JAPAN NEWS: Analyzing the Renesas-NEC deal; fleeing to solar, LEDs

April 21, 2009 – Renesas and NEC are reportedly mulling a merger, but traditional M&A benefits may be trumped in the interest of pure survival. Also from Japanese headlines: nervous firms ahead of quarterly results, and how chipmaking equipment firms are staying above water until the industry turns around.

NEC, Renesas chatter makes sense…or not?

Local reports are abuzz with talk that Renesas Technology and NEC, being hit hard by the current economic downturn, are in the end-stages of talks to merge their operations by the end of the new fiscal year (ending April 2010), creating the third-largest global chipmaker behind Intel and Samsung (~5.1% share vs. Intel’s 13.3% and Samsung’s 6.8%). Blending operations would, among other things, allow them to phase out older unproductive lines and better leverage economies-of-scale. (Renesas has 16 sites in Japan, twice as many as NEC, notes the Yomiuri Shimbun.) Helping the deal move along is that Renesas co-owners Hitachi and Mitsubishi Electric have indicated “they would not insist on calling the shots at the merged entity,” reported the Nikkei daily.

“If they (NEC Electronics and Renesas) are merged, that would give them benefits,” including a dominating 30% share in microcontrollers (they are 1-2) and reduced capital spending, said Haruo Sato, an analyst at Tokai Tokyo Research Center Co, quoted by Dow Jones.

Such a move not only would hoist the companies to a more prominent global position, it would also create shockwaves in Japan’s chipmaking industry, local reports note. Toshiba (currently Japan’s top chipmaker ahead of Renesas and NEC) and Fujitsu, likewise being slammed in the current environment, would be even more pressured to reshape their operations. The Kyodo News notes NEC had investigated a deal with Toshiba for a possible three-way merger with Fujitsu, but those talks were unsuccessful. Elpida, another high-profile Japanese chipmaker (its lone memory maker), is leading the consolidation of Taiwan’s memory chipmakers with government help — and may also be in line for some Japanese state-sponsored aid as well.

But not everyone sees the clear path to synergies in a NEC-Renesas combination. Assuming the two driving factors in any consolidation are cost improvement and product synergy, the highly resource- and capital-intensive chip industry isn’t well positioned to take advantage of either, notes Jim Handy of Objective analysis, in a report. New chip designs require the same general number of engineers no matter whether the company is large or small, he points out. Manufacturing costs can be improved by ramping output in fabs, but that would require significant and complex (and resource-intensive) integration of the companies’ processes. “Two companies cannot just be slapped together and see immediate, or even short-term financial benefits,” he writes. Renesas has sustained product lines of its parent companies, but more as a “co-habitation” than a consolidation, he points out. “Adding NEC to the line card may be approached the same way.”

The ultimate reasoning for consolidating chip businesses is to “lock a customer — “and usually an application category” — with all the chips needed for electronic end-equipment, Handy notes. “If one company has some key components that give another company a substantially more complete offering, then putting those two together is a strong combination and encourages design so the various components work well together.” From this key perspective, though, a Renesas-NEC combination doesn’t make as much sense, with both offering broad technologies and having significant overlap vs. new synergies. “We see little of the traditional benefits from a prospective merger between these two firms,” he summarizes.

Weathering the storm: Sony, Sumco, Toshiba

While not on the M&A front-burner (for now), other Japanese companies are definitely feeling the heat (or perhaps cold) of the bad industry climate. Some snippets, from the Nikkei daily:

  • Sony plans to transfer some development activities for image-capture devices from its Atsugi Technology Center in the greater Tokyo area to production subsidiary Sony Semiconductor Kyushu in Fukuoka Prefecture by June. The move, said to involve “several hundred engineers,” is mainly to cut operating costs, amid a corporate goal to cut expenses by ¥250B in the current fiscal year.
  • Look for Sumco to swing to a group pretax loss of ~¥40B for the three months through April 30, vs. a ¥22.6B profit a year earlier, as sales slide 65% to ¥40B. After investing ¥140B in the prior year, the company will “drastically” scale back capital outlays in the current year. Depreciation expenses are expected to rise 10% to ¥48B in the first half of the year (through September); Sumco projects a fiscal 1H09 pretax loss of ¥60B, but is offering no FY09 outlook.
  • Toshiba plans to slash semiconductor capital spending by 56% in the current fiscal year to ¥<100B, down from ¥230B last year. The company's chip unit posted better-than-expected sales of ¥1.02T were about 2% higher than expected; the segment still lost ¥250B, but that's better than it expected, thanks to steadying chip prices due to production cuts. A proposed ¥500B capital infusion targeted by June would help raise the company's capital ratio to about 13% and improve its credit rating, thus shoring up the balance sheet and steadying the company's key businesses in semiconductors as well as nuclear power plants, the Nikkei daily reported.

But there are some signs of improvement, including:

  • Tokyo Seimitsu has shaved ¥500M from its expected operating loss for the current fiscal year ending, now to ~¥2B, on ~30% lower sales of ~¥32B. Paring its workforce by ~40% is helping the bottom line, as are stronger Chinese demand for products such as dicers.
  • Orders in the April-June quarter will be up from the prior quarter, some positive news from Tokyo Electron.
  • Disco says orders for its wafer-cutting tools jumped 80% in March vs. February. It’s still projecting a -35% decline in profits to ~¥35B, and an operating loss of -¥5B, vs. a ¥100M profit for the just-ended fiscal year.

    Making the best of it

    So what to do in a lousy chip industry? Find other industries that can use your technology, ideally for better profit. And materials firms are leading the way, notes the Nikkei.

    First, a crop of firms targeting solar:

    • Kuraray plans to sell a new glass sealing material to glue cells and glass, with what it says is twice the insulating properties of conventional materials. The goal is to increase supply volumes as much as sevenfold to ¥5000 tons/year by fiscal 2011. Meanwhile, the firm has cut production of LCD panel films. With solar cell materials promising to double to ~¥4.2T LCD panel materials
    • Asahi Glass plans to invest ~¥3B for a glass processing facility in Dalian, China, where it will coat glass sheets with a thin metal membrane for thin-film solar cells — offsetting weak demand from construction and automotive markets. This comes at the expense of the company’s LCD glass substrates, where new plant operations have been postponed.
    • Mitsui Chemicals hopes to tap into the market for solar panel backsheets by turning polypropylene/polyethylene films supplier Tohcello into a wholly-owned subsidiary.
    • Toyo Ink Mfg. plans to apply its know-how in making protective films for signboards into a business targeting solar cells.
    • Equipment supplier Ebara, too, is getting into the green theme. The firm plans to use its site in Germany to sell gas processing equipment to solar panel makers in Europe, and its Shanghai operation to sell vacuum pumps to LED makers in China, notes the Nikkei Business Daily.

    And others looking at how they can tap into LEDs.

    • Later this year Tokyo Seimitsu will launch a new tool to handle LED substrates, with a tough blade to handle the metals, sapphire, and other hard materials. Price is expected to be ~¥10M, nearly half the cost of similar tools for semiconductors.
    • Disco also wants to sell more LED-cutting machines, but with lasers instead of blades, and has set up a team to develop and sell the technology. The firm hopes to double its LED-industry sales from current ¥2B-¥3B/year.


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