ELPIDA AND DRAM CHIPS
Elpida Memory is Japan’s sole maker of memory chips and the world’s third largest maker of dynamic random access memory chips used in cell phones and personal computers. Elpida was created on 1999 through a merger of the DRAM arms of Hitachi and NEC and was later joined by an arm of Mitsubishi. It became Japan's only DRAM maker in 2003, when Mitsubishi Electric sold its chip division to the company.
Elpida aggressively invested to boost its capacity, particularly in 2006 through 2007 as a producer of premium chips for personal computers, mobile handsets and digital appliances, gambling the market would continue to expand. In December 2006, it announced a plan to open a $14 billion factory in Taiwan that can produce 240,000 wafers a month As of 2006 their main plant in Hiroshima produces 30,000 chips a month. It also planed to invest ¥306 billion to expand production there to 100,000 wafers a month. [Source: AFP, March 28, 2012]
Elpida is Japan’s sole maker of computer memory chips and the world’s third largest maker of Dynamic Rando Access Memory (DRAM) chips. It supplies chips to iPhones and other devices and has moved many of its operations to China and Taiwan. Elpida has a large plant in Higashi-Hiroshima, Hiroshima Prefecture. DRAM are used for personal computers and other products
In May 2011 Elpida began mass-producing DRAM chips only 25 nanometers thick, making it the first company to make chips that thin. The new chip technology saves power consumption and makes it possible to produce more chips from a single silicon wafer.
Elpida ranked third in the global DRAM market in the July-September 2011 quarter, with a 12 percent share, trailing Samsung's 45 percent share and Hynix's 22 percent, data from market research firm iSuppli shows. According to DRAMeXchange, an industry tracker, DRAM contract prices fell 58 percent last year, while spot prices decreased 70 percent.
Elpida Memory lost money in 2005 and posted sharp loses in 2008. The company’s president Yukio Sakamoto too responsibility for the decline and took a 100 percent pay cut Elpida was the first Japanese company to apply for new government aid during global financial crisis in 2008 and 2009. It received $2 billion to $4 billion for a state-baked bank and $8 billion to $9 billion from private banks.
Elpida made a net profit about ¥2.1 billion (about $230 million) in fiscal 2010-2011, a drop of 32.1 percent from the previous year. It enjoyed relatively good sales and was largely untouched by the earthquake and tsunami as its main factories in Akita and Hiroshima were largely undamaged. Its profits were lower than they might otherwise have been because of a hike in allocations to minority interest shareholders. \
Elpida has a number of tie ins with Chinese and Taiwanese companies and became the first Japanese company to list on the Taiwan Stock Market, in February 2011. Some of its toughest competition comes from South Korean chipmakers.
In early 2011, Elpida formed a tie up with two large Taiwanese DRAM makers---Powerchip Technology and ProMOS Technologies---to form what is effectively be the world’s second largest DRAM maker, with a 19.8 market share behind Samsung’s 40.4 percent share. The tie in was a strategy to compete---or just survive---against the South Korean giants like Samsung.
In September 2011 Elpida Memory, announced it would transfer up to 40 percent of the production capacity at its Hiroshima plant to its cost-competitive subsidiary Rexchip Electronics in Taiwan, in response to the extremely strong yen and rapid deterioration of the market. The company said it would try to avoid laying iff workers. The Hiroshima plant will focus on products for smartphones. The company also announced it was going to set up a chip production base in mainland China.
