Taiwanese DRAM Companies Might Need Government Aid

[Apoptosis]

Taiwanese DRAM output may top the world with moderate government aid, says DRAMeXchange

Taipei, December 17, 2008 --- According to DRAMeXchange, commodity DRAM contract price plunged sharply in 2007 due to the oversupply, with 83% drop YoY and 48% drop in 1Q07, and most vendors started to suffer from loss in 2Q07. At the beginning of year 2008, DRAM price quietly pulled back again but still below the vendors’ total cost, which was US$ 2.5 average. With the economic downturn, the price of DDR2 1Gb chip dropped from US$ 1.75 in September 2008 to US$ 0.94 with a range of 46%. Even now the price has already fallen below vendors’ cash cost, which excluded the depreciation, the price still couldn’t stop falling. The demand shrank under the financial crisis, both the DRAM contract price and spot price fell under vendors’ material cost (includes material cost of the chip, packaging, and testing cost) US$ 0.6 to US$ 0.7 but no sign of price rebound has shown. Along with the difficulties of raising fund in the capital market, all vendors are now facing the decreasing of operating cash position and the severe circumstances of accepting the government bail out or getting out of the market.

Taiwan Government commits the bail out, the US and Japanese vendors are attracted

In this recession, the Taiwanese government is trying to save one of the “2 trillion twin stars”, the DRAM industry. The Taiwanese Ministry of Economic Affairs was designated to draft the policies, principals, strategic goals and strategic directions of the DRAM industry rescue plan. Comparing to the amount of US$ 685 million that the Korean government asked the loaner banks of Hynix to provide, the “sincerity and willingness” of Taiwanese government has not only given hope to the Taiwan DRAM industry but also attracted the CEOs of Micron and Elpida, the DRAM technology alliances of Taiwanese DRAM vendors, to visit the Taiwanese officials, and hope to gain financial help and secure their status in the DRAM industry through the cooperation with Taiwanese DRAM vendors. The Taiwanese government also announced the premises of the bail out plan are consolidation of the DRAM industry and developing own technology. Although these two goals are not easy to achieve in the short run, the bail out plan is highly noticed and the vendors are fighting hard for it.

At 6 PM December 16th, the Taiwanese Ministry of Economic Affairs held a press conference about the DRAM rescue plan, emphasized in the past ten years the investment amount of the DRAM industry surpassed NT$ 850 billion, and created a complete industry supply chain which widely covers upstream chip makers to downstream packaging & testing companies and module houses. If the recession brought down the industry, the Taiwan industrial chain will be affected severely.

During the press conference, the Taiwanese government released sincerity and willingness, hope that the Taiwanese DRAM vendors can actively start to consolidate horizontally and vertically, and make joint proposing plans to the government. The government will not take the leading position, but the strategic direction is long term integration, which is not just merger but also includes cooperation of co-research, co-develop, and co-manufacturing. The government also emphasized that it will tend to strengthen the relationship between the cooperation of Taiwanese, American, and Japanese DRAM vendors.

Figure-1 Rescue plans of countries

Country


Year


Target


Content

Korea


2002


Hynix


Total liability was US$ 6.25 billion at that time, the Korean government conducted the negotiation to convert US$ 1.58 billion convertible bond to stocks and delayed US$ 2.5 billion loan to 2006, but the loaning banks own 67% of Hynix stake.

Taiwan


2008


PSC, Rexchips, Nanya, Inotera, and Promos


Taiwanese government showed its sincerity and willingness, and expected to secured the short term company operation and the mid term industrial consolidation and technology independency by funding the industry.

Korea


2008


Hynix


The chief of MKE announced Hynix and loaning banks will reach agreement of US$ 685 million support. If not, the Korean government considers getting involved.

Germany


2008


Qimonda


The German government considers to rescue with €500 million but not been officially confirmed.

U.S.A.


None


Micron


None

Japan


None


Elpida


None

Source: DRAMeXchange, Dec. 2008.

Consolidation, the history that vendors had gone through

The full capacity of 12”fabs of the six current Taiwanese DRAM vendors, including PSC, Nanya, Promos, Winbond, and other two joint venture fabs Inotera and Rexchip, is 500K wafers per month, accounts for 39.5% of the WW 12” fab capacity. The capacity of Korean maker Samsung is 300K wafers per month and Hynix is 200K per month. If only the capacity alone is taking into account, the total capacity of the Taiwanese vendors is about the same as the total capacity of the Korean vendors.

In this DRAM downturn, the Taiwanese vendors were first forced to cut capacity due to the financial pressure and their comparatively weak competition positions. Although their total capacity is large, it is running under six different companies and partial of the capacity were provided to their technology partners under market price. Therefore the Taiwanese government proposed the two goals, consolidating the DRAM industry and developing own technology, and hope to lead a way out for the Taiwan DRAM industry.

