Bloomberg News

Elpida’s Failure May Push Chip Industry Closer to Oligopoly

February 16, 2012

(Updates with closing share price in seventh paragraph)

Feb. 16 (Bloomberg) -- Japan’s government may push the DRAM chip industry closer to an oligopoly by not bailing out Elpida Memory Inc., a market researcher said after the company warned its survival was in doubt as a debt repayment deadline nears.

Shares and bonds of Japan’s biggest maker of dynamic random access memory plunged yesterday, a day after the Tokyo-based company said it hasn’t obtained financing for 92 billion yen ($1.2 billion) in bonds and loans due by April. Competitors Samsung Electronics Co. and Hynix Semiconductor Inc., the top two DRAM makers, had risen in Seoul on speculation they may benefit if Elpida doesn’t survive.

“If the Japanese government does not step in to offer assistance and Elpida backs out from the DRAM industry due to financial difficulties, the negative impact on the PC and DRAM markets will be severe,” Taipei-based DRAMeXchange said in a statement yesterday. “The DRAM market will be one step closer to an oligopolistic state.”

Japan government wouldn’t want to “blemish” its name by not supporting the supplier of chips to Apple Inc. because that would mean lenders won’t get their money back and 6,000 workers may lose their jobs, an analyst said. The U.S. personal-computer market declined for the first time in a decade last year as consumers bought more smartphones and tablets, which use 75 percent fewer of the chips in a typical laptop.

Oligopoly is a system in which a small number of companies control the total market supply of a specific product. In an oligopoly, price competition is essentially nonexistent.

‘Greece Situation’

“Elpida’s situation is similar to that of Greece,” said Yuichi Ishida, a Tokyo-based analyst at Mizuho Investors Securities Co. who has a “neutral plus” rating on the company. “The government will offer to save Elpida again by keeping the support. No one is going to benefit from a hard landing.”

The company’s shares fell 0.3 percent to 319 yen at the close of trading in Tokyo. Elpida lost 62 percent of its market value last year, extending a 37 percent slump in 2010.

Samsung, Asia’s largest electronics company, was unchanged at 1.13 million won as of 3:45 p.m. in Seoul trading. Hynix fell 1 percent to 28,700 won.

DRAM is the most common chip in computers. Samsung controlled 45 percent of the market by value in the third quarter, according to Englewood, Colorado-based IHS Inc.’s iSuppli. Hynix held a 22 percent share and Elpida 12 percent.

Bonds Fall

The Japanese chipmaker’s 0.7 percent August 2016 convertible bonds plunged to 66 yen per 100 face value, to yield 20.8 percent as of 2:50 p.m. in Tokyo today, according to prices from the Tokyo Stock Exchange.

Its 0.5 percent October 2015 convertible notes slumped to 72.1 per 100 face value, at 24.8 percent, TSE prices show.

Elpida hasn’t been able to reach a deal with Japan’s trade ministry, the Development Bank of Japan and its main lenders, the Tokyo-based company said in a statement Feb. 14. Its ability to repay bonds and loans by April is made more difficult by plunging chip prices.

The chipmaker has the equivalent of $4.16 billion of bonds and loans outstanding, according to data compiled by Bloomberg. Japan Credit Rating Agency, the only risk assessor to grade Elpida, cut its rating on the chipmaker to BBB-, the lowest investment level, from BBB.

Getting Finance

The company’s comments reversed a Feb. 2 announcement that it expected to secure financing by March 31.

Spokespeople for Development Bank of Japan, Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Sumitomo Trust & Banking Co. -- among 15 lenders to Elpida as of June 28 last year, according to company regulatory filings -- declined to comment.

Trade ministry officials also declined to comment.

Spokespeople at Sumitomo Mitsui Financial Group Inc., which was also among the chipmaker’s lenders as of June 28, weren’t immediately available to comment.

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, which are used in tablet computers and smartphones.

Japan’s government shouldn’t bail out Elpida like it did Tokyo Electric Power Co. and Japan Airlines Corp., said Takashi Aoki, a senior fund manager at Mizuho Asset Management Co.

‘National Policy’

“I wonder if we really need to have the DRAM makers as part of our national policy,” he said. “It’s hard to see growth in Elpida and there are many developed countries that don’t have DRAM makers.”

The company’s cash and savings fell to about 50 billion yen to 60 billion yen in cash and savings as of Feb. 2, from 97.4 billion yen in December, Chief Executive Officer Yukio Sakamoto said. Elpida redeemed 30 billion yen in bonds on Jan. 24.

Elpida may be able to collect about 50 billion yen through support from customers, he said Feb. 2. The company faces a deadline to redeem 15 billion yen in bonds on March 22 and repay about 77 billion yen in loans from lenders on April 2, according to its filings.

‘Rice Ball’

The company’s slump indicates the difficulty Japanese companies have in competing with Samsung, which had 7.34 trillion won ($6.5 billion) in operating profit from selling chips last year. Chip prices had become as cheap as a “rice ball,” Sakamoto said last year.

The price of the benchmark DDR3 2-gigabit DRAM, which plunged to a record low of 71 cents in November, fell 61 percent to 88 cents in the past year amid slowing personal-computer sales, according to Taiwan-based Dramexchange, Asia’s biggest spot market for the chips.

Elpida, Hynix and other makers of DRAM chips lost a combined $14 billion in the past three years, according to Bloomberg calculations.

“They are sounding out their financial issues for the customers,” said Amir Anvarzadeh, a Singapore-based manager for Asian equity sales at BGC Partners. “They’re basically saying: We’re in trouble, we need upfront payments from our customers.”

--With assistance from Jun Yang in Seoul, Yuki Yamaguchi, Mariko Yasu, Takako Taniguchi and Yusuke Miyazawa in Tokyo. Editors: Anand Krishnamoorthy, Michael Tighe.

To contact the reporters on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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