April 05, 1999, Issue: 1154
Section: News
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Japan revamps strategies
Andrew MacLellan
Silicon Valley- In the latest quest for profitability by a Japanese company, Toshiba Corp. last week said it will cut 64-Mbit DRAM production 90% by year's end, moving capacity to a 128-Mbit density to capture higher margins.
Concurrent with the move, Toshiba launched a major reorganization by creating eight "virtual" companies that it will spin off into independent entities within two years.
Heralding the start of a new fiscal year, Japan's semiconductor makers are increasingly refocusing on more lucrative workstation, server, and notebook-PC markets amid growing evidence that soft DRAM prices are taking their toll on gross profits.
Following last year's decision by Oki Electric Industry Co. Ltd. to drop development of discrete 256-Mbit DRAM, Matsushita Electric Industrial Co. Ltd. last week said it will forgo the PC main-memory market altogether, selling its DRAM instead into the consumer-electronics sector.
While neither company is considered a DRAM manufacturing leader, continued price pressure is making it tough for weakened suppliers to remain competitive, according to industry executives.
"We see a change happening to the supplier mix, with a smaller group of suppliers making up to 80% of the DRAM supply," said Stephen Marlow, vice president of memory operations for the semiconductor group of Toshiba America Electronic Components Inc. (TAEC), Irvine, Calif.
Mitsubishi Electric Corp. last week also positioned itself for a widespread restructuring, saying that it would reduce its headcount by 14,500 employees over the next three years and sell, spin off, or close those businesses that cannot return a profit by March 2001. While the company did not identify specific subsidiaries, sales within its semiconductor, computer, and FPD units were off in the last fiscal year by about $490 million and contributed largely to Mitsubishi's $328 million projected year-end loss.
NEC Corp., meanwhile, recently outlined a large-scale profitability plan under which it will divest non-core businesses and increase outsourcing to overseas foundries. And Hitachi Ltd. has reported that its chip division will contribute about $1 billion in red ink to the company's overall $3.3 billion fiscal 1999 loss.
Although Japan's top IC makers will each invest hundreds of millions of dollars this year in new DRAM capacity, they are losing the global investment race, as well as their grip as the dominant DRAM suppliers to the worldwide PC market.
A recent report from Semico Research Corp., Phoenix, revealed that NEC has slipped from its spot as the second-leading DRAM maker to third place, as Hyundai Electronics Industries Co. Ltd. drove past it. (Samsung Electronics Co. Ltd. topped the list.) Hitachi and Toshiba retained their respective fifth- and ninth-place rankings, while Mitsubishi moved up a rung to seventh. Of the four leading Japanese suppliers, only Mitsubishi gained market share in 1988, moving up a percentage point.
And, so far, 1999 isn't living up to expectations. DRAM makers had banked on a combination of factors to play in their favor this year, but have been largely disappointed.
Intel Corp.'s delay of a chipset to support the industry's shift to Direct Rambus DRAM, along with the lingering design issues associated with that technology, has stalled demand for the high-speed-and higher-priced-memory (see related story on page 1). Chip makers that were poised to reap the benefits of improved margins have seen that market opportunity deferred until the third quarter at least, executives now say.
According to Bob Fusco, manager of product marketing for the DRAM business unit of Hitachi Semiconductor (America) Inc., San Jose, the lack of unique features tied to Intel's Pentium III launch also has hurt DRAM suppliers. Because the Pentium upgrade wasn't accompanied by an improved chipset or a faster bus, it was hard to differentiate from the Pentium II, he said. Rather than rushing to buy higher-end Pentium platforms, consumers moved deeper into sub-$1,000 territory.
"The most disconcerting thing for us in the DRAM industry is the shift of these $600 and $500 boxes down to 32 Mbytes of memory," Fusco said. "We had hoped to sell more."
Moreover, the industry's hope that the Y2K bug would require massive hardware upgrades and stir DRAM unit sales hasn't panned out, forcing suppliers that had bet on a spike in business to sell off excess inventory.
According to Toshiba, chip vendors missed the mark when they assumed that outstanding Y2K issues would cause strong fourth-quarter PC shipments to carry over into the new year. Instead, first-quarter PC shipments followed a seasonal pattern and dipped by as much as 15%, Marlow said.
"The industry is in a bit of a dilemma," he said. "We don't see Q1 having met expectations, and we don't see signs of a recovery until maybe the second quarter."
Indeed, after hovering on either side of the $10 mark for much of the past year, several 64-Mbit PC-100 SDRAM configurations are trading on the spot market for less than $9, according to independent distributor American IC Exchange, Aliso Viejo, Calif.; some 64-Mbit PC-66 SDRAMs have fallen below $8.
It's hard to determine whether the dip represents a further market softening or an excess inventory expulsion triggered by the conclusion of Japan's fiscal year.
But one thing is becoming clear: The strain of a relentless need to refill capital-investment coffers is likely to present a real problem for Japan's DRAM manufacturers if thin margins persist at midyear. Although demand is expected to slightly exceed supply in the third and fourth quarters, it remains to be seen just how long Japan's DRAM manufacturers are willing to hang on to the promise of better times-particularly with the presence of powerhouses such as Samsung, Micron, and Hyundai, and the new players emerging in Taiwan.
With their backs against the wall, some of Japan's DRAM vendors are pushing out to the high end of the PC market.
Hitachi last week moved to strengthen its manufacturing position by assuming control of Hitachi Nippon Steel Semiconductor Singapore Pte. Ltd., a joint-venture DRAM fab in Singapore. Following the sale of Nippon Steel Corp.'s 35% stake in the fab, Hitachi will receive 100% of the output, and will expand the facility's capacity from 20,000 8-in. wafers per month to 30,000, according to Fusco.
Hitachi said the fab will enable it to serve the upper end of the computing market and build better margins into its DRAM-manufacturing cost structure. "We'll maintain ASPs better than the industry average," Fusco said. "A lot of guys are trying to get into higher-margin products, so we're seeing some pressure there, but it's not as strong as we're seeing [in commodity 64-Mbit PC-100 SDRAM]."
Detailing a similar strategy, Toshiba said its ability to migrate from 0.35- to 0.15-micron linewidths using the same clean room and with little new equipment will enable it to focus on more profitable markets. While it will retain a presence in the desktop-PC arena, the company plans to gut 64-Mbit production this year to take advantage of demand for 128-Mbit single- and double-data-rate SDRAM in the workstation/server and mobile segments.
By June, Toshiba said, its Yokkaichi fab will be running all its DRAM wafers on a 0.2-micron process. The company's Manassas, Va., plant and the majority of production at Winbond Electronics Corp., its Hsinchu, Taiwan, foundry partner, will complete the shrink by August, Marlow said.
Additionally, Toshiba said its flexible, global manufacturing network will allow it to quickly alter its product mix from PC-100 to PC-133 or Direct RDRAM by means of a relatively simple mask-set swap.
As part of the new manufacturing model, Toshiba last week spun out its chip unit to form Toshiba Semiconductor Co., which will be joined by Toshiba Display Devices and Components Co. and six other in-house ventures that will evolve into independent, publicly traded entities by April 1, 2001. Toshiba has named corporate senior vice president Yasuo Morimoto president and chief executive of the new chip company, while Tadashi Matsumoto, former corporate vice president, has been tapped to lead the display-and-components outfit.
Copyright ® 1999 CMP Media Inc.
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