Sony to slash chip spending

TOKYO Tue Feb 13, 2007 6:51am EST

A man plays the PlayStation 3 at a Sony showroom in Tokyo, November 6, 2006. Sony will cut back on future chip spending and may not produce advanced ''cell'' microchips used in its PlayStation 3 game gear in-house as it seeks better returns on its investments, a senior executive said on Tuesday. REUTERS/Toshiyuki Aizawa

A man plays the PlayStation 3 at a Sony showroom in Tokyo, November 6, 2006. Sony will cut back on future chip spending and may not produce advanced ''cell'' microchips used in its PlayStation 3 game gear in-house as it seeks better returns on its investments, a senior executive said on Tuesday.

Credit: Reuters/Toshiyuki Aizawa

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TOKYO (Reuters) - Sony Corp. (6758.T) will cut back on future chip spending and may not produce advanced chips used in its PlayStation 3 (PS3) in-house, a senior executive said on Tuesday, in a move aimed at driving the semiconductor unit's nascent earnings recovery.

Improving profitability in its chip division is important for the Tokyo-based electronics and entertainment conglomerate, which targets an operating margin of 5 percent in the business year from April, up from an estimated 0.7 percent a year earlier.

Sony Executive Deputy President Yutaka Nakagawa told reporters that investment in chips would come down significantly from the 460 billion yen ($3.8 billion) allocated over the three business years since April 2004.

Sony is already producing the cell chips, dubbed "supercomputer on a chip", using 90- and 65-nanometre circuitry for the PS3, and plans to move onto the 45-nanometre variety by 2009. A nanometre is one billionth of a meter.

Narrower circuitry makes the size of a chip smaller and helps manufacturers cut per-chip production costs.

As the cell, as well as a Blu-ray high-definition optical disc player, have driven up the PS3 price, lower costs for the high-speed chip are expected to help the new game machine better compete with Nintendo Co. Ltd.'s 7974.OS Wii and Microsoft Corp.'s (MSFT.O) Xbox 360.

But finer circuitry also means heavier initial investments for chip makers as costs for chip-making equipment balloon.

"We tentatively plan to start commercial production of 45-nanometre chips in late 2008 or early 2009. We are going to study carefully whether we should carry out all the capital investment and produce them in-house," Nakagawa said.

SPECIALISTS

"When we first offered the PS2, there were no semiconductor companies that were able to make chips for the machine, so we did it ourselves. But now, there are companies that specialize in chip production," Nakagawa said.

Such chip makers include Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) (2330.TW) and United Microelectronics Corp. (UMC) (2303.TW), the world's largest and second-largest contract chip makers.

"They are aggressively investing in cutting-edge technology. Our basic understanding is that we probably won't need to do everything by ourselves for next-generation chips."

Revenue at Sony's chip operations is expected to grow 57 percent to 770 billion yen this business year to March, accounting for 9.4 percent of its estimated group sales, although part of its chip sales are made through in-house transactions.

Sales have been driven by brisk demand for microchips used in its game machines as well as in digital cameras, Nakagawa said.

Sony's PS3 sales have so far paled in comparison with the rival Wii.

The Nintendo machine outsold the PS3 nearly three to one in Japan last month, according to video game magazine publisher Enterbrain, which blamed PS3's higher price tag and a shortage of game titles.

Prior to the announcement, shares in Sony closed up 0.2 percent at 6,000 yen, outperforming the Tokyo stock market's electrical machinery index .IELEC.T, which lost 0.34 percent.

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