Sailing on a silicon Titanic- by John Boyd -
According to market researcher Dataquest, the price per Mbyte of memory in 1996 stood as high as $23; today it's less than $1.50. Head of NEC's semiconductor division, Hajime Sasaki, says the yearly price drop on DRAMs is normally 30%, but since October '97 it began to spiral down at about double that rate. A fundamental reason for the decline is production over-capacity stemming from too many players. Besides six or seven Japanese manufacturers, the same number can be counted collectively in Korea, Taiwan, and Singapore, while Idaho-based Micron continues to fly the flag in the US. When times are good, all these plants can be heard humming pleasantly. But in today's multicalamitous environment of economic downturns, slumping Japanese PC sales, and falling investment, not to mention the Asian monetary crisis, the only humming evident in chip plants right now arises from the shoes left outside the clean rooms. Manufacturers are not doing nothing, though some analysts believe it's too little, too late. Fabricating semiconductors is a hugely capital-intensive business. In order to pack ever more transistors into ever-smaller silicon real estate, companies must regularly replace current manufacturing equipment with next-generation miniaturization technologies. Keep in mind that as they draw, etch and connect the vast circuitry found in a single 128-Mbit memory chip, they are creating something as complex as the design of an entire city the size of Tokyo. With new plants costing $1 billion a pop, it's no wonder that all of Japan's semiconductor makers have been back peddling on capital spending. Hitachi budgeted ¥120 billion on semiconductor expenditure in '97, but may not even spend ¥40 billion in fiscal '98. Fujitsu invested a whopping ¥180 billion in '97, but has set aside only ¥80 billion for this fiscal year. It's no different for Mitsubishi Electric, Toshiba, and the others. Additional cost-cutting measures include plant closures. Mitsubishi, Hitachi, and Oki Electric have closed plants in the US, while Fujitsu turned the ovens off in its 16 Mbit DRAM fab in the UK. But so far, no one, Oki Electric aside, has dished out the same strong medicine in Japan, where plant concentration lies. And that's a major problem, according to Michito Kimura, a semiconductor analyst with market researcher IDC Japan. "There are just too many players," says Kimura. "The market is growing, but no one is making any profit. It's no longer a business." The situation is like a game of poker. There's a huge pot at stake that has the players mesmerized, making it tough for anyone to fold, even though the ante is rising beyond their means. Another reason to keep going is the belief that an ongoing shift from DRAMs to system-on-a-chip products will help turn the industry around. By integrating various logic functions and memory on the same silicon, chipmakers can add more value. These system LSIs (large-scale integration) as they are often called, are helping electronics consumer manufacturers reduce the number of chips they need to build products. This compact technology will also cut the size and weight of upcoming mobile computers and phones even further, as well as increase battery life and boost data transfer rates. Yet Kimura discounts the idea that technology will save the industry. "With so many of the Japanese manufacturers now competing in system LSIs, it's going to be just as tough there. Especially when they are so focused on market share, not on making a profit. That's a dangerous situation." He also points out that most of the Japan manufacturers are concentrating more on the consumer electronics market, where the appetite for system LSIs is still relatively small. DVD players and DVD-ROM drives, digital video and still cameras are potentially huge markets, but right now they are not big enough to keep everyone busy. By contrast, US semiconductor makers like Texas Instruments and LSI Logic are occupied supplying system LSIs to the much larger cellular phone or hard disk markets, while Taiwan semiconductor makers are hoping to become foundries for system LSIs to be used in the huge inkjet printer market. Today's situation simply can't continue, warns Kimura. "Some top executives must make hard decisions right now about getting out. If they don't, it's going to end in a Titanic sinking for the industry, with many going down. Companies like NEC, Toshiba and Fujitsu have the strength to continue on, but even these companies will suffer severe body blows." Got a sinking feeling because there's a chip on your shoulder? Get rid of it by sounding off to John at boyd@gol.com. |
