Elpida: China DRAM move is final turf battle

Sept. 2, 2008 – Elpida’s recently unveiled plan to create a $5B DRAM JV in China’s Jiangsu Province is the final stage in an industry “turf war” with the ultimate prize being simply survival, according to CEO Yukio Sakamoto, in an interview with Japan’s Nikkei daily paper.

The still-slumping DRAM environment may not appear to support such a move, and Elpida posted a third consecutive quarter of net losses in its June quarter. But, he pointed, out, “All memory chip makers are struggling with worsening performance, so the industry is in effect in the final stage of a turf battle. In this situation, taking the offensive to force out rivals is an effective way to cut losses over the long term.”

Sakamoto told the paper that the investment will go forth because the company needs to have a production infrastructure that can be leveraged going forward toward profitability, even if DRAM prices fall below $2. This will be accomplished largely by the new factory’s 50nm capabilities, which will double the number of DRAMs on a single wafer.

As far as why build the site in China, Sakamoto noted that China is a big DRAM consumer, but most of all offers “generous preferential tax incentives” including eligibility for a 10-year corporate tax exemption, as well as local government assistance in construction and employee training. Because rival Samsung and other South Korean producers also get tax breaks, “we cannot compete unless we stand on a par in terms of preferential treatment,” he said.

He further pushed the incentive issue by noting that Elpida will continue to invest in its JV in Taiwan with Powerchip, but plans no more buildups in Hiroshima, Japan (where it was already pulling back market glut-aggravating 65nm output) since it can’t get sweetheart deals from the government. The chip industry’s production-base has migrated from Japan to Taiwan, and is now moving on to China (and has carried equipment suppliers with it), he pointed out. “If the Japanese government wants to stop such a flow, it should have a firm resolution to offer a great deal of preferential measures for the industry.”

Though Elpida’s interest in the JV is limited to 39%, it will sell all the DRAM output under its own brand, he added. And the threat of technology leaks, though always a possibility, are seen as outweighed by the benefits of the Chinese JV. “As other industries are foraying into China, we see no reason why a semiconductor maker doing likewise should be regarded as a problem,” he said.

One problem that seems to have bruised DRAM market expectations was tightened Chinese customs regulations around the Beijing Olympics; chip shipments took longer to clear customs, DRAM imports into China stalled, and inventories piled up. But this unexpected short-term problem should “soon be resolved,” Sakamoto said.


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