Apple Supplier Elpida May Gain Life Support Amid Chip Slump
January 25, 2012, 6:12 PM ESTBy Naoko Fujimura, Takashi Amano and Yuki Yamaguchi
Jan. 25 (Bloomberg) -- Elpida Memory Inc., facing a deadline to repay $1.2 billion of debt by April, may gain financial support for the second time in three years as Japan seeks to keep the company alive amid a slump in the chip market.
The nation’s trade ministry will probably extend support set to expire in March for Tokyo-based Elpida, the world’s third-largest maker of dynamic random access memory, or DRAM chips, said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co.
“The ministry can’t let Elpida go under, as it rescued the company under the banner of a Japanese flagship,” Nakatani, who manages 95 billion yen ($1.2 billion) and doesn’t hold Elpida shares, said in an interview. “Japanese electronics makers are using Elpida’s DRAM, so it would mean trouble.”
Demand for DRAM chips, which speed up processing in computers by temporarily storing data, has slumped as PC sales slowed, causing Elpida to post a fourth straight quarterly loss for the period ended Sept. 30. Japanese media have reported Elpida may tie up with Micron Technology Inc. and Nanya Technology Corp. as it seeks to avoid a failure to refinance its debt, which could cut off supply to clients including Apple Inc.
Elpida, the largest maker of DRAM after South Korea’s Samsung Electronics Co. and Hynix Semiconductor Inc., needs 92 billion yen to repay bonds and loans by April, according to a company filing in June. Cash totaled 100.2 billion yen as of Sept. 30, the company said in October.
Tepco, Olympus
Japan’s government will likely support Elpida given its previous commitment to other crippled companies, according to Amir Anvarzadeh, a Singapore-based manager for Asian equity sales at BGC Partners.
He cited the examples of Tokyo Electric Power Co., which has stayed afloat with government support since the disaster at its Fukushima nuclear power plant in March, and camera maker Olympus Corp., which kept its stock-market listing amid an accounting scandal. Tepco received 2 trillion yen in emergency loans last year related to the Fukushima disaster.
“They will not even let Tepco or the less strategically placed Olympus to go under,” Anvarzadeh said. “Even assuming the worst, the costs involved to keep Elpida solvent would be insignificant.”
Japan Airlines Corp. received four government bailouts in nine years before filing for bankruptcy in January 2010. The Tokyo-based company emerged from bankruptcy protection last year.
‘Severe Environment’
Yukio Edano, Japan’s trade minister, said Jan. 6 Elpida is considering various plans to improve its cost structure.
“The industry is in a severe environment as the yen rises and the chip prices fall,” he said at the time.
He declined to say whether the ministry will extend its support at a press conference on Jan. 20.
Elpida declined in an e-mail today to comment on the outlook for refinancing or government support. The company is in talks with banks to refinance its borrowing and discussing advance payments and capital investments with customers, it said in a statement on Jan. 18.
The chipmaker’s main lenders told it to craft a government- approved restructuring plan to receive continued financial support, the Yomiuri newspaper reported Jan. 7, without saying where it got the information. Elpida may present a plan to banks as early as today, the Sankei newspaper reported today, also without citing anyone.
‘Pocket Change’
Keeping Elpida in business is also important to its clients, BGC’s Anvarzadeh said. The company is “one of the primary suppliers” of mobile DRAM chips for Apple’s iPad2 and iPhone 4, giving the Cupertino, California-based company an incentive to support Elpida if necessary, he said.
“Providing Elpida with, say, 50 billion yen in equity injection is pocket change for the U.S. giant to keep its supplies secure,” Anvarzadeh said.
Apple has $97.6 billion in cash and investments, money it’s “actively” discussing how to use, Chief Financial Officer Peter Oppenheimer said on a conference call yesterday. That could include supply-chain investments, he said.
Steve Dowling, a spokesman for Apple, didn’t immediately return a call seeking comment on Elpida.
Elpida may ask the Innovation Network Corp., a government- affiliated technology fund, to invest 100 billion yen as the company needs to buy equipment to improve its chips, the Yomiuri reported yesterday.
