Bloomberg News

Elpida Falls as Lack of Smartphone Strategy Spurs Japan Bankruptcy Filing

February 28, 2012

Yukio Sakamoto, president and chief executive officer of Elpida Memory Inc. Photographer: Tomohiro Ohsumi/Bloomberg

Yukio Sakamoto, president and chief executive officer of Elpida Memory Inc. Photographer: Tomohiro Ohsumi/Bloomberg

Elpida Memory Inc. (6665) tumbled the most in more than seven years in Tokyo trading after a failure to embrace the global consumer shift from computers to smartphones and tablets pushed the chipmaker into filing for bankruptcy.

The last Japanese maker of computer-memory chips, which lost money for five straight quarters, sought protection at the Tokyo District Court yesterday with liabilities of 448 billion yen ($5.5 billion), according to a filing with Japan’s finance ministry. Elpida fell by its daily-limit 80 yen, or 24 percent, to 254 yen at the close of trading today. The shares will be delisted from the Tokyo Stock Exchange on March 28.

Elpida’s woes came as the Tokyo-based company failed to mimic South Korea’s Samsung Electronics Co. in diversifying into specialty memory needed in mobile handheld devices such as Apple Inc. (AAPL)’s iPad and iPhone. Tablet-computer sales more than doubled and smartphone demand surged 47 percent in the last quarter, while personal-computer shipments declined.

“There was a generational change from PCs to smartphones, and Elpida failed to respond to that with the right technological shift,” said Kim Hyung Sik, a Seoul-based analyst at Taurus Investment Securities Co. “Mobile DRAM is where the money is, and Samsung and other Korean companies control more than 70 percent of that market. Elpida couldn’t hold out anymore.”

Sell offers on Elpida shares outnumbered bids about 1,500- to-1 earlier today, prompting no trade in the stock. The company has lost 29 percent of its value this year, adding to a 62 percent erosion last year.

Samsung, Hynix Gain

Elpida’s rivals in South Korea advanced while Japanese chipmakers Advantest Corp. (6857) and Renesas Electronics Corp. fell.

Samsung rose 1.2 percent to 1.185 million won in Seoul and Hynix Semiconductor Inc. (000660) surged 6.8 percent to 29,850 won. Micron Technology Inc. (MU), the Boise, Idaho-based chipmaker that will probably emerge as the top winner from Elpida’s bankruptcy filing, rose 7.7 percent to $8.56 in New York yesterday.

Elpida plans to hold a meeting for creditors tomorrow, Toppan Printing Co. (7911), which supplies photomasks to the chipmaker, said in a statement today. Toppan may not be able to collect the 4.4 billion yen in accounts receivable from Elpida, the printing company said.

Global tablet shipments rose to a record 26.8 million units in the last three months of 2011, Boston-based Strategy Analytics said in a report last month. PC shipments declined 1.4 percent in the fourth quarter to 92.2 million units, according to Gartner Inc.

Sales of handsets that use computer-like processors and can handle business e-mail and streaming video increased 47 percent to 149 million units, according to Stamford, Connecticut-based Gartner. Smartphones and tablets use 75 percent fewer of the DRAM chips inside a typical laptop.

Smartphones, Tablets

Samsung boosted its profits by producing specialty chips for smartphones, tablet computers and servers. The Suwon, South Korea-based company had 7.34 trillion won ($6.5 billion) in operating profit from selling chips last year.

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

“Elpida’s bankruptcy filing increases the chances and potential speed for consolidation,” said Mark Newman, a Hong Kong-based analyst at Sanford C. Bernstein & Co. Taiwanese chipmakers “are all suffering the same fate,” he said.

Troubles at Elpida were exacerbated by DRAM prices falling 85 percent and a stronger yen that cuts overseas sales when repatriated. Japan’s government and banks bailed out the company in 2009 with 140 billion yen in financial aid and loans.

“We didn’t hear detailed proposals from potential partners,” Chief Executive Officer Yukio Sakamoto said yesterday. “We had expected to hear various offers.”

Japan’s Strengths

Elpida’s filing shows that government assistance doesn’t guarantee success, said Kaname Tajima, head of the ruling Democratic Party of Japan’s industry team.

“What doesn’t work in global competition doesn’t work even with the help of state funds,” Tajima said in an interview in Tokyo today. “We must discern Japan’s strength and learn lessons from the failure.”

Japan’s chief cabinet secretary, Osamu Fujimura, said “the situation is different” from three years ago because of the strong yen, Thailand flooding that disrupted production and falling demand for DRAM.

“It was an appropriate decision at the time to give financial assistance,” Fujimura said today. “There have been sharp changes in the business environment.”

The bankruptcy may cost taxpayers as much as 28 billion yen, said Yukio Edano, the trade minister.

Bonds Plunge

Elpida said it defaulted on six bonds as they came due for redemption yesterday, according to a company statement. The face value of the bonds totaled 138 billion yen, according to data compiled by Bloomberg.

Elpida’s 0.5 percent convertible notes due in October 2015 plunged to 15 per 100 face value as of 7:56 p.m. in Tokyo, according to Citigroup Inc. prices. The company’s 0.7 percent convertible notes due August 2016 fell to 18 per 100 face value, according to prices from the Tokyo Stock Exchange.

The supplier to companies such as Apple said earlier this month it saw “uncertainty” over remaining in business because it might not have the necessary financing. Elpida hadn’t been able to reach a deal with the trade ministry, the Development Bank of Japan and its main lenders over financing for 92 billion yen in bonds and loans due by April, the company said Feb. 14.

Rating Cut

Elpida’s bankruptcy would be the nation’s biggest since Japan Airlines Corp. (9205) sought protection in January 2010 with 2.32 trillion yen in liabilities, according to data from Tokyo Shoko Research. Elpida employed 5,898 people as of March 31, according to data compiled by Bloomberg.

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. Chip prices had become as cheap as a “rice ball,” Sakamoto said.

DRAM prices plunged to a record low last year after PC shipments missed analyst forecasts and sales of Apple’s iPad surged. The price of the benchmark DDR3 2-gigabit DRAM declined to a record 71 cents in November, compared with $4.85 on Sept. 1, 2010, amid slowing PC sales, according to Taipei-based DRAMeXchange, Asia’s biggest spot market for the chips.

The DRAM (DRAM84) chip industry may be pushed into an oligopoly by an Elpida failure, DRAMeXchange said in a statement Feb. 15. 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.

DRAM Chip

DRAM is the most common chip in computers. Samsung controlled 38 percent of the market by revenue last year, according to data compiled by Bloomberg Industries. Hynix held a 25 percent share and Elpida 18 percent.

Elpida’s cash and savings fell to about 50 billion yen to 60 billion yen as of Feb. 2, from 97.4 billion yen in December, Sakamoto said.

The company faced 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. Elpida owed 19.3 billion yen to Sumitomo Mitsui Trust Holdings Inc., the lender said in a statement today.

Mitsubishi UFJ Lease & Finance Co. and IBJ Leasing Co. may lose a combined 17.5 billion yen, according to statements by the two companies.

Elpida was formed through the 1999 merger of NEC Corp. (6701)’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.

To contact the reporters on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Jun Yang in Seoul at jyang180@bloomberg.net.

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


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