Renesas says to tie up with TSMC in chip business

TOKYO/TAIPEI Thu May 24, 2012 7:06am EDT

1 of 2. A Renesas Electronics Corp's microcontroller chip sits on a finger in this illustrative photograph taken in Tokyo May 24, 2012.

Credit: Reuters/Kim Kyung-Hoon

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TOKYO/TAIPEI (Reuters) - Japan's loss-making Renesas Electronics Corp said on Thursday it will tie up with Taiwan Semiconductor Manufacturing Co in the microchip business as it struggles to keep up with aggressive rivals like Samsung Electronics.

Renesas gave no details on the tie-up, which it will reveal in a news conference next Monday, but chipmakers increasingly are tapping the technological prowess of companies such as TSMC, the world's biggest contract chipmaker, to rein in costs.

Renesas, the world's biggest supplier of microcontroller chips for automobiles, is already a client of both TSMC and rival United Microelectronics Corp, the No.2 contract chipmaker.

While a rising yen squeezes margins at its plants in Japan, Renesas is under constant pressure to spend heavily on a technological arms race with emerging overseas rivals to produce smaller and more powerful chips at lower prices.

High costs and fierce competition with Asian competitors forced Elpida Memory, Japan's last player in dynamic random-access memory chips, into bankruptcy protection in February.

"People in the market are calling this the next Elpida, but I can't tell yet to what extent that might be true," said Tetsuro Ii, president of Commons Asset Management, which has $33 million of assets but holds no Renesas shares.

"What I hear from the industry side is that when Chinese and Taiwanese manufacturers decide to build new plants they do so quickly, and at huge cost, and start operating right away.

"But the Japanese industry doesn't have the capital to do anything like that."

TECHNOLOGICAL ARMS RACE

Renesas, which has posted cumulative net losses of nearly $6 billion over seven consecutive years in the red, has lagged in the costly shift to ever-narrower chip circuitry, analysts say.

TSMC, however, has been quick to adopt the latest 28-nanometre technology, which is essential in the race to make cheaper and higher-performance chips, and this has attracted interest from many semiconductor companies seeking a manufacturing partner.

The Taiwanese company will invest $1.3 billion this year, although even with that, the competition from industry giants Samsung and Intel Corp is daunting.

"I always describe them as 700-pound gorillas," TSMC Chairman Morris Chang told a youth forum in Taipei last week, noting that Samsung would be spending $3 billion and Intel $5 billion this year.

"Their investment is truly frightening. But I'm not afraid. If I were, I wouldn't be doing this."

Building a 28 nm chipmaking line costs 300 billion to 400 billion yen ($3.8-5.1 billion), according to research firm IHS iSuppli estimates.

That would be a hefty investment for Renesas, which posted a 62.6 billion yen net loss in the financial year to March 31, when it was forced to shut eight of its factories after natural disasters in Japan and Thailand.

The Yomiuri newspaper reported on Tuesday that Renesas plans to raise 50 billion yen in new capital, while cutting its workforce by about 15 percent.

Workforce reductions can be drawn out in Japan, where layoffs remain taboo and companies often offer generous voluntary redundancy deals or shift workers to affiliates' payrolls, although many now hire contract workers who can be let go when their contracts come up for renewal.

The problems at Renesas, formed by a merger of once-mighty chipmaking operations at conglomerates Hitachi Ltd, Mitsubishi Electric Corp and NEC Corp, are typical of the Japanese chip sector.

Japanese suppliers' share of global semiconductor revenue fell to 19 percent by 2011 from 27 percent in 2003, according to IHS iSuppli, although Toshiba Corp, Japan's biggest chipmaker, has remained competitive by focusing on NAND memory chips used heavily in smart phones and tablets.

The Yomiuri reported on Thursday that the Renesas tie-up with TSMC was likely to involve contracting out chip production to the Taiwanese firm.

"Renesas is not a major client of TSMC," said Nomura Securities analyst Patrick Liao. "I think this tie-up is just for Renesas to catch up on collaboration and to secure advanced technology."

Renesas shares rose 1.9 percent on Thursday to 268 yen, outperforming Tokyo's flat Nikkei benchmark. The shares have fallen by more than half since late March, however, as its business deteriorated, while the Nikkei is down 15 percent.

($1 = 79.2300 Japanese yen)

(Additional reporting by Ayai Tomisawa in Tokyo and Clare Jim in Taiwan; Editing by Edmund Klamann)

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