'' said Samsung's
Lee.
Shrink and Grow
Opinions differ about the impact on the DRAM market of the
''shrinking'' of successive generations of electronic device,
whereby a microchip's electronic circuitry is packed onto its
silicon wafer base at increasingly narrower line widths.
The narrower the circuitry, the smaller and faster each
generation of finished microchip can be, and the more chips can
be cut from each 8-inch silicon wafer.
That's crucial because few things affect chipmakers' costs
as much as the number of chips that can be sliced from each
wafer. A greater yield reduces energy costs per chip and allows
companies to increase output substantially without increasing
capacity to process wafers.
From a single 8-inch wafer, for example, about 110-120 chips
can be made if the chips have circuitry of 0.35 microns --
millionths of a meter -- while 600 can be made if circuits are
0.18 microns wide.
NEC's losses swelled in the six months ended Sept. 30
because it was slower than scheduled in switching to 0.25 micron
technology from 0.28 microns, said Wakabayashi.
Industry wide, while worldwide production capacity for
microchips with circuitry widths of 0.30 microns or less
currently outstrips demand, production capacity for chips with
circuit widths of 0.25 microns or narrower is ''nowhere near
enough,'' Wakabayashi said.
Tokyo-based Toshiba is probably the only Japanese company
genuinely capable of mass-production of chips with line widths of
0.25 microns or less, he said.
Subsequent shrinks to 0.18 micron technology by the first
half of 1999 are ''going to lead to a lot more supply coming into
the market,'' said ING Baring's Wolff. ''The market's dependent
on pricing.''
''Value Destruction''
To be sure, others disagree vigorously with forecasts for
improvement in the DRAM market.
''There's value destruction as far as the eye can see,''
said Naoki Sato, an analyst at HSBC Securities Japan Ltd.
''Demand for both capital equipment and consumer very goods is
very weak, and some companies will remain in the red indefinitely
unless they restructure more aggressively.''
Sato said he doesn't expect demand for memory capacity in
PCs to increase substantially in 1998 and 1999 because Microsoft
Corp.'s Windows 98 operating software, an upgrade of Windows 95,
doesn't require a significant increase in memory capacity.
Corporate purchases of Windows NT 4.0 software, released August
1996, had helped boost overall DRAM demand 94 percent in 1997.
Further, global PC shipments will probably rise by between
10 and 13 percent in 1998, and between 8 and 11 percent in 1999,
down from about 15 percent in 1997, depressing DRAM demand, Sato
said.
''DRAM prices could lurch lower again'' if Korean makers
ramp up production to boost sales, said Sato, echoing Samsung's
Lee's comments that ''a certain section of our customers is
asking us to increase production.''
And while several Japanese makers have begun to restructure
their microchip businesses -- Hitachi is closing U.S. production
lines and concentrating DRAM output in a joint venture in
Singapore, Mitsubishi is outsourcing more of its DRAM output and
concentrating on higher value-added chips and Fujitsu decided to
shut a production line in the U.K. -- the plans ''do not go
anything like far enough,'' Sato said. |
