Japan Chipmakers' Profit May Suffer as Prices Fall (Update2)
Japan Chipmakers' Profit May Suffer as Prices Fall (Update2) (Adds closing prices of stock in section called Earnings.)
Tokyo, May 11 (Bloomberg) -- Don't count on Japan's top computer chipmakers making any profit this year.
A 30 percent decline since January in the price of memory chips most commonly used in personal computers could spell another year of losses for the nation's five largest chipmakers - - NEC Corp., Toshiba Corp., Hitachi Ltd., Fujitsu Ltd. and Mitsubishi Electric Corp.
The price declines may have less impact on U.S., Taiwanese and Korean chipmakers such as Samsung Electronics Co., the No. 1 memory maker, which can produce 64-megabit synchronous dynamic random-access memory chips for as little as $5.50 each.
For NEC and other Japanese companies, however, the fall in spot prices, or prices for immediate delivery, to about $6.90 a chip from $10 means they can barely break even. ''Prices keep falling and falling, and we're stuck at the mercy of the market,'' said Aston Bridgman, a spokesman for NEC, Japan's largest maker of microchips and personal computers. ''It'll be difficult'' to make money in the year to March 31, 2000, he said.
Production cuts by Samsung and other Korean chipmakers enabled Japanese makers to hold prices stable from last September through January, raising expectations of better earnings after two years of losing money or breaking even on their chip businesses.
Yet increases in production capacity by No. 2 producer Micron Technology Inc. of the U.S. and companies in Taiwan have pushed prices down, hurting Japanese chipmakers whose costs are higher than those of Boise, Idaho-based Micron and Taiwan's largest DRAM makers such as Winbond Electronics Corp. and Mosel Vitelic Inc.
Lower Costs ''We had thought Japan's chipmakers would be able to make some money on DRAMs this fiscal year, but the issue's basically already settled,'' said Yohei Kanazawa, a senior analyst at Daiwa Institute of Research Ltd.
Kanazawa estimates it costs Japanese makers between $8.50 and $9 to make each 64-megabit DRAM chip, compared to between $6.50 and $7 for Micron. ''Once we go through $7, the very best the Japanese makers will be able to hope for is break-even, however much they succeed in cutting costs,'' said Kanazawa.
Taiwanese makers' costs are lower, at about $5.50 a chip, adding to the pressure on Japanese companies, said Satoru Ohyama, a senior analyst at ABN AMRO Securities (Japan) Ltd. ''There's no way the Japanese makers can compete on costs,'' Ohyama said. Not only are Japanese labor costs higher, but the Taiwanese are more efficient at using their factories and better at maximizing yields -- getting more perfect chips out of each batch of silicon, analysts said.
Earnings
Tokyo-based NEC, which reports earnings May 28, said in February it expects a record group net loss of 150 billion yen ($1.25 billion) in the year ended March 31 because of poor sales at its U.S. subsidiary and higher-than-expected restructuring costs.
The fall in memory chip prices won't help NEC earnings in the year that began April 1 but its loss ''shouldn't be hideous'' because NEC sells ''about 99 percent'' of its DRAM chips at prearranged contract prices rather than on the spot market, the company's Bridgman said.
Toshiba, Japan's second-largest chipmaker, which reports earnings May 25, forecasts it broke even at best in the year ended March 31, in part because of losses on memory chips.
Hitachi, the nation's No. 3 chipmaker, forecasts a group loss of 375 billion yen for the year ended, its first ever, partly attributable to chip losses. Mitsubishi Electric, the No. 5, projects a loss of 40 billion yen, its second straight year in the red. To date, none of the companies have announced forecasts for the year that started April 1.
To be sure, those earnings will be swayed by many other factors, from currency changes and other business activities to one-time gains from sale of businesses and the impact of cost- cutting programs. Yet the renewed slide in DRAM prices spooked investors and traders yesterday and today, sending shares in all five chipmakers down.
NEC shares, which have risen 32 percent so far this year, fell 38 yen, or 2.7 percent today to 1,362. Toshiba shares fell 20 yen, or 2.5 percent to 777.
Hitachi retreated 41 yen or 4.3 percent to 904. Mitsubishi Electric Corp. fell 17 yen, or 4.0 percent to 406. No. 4 chipmaker Fujitsu fell 20 yen to 1,980.
Taiwan Not Immune
Taiwan's largest chipmakers aren't immune from the impact of price cuts, even though their costs are lower than the Japanese. ''It'd be hard for Taiwan's DRAM companies to make money when chip prices dropped below $7.50,'' said John Lin, a semiconductor analyst at Core Pacific Securities Investment Trust Co., which oversees NT$36 billion ($110 million) in client assets. Lin recommends a ''hold'' on the island's chipmakers. ''The falling prices have a negative effect on us,'' said Thomas Hsu, an assistant vice president with Winbond Electronics Corp., one of Taiwan's two largest DRAM makers.
Taiwanese chipmakers such as Winbond, Mosel Vitelic Inc. and others account for about one tenth of worldwide DRAM output.
Hsu said his company is set to lower its contract price to Toshiba -- Winbond's largest client -- to $7 from $8.50 last month. ''DRAM prices may extend their falls to as low as $5 through the second quarter, crimping the earnings of Winbond and Mosel,'' said Core Pacific's Lin.
Declining prices will also ''force DRAM players to slash prices to win orders from foundries,'' including TSMC and UMC, the world's top two foundries.
To be sure, DRAM prices are expected to rebound to about $7 in July as U.S. computer companies and retailers prepare for the Christmas shopping season, Lin said.
Technological improvement will also help chipmakers cut costs by one third per year. ''We'll upgrade all our DRAM output to 0.20 micron technology from June, lowering our costs to $5,'' said Winbond's Hsu.
Etching a microchip's circuitry at line widths of 0.20 microns -- millionths of a meter -- rather than the 0.25 micron technology currently used allows companies to make more chips from each batch of silicon.
Samsung Unconcerned
South Korea's Samsung, the world's largest computer memory chipmaker, said it isn't concerned about the dip in prices. ''The price of the 64-megabit DRAM isn't below our factory cost, so it isn't that much of a concern,'' said Samsung spokesperson Cho Sungin.
Prices have fallen less than Samsung forecast, and the company expects average 64-megabit DRAM prices to decline as low as $6, Cho said.
Hyundai Electronics Industries Co. and LG Semicon Co., soon to combine to form the world's largest memory chip company, may have more to worry about. ''Hyundai is still marginally profitable at this level,'' said Chong Wha Jon, an electronics analyst at Salomon Smith Barney in Seoul.
Tony Chung, electronics analyst at Crosby Socgen Securities said that the two are ''probably breaking even or possibly losing money.''
Both predict demand will increase in the second half of the year, sparking a rally in chip price. ''According to our forecasts they don't have to worry because we see a rebound to $7 or $8 in the third or fourth quarter,'' said Salomon's Chong. If this fails to materialize, though, ''earnings will be hit hard.'' |