Compare to the other global DRAM vendors, the US, Japanese, and Korean vendors all had been through consolidation at the previous cyclical bottom. After Micron acquired TI, its market share jumped to number two worldwide but declined in the recent year due to its conservative attitude toward 12 inch fab and unwilling to exchange technology licensing for capacity. The Korean vendor Hynix, was the merger of the DRAM departments of Hyundai and LG. Hynix fought hard to survive after the merger and the market share grew from 5% to 22%. The Japanese vendor Elpida is the merger of NEC and Hitachi, the market share also grew from 5% to 15% (including the PSC contribution). Although Qimonda, previously as Infineon, haven’t gone through any merger, it gained market share by forming alliance and licensing technology to Nanya, SMIC, and Windbond. Including Nanya and Inotera, the market share of the alliance once reached 23%. In the previous consolidation wave, the Taiwanese vendors fell behind. But if Taiwanese vendors consolidate well and concentrate their R&D resources to reduce overlapping expenses, their competitiveness can be strengthened after the cycle goes up again.

Figure-2 Consolidation History

Company


Consolidation History


Process

Micron


Micron acquired TI in 1998 and retired most of TI capacity


Micron’s market share jumped to global number two in year 2004 and 2005.

Hynix


The DRAM departments of Hyundai and LG merged in 1999 and became Hynix under the support of Korean government.


Market share grew from 16% to the historical high of 22% in 2007.

Elpida


Elpida formed in 1999, with the merger of NEC and Hitach, and part of Mitsubishi shares also joined in Elpida.


Market share grew from 5% to 15% of 2008.

Qimonda


Simens spun off Infineon in 1999 and Infineon spun off its DRAM department in 2006 which became Qimonda. It cooperated with Promos in 1995, ended 2002. After that, it cooperated with Nanya and formed Inotera. It also includes SMIC and Winbond into its alliance as OEM foundries.


Alliance market share reached 23% in 2006 (Qimonda+Nanya+Winbond+SMIC)

Source: DRAMeXchange, Dec. 2008.

The future of Taiwan DRAM industry will rely on capacity or technology?

The current 12” fab 500K wafer per month capacity of Taiwan is about the same as the Korean vendors. If the capacity portion of OEM for technology partners is deducted, it’s still 300K wafer per month. This is not only close to the Samsung capacity but also surpass Micron, Hynix, Elpida, and Qimonda. Although the Taiwan DRAM industry is not technologically independent, the capacity advantage still remains. Under the subsidy of Taiwanese government bail out plan, there are two aspects to build up international competitiveness:

1. Alliance with the American, Japanese, and Taiwanese vendors, to form the largest DRAM joint venture in the world.
If the 500 K capacity can be combined under one company, Micron, Elpida, PSC, Nanya, Promos, and Winbond share the capacity according to their share holding percentages, they can share CAPEX while upturn and it’s easier to reach capacity cut agreement while downturn to avoid elongated oversupply period.
　

2. Through merger to gain technology
When Micron or Elpida is facing severe capital demand and has to gain fund from the Taiwanese government support, while Taiwanese DRAM vendors have no technology independency but still deeply connect to Micron or Elpida, the other way is to buyout the DRAM vendor with technology to help the Taiwanese DRAM vendors to gain the technology leading position.

Technology is an essential and decisive factor for the DRAM vendors in their developing processes. Since the Taiwanese vendors have no independent technology, once the technology partner wants out or has problem with technology R&D or licensing, the Taiwanese vendor has to look for another partner. During the transition, not only the investment amount increases, the competitiveness also has weakened. Take Nanya as an example, since established in 1955, it has switched to four different technology partners. Even the Taiwanese DRAM vendors possess capacity advantage after the consolidation, they still have to gain technology lead or secure stable long term relationships with technology partner, otherwise the industry is still facing higher risk than other major vendors.

Figure-3 DRAM Makers Capacity by Feb


　

Note: Monthly capacity here is the fully loaded capacity. The capacity of Taiwanese vendors included their OEM output portions for their technology partners, and these portions are excluded from their technology partners’ capacity.
Source: DRAMeXchange, Dec. 2008.

Figure-4 Technology partners of Taiwanese DRAM vendors.

Company


Time of Establishment


Technology Partners

Winbond


1987


1995: Toshiba
2002: Infineon/ Qimonda
2006: Qimonda

PSC


1994


1999: Mitsubishi
2003: Elpida

Promos


1995


1995: Siemens/ Infineon
2003: Hynix

Nanya


1996


1995: OKI
2000: IBM
2002: Infineon/ Qimonda
March 2008 till now: Micron

Source: DRAMeXchange, Dec. 2008.

The great alliance of the U.S., Japan, and Taiwan is so out of the expectation of Samsung

In this cold front of DRAM, or even we can call it the “Ice age”, all the vendors try everything they can to survive. Even the DRAM price fell to the historical low of US$0.6 to US$0.7, which is the material cost of the DRAM vendors, no one has announced its own death yet (SMIC announced getting out of DRAM foundry business this April) and made it harder to predict the end of this cold front. After the sincerity of the Taiwanese government announced bail out to the DRAM industry, it attracts the American and Japanese vendors to come close to Taiwan, and may accidentally consolidate the DRAM vendors of these three countries into one great alliance together to fight the Korean vendors. This will be some thing that Samsung never wants to see.