“I assume there’s a 70 to 80 percent chance that Elpida can get refinancing,” Haruo Sato, an analyst at Tokai Tokyo Securities Co., said in an interview. “Forming an alliance would be positive if that doesn’t require investing in other companies or spending on facilities.”
Forming Alliance
The Yomiuri report also said Elpida is in merger talks with Micron and Nanya. The report “isn’t factual,” the Japanese company said in a statement yesterday. Dan Francisco, a spokesman for Boise, Idaho-based Micron, declined to comment, and calls placed to Taoyuan, Taiwan-based Nanya during a Taiwanese public holiday went unanswered.
“Elpida needs to find a business partner to convince banks,” Yuichi Ishida, a Tokyo-based analyst at Mizuho Investors Securities Co., said in an interview.
The company got 140 billion yen in financial aid and loans from the government and banks in 2009 after falling chip prices caused it to post a record loss, as the trade ministry said Japan needed to have a domestic DRAM manufacturer to prevent supply disruptions.
Elpida was formed through the 1999 merger of NEC Corp.’s and Hitachi Ltd.’s memory businesses. Fujitsu Ltd. abandoned the business that year, and Toshiba Corp. announced its withdrawal in 2001 to focus more on making NAND flash memory chips used in tablet computers and smartphones.
Samsung, Hynix
Samsung controlled 45 percent of the DRAM market by value in the third quarter, according to Englewood, Colorado-based IHS Inc.’s iSuppli. Hynix held a 21.5 percent share, followed by Elpida’s 12.1 percent, the researcher said. Micron had the same share as Elpida, with $2 million less in revenue, and Nanya had a 3.6 percent share, according to iSuppli.
The average selling price of DRAM fell 26 percent in the third quarter, iSuppli said last month. Nomura Holdings Inc. cut its forecast for 2012 growth in global shipments of semiconductors by value to 2.7 percent from 3.7 percent because of falling DRAM prices, it said Jan. 5.
The rising Japanese currency, which strengthened to a postwar high of 75.35 against the U.S. dollar on Oct. 31, is also eroding Elpida’s repatriated earnings from overseas sales.
Net Loss
The company’s net loss probably will amount to 106 billion yen for the year ending March 31, according to the average of 18 analyst estimates compiled by Bloomberg.
Elpida is trying to diversify its products from chips for personal computers, a strategy that helped Samsung be the only profitable chipmaker in the third quarter. The Japanese company may boost output of mobile DRAM in Japan, BGC’s Anvarzadeh said.
Elpida plans to shift some domestic production to its unit Rexchip Electronics Corp. unit in Taiwan, it said in September.
If Elpida fails to persuade lenders to renew its loan contracts, it would lead to the biggest shakeup in the chip industry since Japanese companies began exiting the market in the late 1990s.
“The possibility that the government will pull the plug isn’t zero, as the current slump in the chip industry is structural, not cyclical,” said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co. in Tokyo. “There may be an argument this time about whether the country really wants to keep this.”
‘Just a Commodity’
Japan may no longer have a strong strategic incentive to support a domestic chipmaker, as technological development in the industry has slowed, Kikuchi said.
“The changes they make are very small improvements” compared with a decade ago, he said. “Now it’s just a commodity, and I’m not sure it has to be kept in Japan.”
Akira Minamikawa, vice president at the Japanese unit of iSuppli, said it’s unlikely Japan’s government would want to deal with job losses that would result from Elpida’s failure. The company, with two domestic production sites, employed 5,957 people, including about 3,200 in Japan, as of Sept. 30, according to its website.
“The support will be probably extended,” Minamikawa said. “Otherwise, they would have to face the problem of job losses that would necessarily result.”
--With assistance from Adam Satariano in San Francisco. Editors: Terje Langeland, Anand Krishnamoorthy
To contact the reporters on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Takashi Amano in Tokyo at tamano6@bloomberg.net; Yuki Yamaguchi in Tokyo at yyamaguchi10@bloomberg.net
To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net
