Asia's Chip Wars Heat Up


By Bruce Einhorn As if Powerchip Semiconductor didn't already have enough problems. All year long, the Taiwanese producer of memory chips has been suffering from slumping demand for dynamic random-access memory chips (DRAMs), just as other IT companies worldwide have seen sales drop. The downturn has jeopardized the company's efforts to raise capital: Powerchip had been hoping to raise $300 million in a global equity offering by yearend to help pay for a new, state-of-the-art chipmaking fabrication plant. Now, the high-tech recession and the financial aftershocks from the September 11 terrorist attacks on the U.S. have forced the company to put that plan on hold. Some analysts even wonder if the company will run out cash soon -- speculation that Powerchip says is just wrong.

On top of these woes, Taipei-based Powerchip's executives have to worry not just about markets in New York and war in Afghanistan but also politics in South Korea. That's because its biggest rival, Korean chip giant Hynix, is having big problems of its own. Seoul is in the process of arranging a $5.4 billion emergency bailout of the company, and it is doing so just a few months before presidential elections.

That buys Hynix some time, although no guarantee of long-term survival. While the recovery effort continues, Hynix, which employs thousands of Korean workers, is trying to win sales by unloading chips on the world market. That's driving prices so low that nobody can make any money, complains Powerchip vice-president Eric Tang.

In a grim time for semiconductor companies, the Hynix factor is compounding the industry's woes. The Korean company, with about 15% of the world market for DRAMs, dwarfs Taiwanese rivals like Powerchip, Mosel Vitelic, Winbond, and Nanya Technology. And these smaller players may be hard-pressed to survive when the cost of production for 128-bit memory chips is $3.20, but the spot price is as low as $1.30. "The cash drain is severe," says Daniel Heyler, a Tapei-based analyst for Merrill Lynch who predicts that some Taiwanese companies "will be running out of cash between two to four quarters from now."

IN THE RED. Taiwanese chipmakers bravely insist they'll be able to survive. They point out that most Taiwanese companies are under-leveraged compared to Hynix. That means "it's much easier" for Taiwanese companies to make it through the downturn, argues Thomas Chang, vice-president for technology development at Mosel Vitelic, which is the major shareholder in a chipmaking joint venture, called Promos, with Infineon.

Still, there's no hiding the problems already on many balance sheets. Mosel lost $255 million in the first half, on sales of $180 million. And that was before the company had to cope with the full impact of Hynix or the war on terrorism. So while rivals call off their equity offerings, Mosel is proceeding with a plan to raise cash by selling about $50 million more shares of Promos and get an additional $90 million in bank loans.

And last week it announced that it was forming a joint venture with ON Semiconductor of the U.S. to diversify into the chip-design business. "Demand for DRAMs won't turn around till the third quarter of next year, so we have to prepare ourselves," says Chang, who bemoans competition from Hynix. The Koreans "sell at any price to get as much cash as possible," he says. "That definitely has a negative impact."

While it is the biggest, Hynix is not the only Korean chipmaker causing headaches for Taiwanese rivals. For instance, Korean chipmaker Anam Semiconductor last May sold its chip-packaging business to focus on the foundry, or made-to-order, segment. Anam, which lost $93 million in the first half of the year on sales of $69 million, is operating at less than one-third of capacity.

PROGNOSIS: CRITICAL. While Lee Do Hoon, a semiconductor analyst with Samsung Securities in Seoul, says that Anam's default risk is "minimal," the company's problems are not making life any easier for the world's two biggest foundries, Taiwan's United Microelectronics and Taiwan Semiconductor Manufacturing.

For the first half of the year, United Microelectronics reported a 76% drop in profit, to $133 million, on a 12% drop in sales to $1.1 billion. While Taiwan Semiconductor had recently reported a mild uptick in sales, recent events put a damper on the good news. "We were expecting the recovery to go into January," says company Chairman Morris Chang. "We probably won't see that now." On Sept. 27, Taiwan Semiconductor cut its 2001 profit forecast by 57%, to $320 million.

One sign of hope for Taiwanese memory chipmakers: the Hynix bailout could fail. Korea Exchange Bank, which is leading the effort to save Hynix, is trying to keep its spooked creditors from balking at a relief plan. "Hynix has been placed in the emergency room but is still awaiting an operation," says Jeon Byeong Seo, an analyst with Daewoo Securities in Seoul. "And given the seriousness of its illness, time is running out."

PLAYING CHICKEN. Few Taiwanese executives are counting on a Hynix collapse, however. So companies are adjusting their plans for next year. Powerchip, for instance, is looking to save $140 million in the first half of 2002 by scaling back its investment in a new, next-generation fabrication plant that produces 12-inch silicon wafers rather than the current 8-inch standard. Mosel Vitelic is accelerating its transition to more advanced technology that can produce more chips per wafer by etching lines with widths of 0.14 microns, vs. its current 0.17 microns. That can reduce costs by up to 40%, Chang estimates.

Having invested billions of dollars in an industry that is notoriously volatile, few companies or their backers are prepared to give up easily. "It's very much a game of chicken," says Merrill Lynch's Heyler. "And nobody wants to blink first." But with key business ailing, it will prove ever more difficult for Taiwan's small chipmakers to see a rebound any time soon. With Moon Ihlwan in Seoul

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BW Online.


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