Inside Taiwan’s proposed gov’t DRAM bailout

by James Montgomery, news editor, Solid-State Technology

Nov. 24, 2008 – With some domestic DRAM suppliers (though not all) pleading for help, Taiwan’s government appears poised to offer some form of a bailout, according to local reports. But if this is good news for domestic companies, how will this move affect the overall market? SST asked industry watchers for their take.

Some quick background on why a bailout is being considered:

– Taiwan’s memory chip sector employs more than 18,000 people, and its production value topped US $7B in 2007, notes the Taiwan Economic News. But through September of this year the island’s top four memory chipmakers — Powerchip, Nanya, Inotera, and ProMos — have collectively seen losses surpass >$2.8B, while they owe about $12.7B in bank loans that will start coming due in the next year. Some estimates suggest some DRAM makers may have only a quarter or so left until facing bankruptcy (source: Digitimes). Defaulting on those loans, so they say, will not only be catastrophic to them but also the lending banks, and by extension disrupt Taiwan’s financial market. Powerchip, for example, is due to make a NT$5B (US ~$150M) payment by next summer, plus installments on bank loans. Nanya, meanwhile, obtained a bank loan to pay off NT$10B (~$300M) in bonds due this month.

– The Ministry of Economic Affairs’ (MOEA) proposed plan: refinance the bank loans (e.g. a six-month grace period from creditors), with banks extending interest and debt liabilities to debtors. Also requires a deal between the central bank and Taiwan Payments Clearing System Development Foundation to ensure sufficient funds. Result: companies can continue normal operations and maintain good credit while figuring out with creditors how to fulfill obligations. (Source: Taipei Times)

– Some say government intervention isn’t a good idea, since the proposed bailout of NT$450B ($12.6B) still wouldn’t be enough for DRAM firms that are still facing daunting industry conditions for the foreseeable short-term, at least through 1H09. (A broader loan program of NT$600B/$18.15B covers local firms, with up to NT$60B for each applicant; though, that’s still hardly enough to cover the massive losses by the DRAM firms.) Moreover, there are worries that other industries such as flat-panel displays would line up for a handout given the precedent. And the memory market’s bigger issue of oversupply needs has to be addressed, not by a bailout but by some kind of industry shakeout that removes weaker players (and their capacity) from the equation, leaving stronger ones to lead a recovery through cost-cutting, technology upgrades, and expansion.

– Sides are divided even within Taiwan’s DRAM industry. ProMos chairman M.L. Chen argues that the DRAM industry’s influence is felt in other areas, e.g. backend packaging and testing and modules; moreover, government aid, including restricted bank loans to be used not just for capacity but also R&D, would help support “home-grown technologies” (Source: Digitimes). But Powerchip chairman Frank Huang thinks reducing output should be enough to reverse slumping DRAM prices, notes Reuters.

– The profitability picture isn’t getting any better, with pricing still horrible. DDR 1Gb devices are now selling below $1 each, vs. a general breakeven cost of >$2, according the latest tracking from Gartner.

Analysts: Short-term local help, but no big fix

So what do the analysts think about a Taiwan government DRAM bailout? Jim Handy of Objective Analysis and iSuppli’s Nam Hyung Kim both told SST that there’s a good chance any bailout, while providing temporary relief, would “simply prolong the agony” (Handy) and “delay the market recovery for sure” (Kim). Handy added he’d probably support some kind of “small safety net, like loan guarantees, but nothing more.”

Consolidation is inevitable in any cost-driven market, and DRAMs are no exception, Handy points out — a 300mm fab takes about $2.5B to rationalize, and without 300mm cost structures jump dramatically vs. those who do. Plus, looming on the horizon is 450mm which will probably cost ~$4B to even justify the plunge, Handy adds. “Between here and there I expect to see significant consolidation.” Kim notes that there has already been significant restructuring, but with many shutdowns as well as market entrants, so he expects 2-3 DRAM suppliers “will disappear within five years through acquisition.”

Handy adds that historically, DRAM plants & capacity haven’t simply been closed down, they’ve been sold off to others, but without any bailout Taiwan DRAM firms might “get gobbled up for pennies on the dollar.”

An added wrinkle in a Taiwan DRAM industry bailout is the significant ties to foreign partners/JV participants. Handy notes that any bailout would be structured to focus on domestic supplier and avoids any foreign benefit from taxpayers (though of course the foreign partners will be keen to preserve their interests during any negotiations).

Speaking of foreign DRAM suppliers, iSuppli’s Kim also raised an interesting point about how Samsung might react to any Taiwan government rescue plan. Elpida, Hynix, and Micron all have ties to Taiwan’s DRAM industry — but Samsung could cry foul, he suggests, similar to the way in which complaints were lodged against Hynix several years ago, which resulted in countervailing duties in several regions (spurred by Micron in the US and Elpida in Japan).

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