Elpida Gets in Trouble, Bailed Out by the Government
Elpida fell into a serious business slump after the 2008 financial crisis. DRAM prices sharply fell in 2009, shrinking its earnings. Elpida managed to survive as the government-backed Development Bank of Japan (DBJ) bought 30 billion yen's worth of Elpida shares. The DBJ also joined three other private banks to issue loans worth 110 billion yen. [Source: AFP, March 28, 2012]
“But the sustained strength of the Japanese currency, falling DRAM prices and fierce competition against South Korean and Taiwanese rivals squeezed Elpida. It was also hit hard by the severe Thai flooding last year that disrupted its supply chain. The strong yen hits Japanese exporters by making their products more expensive overseas while eroding the value of repatriated foreign profits. [Ibid]
Elpida fell into a serious business slump after the 2008 financial crisis. It was the Economy, Trade and Industry Ministry that came to Elpida's rescue. METI changed its policy to enable an injection of public funds into private companies and in the summer of 2009, it approved Elpida as the first company to qualify for the revised Law on Special Measures for Industrial Revitalization and injected 30 billion yen into it. [Source: Yomiuri Shimbun, February 29, 2012]
“The action was designed to preserve the DRAM business, a specialty field for Japan, in the country and support Elpida as a "national policy concern" so it could compete with rapidly emerging South Korean companies. However, Elpida was defeated in its competition with the South Korean firms, and METI's attempt failed in a little less than three years. It is inevitable that the public assistance program was criticized as a mere life-extension measure. [Ibid]
“Why did the government's assistance to Elpida result in a strikeout? Were there mistakes in Elpida's business strategy against the South Korean firms, which engaged aggressively in a sales war through major investments and low-price goods?
Elpida Files for Bankruptcy with $5.6 Billion in Debts
In February 2012, Elpida Memory Inc filed for protection from creditors with $5.6 billion in debt, the biggest bankruptcy filing by a Japanese manufacturer. Yoko Kubota and Taiga Uranaka of Reuters wrote: “Japan, which had lent or invested 40 billion yen ($500 million) with the country's last maker of PC memory chips to help it through the post-Lehman Brothers crisis, appeared to throw in the towel this time as the company faces slumping prices and relentless competition from well-funded Korean rivals. [Source: Yoko Kubota and Taiga Uranaka, Reuters, February 27, 2012]
“But both Japan's trade minister and Elpida's president expressed hope that the company could be rehabilitated, in a process similar to U.S. Chapter 11 bankruptcy protection, and that Japan could retain a presence in the dynamic random-access memory chip sector that it once dominated. Elpida has been struggling with weak chip prices in a sluggish global economy and as consumers increasingly bypass PCs for products like Apple Inc's iPad, which primarily uses flash memory instead of DRAM. It was also saddled with heavy capital spending to keep pace with market leaders Samsung Electronics Co and Hynix Semiconductor Inc, while a strong yen undercut its global competitiveness. Lee Seung-woo, an analyst at Shinyoung Securities in Seoul, added: "Elpida is shrinking and major customers will defect from the company and move to South Korean companies ... This is not a bad picture for South Korean chipmakers.” [Ibid]
“Elpida's debt was the largest ever for a Japanese manufacturer seeking bankruptcy protection, corporate credit research firm Shoko Research said. Lenders to Elpida, which is a supplier to Apple as well as a victim of the iPad's success, had given the company until this month to devise a turnaround plan. An official at one of Elpida's lenders, speaking on condition of anonymity, said he was surprised at how quickly it gave up and opted for a bankruptcy filing when it still had some financial leeway, but said it would be easier to rehabilitate by going through the process now, before all of its money runs out. [Ibid]
“Doubts remain as to whether Elpida is worth saving. "The world has DRAM coming out of its ears and being produced a lot cheaper than Japan can produce them," said Darrel Whitten, managing director of Investor Networks Inc, an investor relations consultancy. "The question is whether you pour more good money after bad or try to encourage something that does appear to be working strategically.” [Ibid]
“Yomiuri Shimbun reported: “It was a setback for the "flagbearer of Japan's semiconductor industry," and it symbolizes the decline in Japan's industrial competitiveness...Competition is fierce in the DRAM market, as South Korea's Samsung Electronics Co. and Hynix Semiconductor Inc. hold a combined market share of well over 60 percent. Affected by the hyperappreciation of the yen, depreciation of the won and the market slump, elpida's business performance has deteriorated rapidly. [Source: Yomiuri Shimbun, February 29, 2012]
