Taiwan consolidates chipmakers

On March 5th, the Ministry of Economic Affairs (MOEA) announced the formation of the Taiwan Memory Company (TMC), a holding company that will buy or consolidate the island’s top six makers of dynamic random access memory chips (DRAM). The entire industry has suffered from years of chip oversupply and persistent low prices, and the global economic meltdown has dimmed prospects for recovery anytime soon.

In announcing the formation of TMC, Economics Minister, Yin Chi-ming, also appointed John Hsuan to head-up the new venture. An industry veteran, Hsuan was the former CEO of United Microelectronics Corp. (UMC). His first order of business will be to pursue a partnership agreement with Japanese memory maker Elpida Memory and/or American memory maker Micron Technology. Combined, they account for 28 percent of the DRAM market and also hold some crucial intellectual property.

The government hopes that negotiations can be concluded in three months so that TMC can begin working on research and development. MOEA plans to have the new company established within six months. Although Taiwan is not lacking in hi-tech capacity, it is short on world-known brand names and key intellectual property that would make it more competitive. MOEA is hoping that an alliance with one or both of the companies will strengthen Taiwan’s DRAM position, enabling TMC to gain a competitive edge over Samsung Electronics.

According to Dramexchange Technology, the Korean chip giant Samsung accounts for 25 percent of worldwide sales, while the six Taiwanese companies combined account for 23 percent. Samsung has greater bargaining power, enabling it to set higher prices, while the scale of its multi-billion dollar chip factories allow for lower production costs.

"Local chipmakers are more vulnerable to an economic downturn than Samsung, because they lack price power,” said Cheng Cheng-mount, an economist with Citigroup Inc. in Taipei. With TMC, Taiwan’s DRAM companies will gain greater economies of scale.

Although the consolidation is partly for the sake of survival, it is certain that the overcrowded DRAM industry is likely to see yet more consolidation in the near future. Both Micron and Elpida have current agreements with Taiwanese DRAM companies, while other chipmakers have forged alliances with each other. It is likely not everyone will be happy with the new alignment as individual companies begin to break alliances in favor of more lucrative deals.

In an industry that has bleed money in the last years, the TMC will give chipmakers a chance to halt the downward spiral. According to Andrew Norwood, an analyst at Gartner Inc. in London, the chip industry lost a combine US$12.5 billion in 2007 and 2008, the most ever. For the first nine months of 2008, Taiwan’s publicly traded DRAM makers’ combined losses exceeded NT$94 billion (US$2.7 billion). With global sales of chips predicted to fall another 15 percent this year, Taiwan’s chipmakers were in desperate need of the cash injection from the government to remain competitive.

Minister Yin said that the TMC will not be a state-run business, with the government holding less than 50 percent of total capital. No concrete figures have been mentioned on how the government will fund the TMC, but the six players involved are likely to be Nanya Technology Corp., Inotera Memories Inc., Powerchip Semiconductor Corp, Rexchip Electronics Co, ProMOS Technologies Inc. and Winbond Electronics Corp.

One complication in the creation of TMC could be Taiwan’s two largest DRAM companies, which already have agreements with Micron and Elpida. In speaking to the Central News Agency, Liu Szu-liang, a memory chip industry analyst at Yuanta Securities believes, “The success [of the plan] will, however, largely depend on whether the nation’s two biggest DRAM companies [Powerchip Semiconductor Corp] and Nanya Technology Corp will join TMC.”

With the government’s backing, TMC has the means to secure intellectual property, update their manufacturing facilities and build a world-renowned brand that can truly compete with the Korean chipmakers. If all goes according to plan, the eight combined DRAM companies would make up 51 percent of the global market, giving Samsung a real run for their money.