ANALYSIS-Taiwan's DRAM industry: desperately seeking a future

* “Zero-growth” industry faces stark choices for road ahead

* Merge, change products, seek government help or fade away

* $2 billion in debt industry-wide coming due in 2012

* “If you have a choice, don’t do DRAM”-researcher

By Clare Jim

TAIPEI, Dec 22 (Reuters) - Taiwan’s six DRAM memory chip makers are struggling to keep afloat as falling prices and stiff competition saddle them with huge losses and while their demise isn’t imminent, the time is close for them to make difficult choices on their future.

DRAM chips, memory storage devices ubiquitous in computers, have long been a commodity product, but one that requires huge investment to stay competitive even as prices fall : they have dropped 50 percent since the beginning of 2011 alone.

For Taiwan's makers, the smallest in the industry and lacking the deep pockets of industry leader Samsung Electronics 005930.KS, the choices are to move into higher-value chips, tie up with foreign partners to gain scale, seek government help or simply fade out.

“DRAM is a zero-growth market,” said Andrew Norwood, analyst at technology research firm Gartner. “Small Taiwanese players only have the choice of migrating from DRAM or fading out slowly.”

Taiwan's six DRAM makers are Nanya Technology 2408.TW, Promos Tech 5387.TW and Winbond Electronics 2344.TW, which have their own brands, and contract makers Inotera Memory 3474.TW, Powerchip 5346.TWO and Rexchip 4932.TWO.

The numbers show the difficulties they are in. The three branded vendors have a combined market share of less than 7 percent versus Samsung’s 45 percent in the latest quarter and have posted combined total losses of some T$215 billion ($7 billion) since 2007.


Graphic on global DRAM Q3 market share:

Elpida seeks tie-up with Nanya-Nikkei [ID:nL3E7NL2PL]

Tepid PC sales weigh on Micron [ID:nN1E7BK095]

Samsung president sees DRAM market worsen [ID:nL4E7LS15U]

Elpida eyes Taiwan to hedge yen woes [ID:nL3E7KF01S]

Nanya counter-sues Elpida over patents [ID:nL4E7MM0AF]


In addition, banks hold some $2 billion in debt to the DRAM industry that is due to mature in the next year, according to brokerage firm Jih Sun Securities.

They are not alone. Japan's Elpida Memory Inc 6665.T is struggling with a debt burden, while South Korea's Hynix Semiconductor 000660.KS has just been bought after being on the block since creditors saved it from a debt crisis in 2001. [ID:nL3E7ME0S9]

“If you have a choice, don’t do the DRAM business, it’s not a good business,” said Joyce Yang, chief executive of Eureka International Corp, a Taipei-based semiconductor industry research company.

“During the up-cycle, for the most part the good operating profit margins are 30 percent to 40 percent. But during the down cycle the losses could be higher than that. And also, you have continued investment,” she said, noting that only Samsung has made money on investment on DRAM.

Taiwan’s DRAM industry came into being as part of a government plan to develop the island as a technology hub. It took off during the 1980s and 1990s, turning Taiwan one of the top producers before competition from U.S., Japanese and Korean companies increased supply and forced prices down.

“This is a question Taiwan has to think about; if it doesn’t see a probability of winning in the future, it should cut losses as soon as possible,” said Mark Peng, an analyst at IEK, a government-backed technology and industrial policy research body.


Powerchip has opted to go upmarket, switching to mobile DRAM and NAND flash chips used in hot-selling devices such as smartphones and tablets. It said in November it would cut PC DRAM capacity to no more than 20 percent of the total in 2011.

“The technology is changing too fast,” Powerchip’s Chairman Frank Huang told a briefing at the time. “In the past, one generation (of DRAM chips) could last two to three years, but now, we’re talking about three generations in one year.

“Each change in generation needs new investment in facilities and with each new investment the supply will go up, hence leading to oversupply,” he said.

Winbond, Taiwan’s No.2 DRAM vendor, is also shifting more to NAND and NOR flash production.

The situation at Promos is more urgent. It has been unable to produce its earnings and its shares have been suspended from trade since Sept. 6.

It has T$57 billion in debt and has been given, at government prodding, a syndicated loan at only 0.1 percent interest to keep it alive until it finds a strategic investor.

“It is a government instruction that banks cannot let the loan to go default, so we have to follow the rule and lower the rate for the loan,” said a banker involved, who asked not to be named because he was not authorised to speak to the media.

Nanya meanwhile, is kept going by funds from its parent, the giant Formosa petrochemical group. The latest was a T$30 billion private placement in November, which would generate a negative immediate return, according to a note at the time by Merrill Lynch.

Nanya, which has posted losses for seven consecutive quarters, also has one of the other options available for Taiwan’s firms: a tie-up with a foreign firm.

It has a 10-year agreement with U.S. firm Micron MU.O to co-develop new DRAM chip technology until 2018. Micron also runs contract DRAM maker Inotera Memory via a joint venture.

“Micron has NAND technology, it has a joint operation with Intel that might give an opportunity there for Nanya to get into the NAND market,” Gartner analyst Norwood said.

On Thursday, Nanya denied a report in a Japanese newspaper that it would start tie-up talks with Elpida with a view to a possible merger. [ID:nL3E7NL2PL]

Rexchip, which has said it will cut management salaries by 10 percent in the current downturn, is another example of the foreign alliance route.

It is a joint venture of Powerchip and Elpida and is getting a helping hand from the strength of the Japanese yen as Elpida plans to transfer some chip production from Japan to Rexchip [ID:nL3E7LR0HF].

Another, less likely option, is for the government to step in and restructure the industry because it is not keen to see the loss of an industry it helped create and is afraid of the social fallout from job losses should companies close.

During a steep downturn in 2008-2009 it tried just that, setting up a company called Taiwan Memory Co. (TMC) that planned to tie up with a foreign firm and then invite local DRAM makers to merge with it.

But it faced resistance, particularly from Nanya’s parent Formosa, and the plan finally died after the government decided not to put any money into TMC.

This time around, while it has voiced concern over the industry, it is so far trying a different tack, looking to raise R&D capability in the industry.

The Industrial Technology Research Institute, an affiliate of the Ministry of Economic Affairs, will join with Intel Corp INTC.O to each invest $5 million over the next five years into projects such as developing next generation memory technologies.

($1=30.28 Taiwan dollars)

(Additional reporting by Argin Chang and Jialu Chen; Editing by Jonathan Standing and Matt Driskill)

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