“Elpida strove to come back from its near-dead status through business tie-ups with U.S. and Taiwan companies, but none of its attempts came to fruition. As a result, the company could not raise sufficient funds. It is very regrettable Elpida was forced to choose legal liquidation. The possibility that the taxpayers' burden will swell to as much as 28 billion yen because of Elpida's failure is also a problem. In March 2012 Elpida was delisted from the Tokyo Stock Exchange. The company’s failure was the biggest corporate failure in Japanese manufacturing history. [Ibid]
U.S.-Based Micron Acquires Elpida
In July 2012,Shara Tibken wrote in the Wall Street Journal: “Micron Technology Inc. agreed to acquire troubled Japanese rival Elpida Memory Inc. for about $2.5 billion, as the U.S. memory maker bulks up to compete against rivals in South Korea and Taiwan. The deal would make Micron No. 2 in the market for memory chips, second only to Samsung Electronics Co. Micron, based in Boise, Idaho, currently ranks third, behind SK Hynix Inc., another Korean company that until earlier this year was called Hynix Semiconductor Inc. [Source: Shara Tibken, Wall Street Journal, July 4, 2012]
“Micron agreed to acquire Elpida's equity for $750 million and pay a total of $1.75 billion in annual installment payments. The payments will end in 2019 and will be interest free. All prepetition debt obligations of Elpida will be discharged under the corporate reorganization proceedings. "This is a highly attractive deal for Micron," Chief Executive Mark Durcan said. "The combined company will put us in a stronger position in the memory landscape." Durcan said the new capacity gained from Elpida costs less than a third what it would take to build new operations and would boost Micron's total capacity by about 50 percent. He said the deal should add to per-share earnings and cash flow within the first year of closing. [Ibid]
“The agreement also calls for Micron to provide financing support for Elpida capital spending and to maintain the company's operations and staffing. Elpida will only use the financing if its operating cash flow doesn't cover the required expenditures. S&P Capital IQ analyst Angelo Zino said the deal's terms are attractive to Micron. He said it also boosts Micron's exposure to mobile DRAM---an area where Elpida is particularly strong---and gives Micron more manufacturing flexibility among different memory technologies. [Ibid]
“Micron is the last U.S. maker of DRAM computer chips, and its NAND flash memory chips are used in MP3 music players, tablet computers and digital cameras. The company expanded into a new area of the memory market, known as NOR, with a $1.2 billion Numonyx acquisition in 2010. Micron long has had ambitions to acquire an Asian DRAM maker to boost its competitiveness. It attempted to acquire Hynix in 2002 for about $4 billion only to see talks fail after that company's creditors---mostly state-owned banks---fretted that the Korean company would fall into foreign hands. Hynix was on the brink of bankruptcy in 2001 after it accumulated billions of debt following losses from chip prices plunging below production costs. [Ibid]
“The Yomiuri Shimbun reported the Japanese government is worried about the outflow of technologies and human resources to other countries. [Ibid]
Renesas and MCUs
Renesas Electronics Corp. makes 42 percent of the world’s microcontroller units (MCUs), devices which are vital to controlling automotive engines and other systems, including anti-lock brakes, power steering, airbag control, and keyless entry. The company’s main factory---in Naka in Ibaraki Prefecture---was badly damaged by the March 11 earthquake."There's not a car that doesn't have a Renesas MCU installed that holds a top share in the global market," an industry source told the Yomiuri Shimbun. [Source: Yomiuri Shimbun]
Renesas was formed in 2010 through the merger of money-losing chipmakers Renesas Technology Corp., a venture between Hitachi and Mitsubishi Electric and NEC Electronics Corp. It is 91 percent owned by NEC Corp., Hitachi Ltd. and Mitsubishi Electric Corp. combined, posted a net loss of 62.6 billion yen in the year ended March 31, 2011. Falling demand for TVs and a drop in prices for chips used in computers have eroded profit at Renesas’s unit making System LSI chips, used for functions ranging from processing images for TV screens to crunching data. [Ibid]
“Renesas got 43 percent of its semiconductor sales of 786 billion yen from microcontroller chips in fiscal 2011, while system chips accounted for 26 percent, according to the company. Domestic auto manufacturers rely on Renesas for 60 percent to 70 percent of chips used in their cars, Kunihiko Onuma, head of Hitachi’s automotive systems unit, said June 14. [Ibid]
Renesas and the March 2011 Earthquake and Tsunami
Renesas made headlines after the March 2011 earthquake as production at many automobile factories was affected by a shortage of vital Renesas-produced parts. One of the keys to getting the automobile industry back on its feet not only in Japan but globally was bringing the Renesas Industries Naka semiconductor factory in Ibaraki Prefecture back online. In June three months after the disaster, shipments were 90 percent of what they were before the disaster as parts that its had on hand had all been shipped and the Naka factory had not yet been brought online.
