NEC's Plan: Establish foundry ties; divest non-core businesses
By Jack Robertson
Electronic Buyers' News
(03/19/99, 04:56:51 PM EDT)
NEC Corp., stung by a $1.3 billion loss in fiscal 1998, will sell off operations, outsource more chip production to foundries in Taiwan, and continue to shake up its U.S. PC business, the company's new chairman told EBN in an interview earlier this week at the company's headquarters in Tokyo.
In his first interview since taking the helm of the Japanese electronics giant, Hajime Sasaki said NEC will divest or consolidate non-core businesses and focus instead on five key areas: semiconductors, communications, computers, consumer information devices, and flat-panel displays.
“We're not going to be hasty,” Sasaki said. “We'll draw up a corporate plan by September on business lines we'll sell or combine. Of course, if we get any good offers before then, we will consider them.”
Semiconductors, buffeted in recent years by plunging prices, should rebound sharply in 1999 as a result of a firmer DRAM market, according to Sasaki. However, NEC is considering cutting semiconductor capital spending for its new fiscal year, starting April 1, and could trim its outlay by 20%, to about $1 billion. By comparison, the company's chip-equipment budget two years ago totaled $1.5 billion.
Sasaki said NEC expects to train its capital on leading-edge chips, where return on investment is much higher. “Mature chips with very low margins will increasingly be outsourced to foundries, freeing up production capacity for newer products,” he said.
While most of its competitors in Japan have followed the trend toward outsourced manufacturing, NEC has, until now, been viewed largely as a holdout. Sasaki said the company will build its foundry relationships slowly, at first outsourcing perhaps 10% of its chip production.
“We won't move leading-edge [64- and 128-Mbit] DRAMs to foundries, as some Japanese manufacturers have,” Sasaki said. “We'll use foundries for 4- and 16-Mbit DRAMs.”
NEC will begin to use foundries for a variety of logic devices as well, since demand in that segment can fluctuate widely from month to month. “We don't need to keep a lot of capacity in place just to meet sudden peak demand for a particular logic chip,” Sasaki said. “Foundries can help us get better control of our logic semiconductor business.”
Sasaki said NEC is taking a cautious stance on adopting semiconductor partnerships or joint ventures. “It's like marriage,” he said. “It would take a very attractive 'lady' before we would want to get married. Otherwise we prefer to remain 'single.'”
The NEC chairman is also looking for higher-priced active-matrix LCD panels to restore profitability to that sector this year. Despite an increasingly stronger global FPD market, NEC is holding off on plans to build a fourth-generation fab-a project the company froze a year ago.
“In any event, there simply isn't adequate production equipment available today to make the very-large-size motherglass panels in a fourth-generation fab,” Sasaki said. “We're waiting for suitable equipment to come on the market before deciding to build a new [FPD] plant.”
In the computer market, NEC retains its title as the largest PC vendor in Japan, he said. However, the company's U.S. subsidiary, Packard Bell NEC (PBN), lost $500 million in 1998, and is expected to be about $80 million in the red this year. PBN hopes to be profitable again in 2000.
“Frankly speaking, it's been very difficult to compete in the U.S. PC market because of the extreme price-cutting,” Sasaki said.
As part of its PC-operations restructuring plan, NEC spun out PBN's profitable European division, bringing it under control of the Japanese parent. The Sacramento, Calif.-based PBN subsidiary will get a $450 million cash transfer, and will use the new funds to reposition itself in the market with an eye toward higher-end systems.
In other areas, NEC hopes to expand its strong wireless-communications operations in Japan by moving aggressively into the U.S. market. “We intend to be a major player in the U.S.,” Sasaki said.
Like other Japanese cell-phone makers, NEC is developing wideband-CDMA handsets, hoping the International Telecommunications Union will adopt the European-Japanese standard over a rival proposal from San Diego-based Qualcomm Inc.
“Ideally, we would like to have a single world standard for the next-generation cellular phones,” Sasaki said. “If the ITU cannot get the two [CDMA] sides to agree, and we end up with two separate standards, we'll watch to see how the market reacts. We're ready to build wideband CDMA. We'll have to see if the market justifies devoting our resources to develop other types of next-generation cellular phones.”
As part of Sasaki's corporate strategy, NEC will cut interest costs this year by reducing its debt-to-equity ratio from 180% to 150%, he said. In his new role as chairman, Sasaki also will tend to trade-policy matters, bringing to bear his years of experience negotiating semiconductor agreements with the U.S. chip industry. Semiconductor trade is no longer a major dispute, but the NEC executive is concerned that a mounting general U.S. trade imbalance with Japan could affect other electronics sectors.
“It could become a political issue if the value of the yen drops to 140-to-the-dollar or lower, making Japanese exports cheaper in the U.S. market,” he said. “The present rate of about 120-yen-to-the-dollar is just right.”
On a wider economic front, the Asia-Pacific region is showing signs of marked fiscal improvement, Sasaki said, which could boost NEC's exports but would also enhance its rivals' competitive positions.
“South Korea seems to be coming back very quickly,” he said. “Taiwan may be doing even better-and the companies there have money.”
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