Chipmakers on the Edge

Awash in inventory, global companies are in deep trouble—and some are seeking bailouts

By Bruce Einhorn

Browse Issues

Browse the BusinessWeek Archive

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

Brian Stauffer

HONG KONG—Overcapacity. Looming bankruptcies. Government bailouts. The U.S. automobile industry? No, this is the global semiconductor industry, producers of the chips that power everything in today's economy from cell phones to smart infrastructure. While so much attention has been focused on American automakers, the convulsions in the chips business may have just as broad implications and possibly more strategic significance for countries around the world.

In recent years, Intel (INTC), Samsung, and many lesser-known companies have pumped huge amounts of money into new production facilities. They saw rich opportunities in making chips for the growing crop of digital devices, from iPhones and BlackBerrys to electric utility monitoring systems. But now as the worldwide economy slows, demand for those chips has fallen off a cliff. Companies that sank billions into new factories are running them at half capacity or less, and losing a bundle. The situation is "desperate," says Daniel Heyler, head of global semiconductor research for Merrill Lynch (MER) in Hong Kong.

The semiconductor industry has always been cyclical, and if these were normal times there would be a brutal shakeout with the weakest players shutting their doors or selling out. But this downturn looks different from those of the past. Chip production is more global than ever before, with many of the largest facilities in Asia. Many governments see semiconductor production as strategically important to their economies. So some governments are providing financial support to local companies. This will mean lower prices for chip customers, but it could cause serious pain for chip companies that compete without government support. "The last thing you want to see is governments rescuing less-competitive companies," says Avi Cohen, head of research at Avian Securities in Boston. "The supply never goes away."

Overcapacity is a growing problem. On Dec. 16, the market research firm iSuppli issued an alert to clients that semiconductor inventories are likely to balloon to $10.2 billion at the end of December, up from $3.8 billion at the end of September.

The government bailouts began this month. China's biggest chipmaker, Semiconductor Manufacturing International (SMI), cut a deal to receive $170 million from a state-owned company. In Germany, the state of Saxony offered Qimonda (QI) $206 million in support, although it's not clear the pact will be finalized. And in Korea, a consortium of state-owned and private banks are expected to provide Hynix Semiconductor with about $600 million in new loans. "One country starts considering a bailout, and then it kind of spreads," says Christian Heidarson, senior research analyst with Gartner (IT) in Hong Kong. "Nobody wants to see their industry being lost to another country."