Renesas received a big boost from automakers and electronics firms, who provided 2,500 workers to help the firm cope. Renesas restarted production at its Naka plant in Hitachinaka, Ibaraki Prefecture, in June---more than one month earlier than previously forecast. Pre-disaster production returned in September, also a month earlier than previously forecast.
Renesas' suspension caused many automakers at home and abroad to halt production. The firm holds about a 40 percent share of the market for semiconductor chips, or microcontrollers, used in auto parts.In August 2011 a Renesas executive said the company plans to outsource more of its production operations to foreign firms to "avoid such negative impacts from future natural disasters." Currently, Renesas outsources about 8 percent of its production to manufacturers overseas, but plans to raise the rate to 25 percent by March 2013. The company is also considering whether it should accelerate that schedule.
Renesas Closes Plants and Lays Off Thousands of Employees
In June 2012, the Yomiuri Shimbun reported: “The Kawasaki, Japan-based chipmaker Renesas Electronics Corp. plans to close or sell 11 of its 19 domestic factories over three years to cut 60 billion yen to 100 billion yen in annual costs as part of its business reconstruction plan, according to industry sources. [Source: Yomiuri Shimbun, June 22, 2012]
“In July 2012, Bloomberg reported: “Renesas Electronics Corp, the Japanese chipmaker that’s been unprofitable each year since it was set up in 2010, will eliminate more than 5,000 jobs, or 12 percent of its workforce, as it seeks to trim losses. The job cuts will be achieved through offering incentives and early retirements and could save the company 43 billion yen ($539 million) annually, Renesas said.. [Source: Naoko Fujimura, Bloomberg, July 3, 2012]
“The company, which had 42,800 workers as of the end of March, will give the buyout offer to workers in September 2012. Renesas planned to cut as many as 14,000 jobs as part of the restructuring, the Nikkei reported in June 2012. In 2010 as well, Renesas had said it was cutting 5,000 workers. [Ibid]
“Semiconductors of Renesas, whose customers include Apple and Sony Corp., are used in products from automobiles to consumer electronics for tasks such as triggering air bags. “The management’s responsibility is to pick a way for survival, even if that involves pain or sacrifice,” Renesas President Yasushi Akao told reporters in Tokyo today. “We needed to take more drastic measures on our cost structure as our top line is more unstable than before, in addition to the opportunity losses from the earthquake last year.” [Ibid]
Efforts by Renesas to Become Profitable
Renesas is counting on increased demand for microcontrollers in emerging markets, inverters and autos to help it turn profitable. Demand from automakers including Toyota Motor Corp. is recovering after last year’s earthquake and tsunami in Japan disrupted car output, Renesas said in May. The chipmaker has reached a “basic agreement” with its three major shareholders and is holding negotiations on details of assistance with them and banks, The company had also decided earlier to release new shares of stock to third parties for a capital injection of 50 billion yen. [Ibid]
“In May 2012, the Yomiuri Shimbun reported: “Renesas Electronics Corp. will form a business partnership with Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract manufacturer of semiconductors, to produce microcontroller chips for automobiles, digital home appliances and other goods, according to informed sources. [Source: Yomiuri Shimbun, May 25, 2012]
“According to the sources, Renesas will contract TSMC to produce some elements of its microcontroller chips to reduce production costs. The company aims to implement the management strategy of "selection and concentration" in business operations. Under the strategy, Renesas plans to focus on production of microcontroller chips for automobiles, as it currently has the largest global market share of about 40 percent, through alliances with foreign companies. [Ibid]
“As 19 of Renesas' 26 manufacturing plants are located in Japan, the issues of high labor costs and the appreciation of the yen are primary concerns for the company. Through receiving contract production orders from chipmakers across the world, TSMC's core business is the mass production of high-quality semiconductors at a low cost. [Ibid]
Text Sources: New York Times, Washington Post, Los Angeles Times, Daily Yomiuri, Times of London, Japan National Tourist Organization (JNTO), National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.
© 2009 Jeffrey Hays
Last updated August 2012