February 17, 2011 – Powerchip is getting out of the commodity DRAM business, selling its unit to Japan’s Elpida. The first phase of the takeover will be stopping Powerchip-branded DRAMs and shifting production entirely for Elpida. The next phase, currently still in negotiations, is to take over Powerchip’s 300mm P3 plant, to which Elpida would later transfer its process technology.

The Elpida-Taiwan DRAM tie-ups apparently have Taiwan government approval; the Yomiuri Shimbun cited an unnamed "senior Taiwanese official" as being in favor of an Elpida-led consolidation of the island’s DRAM firms. The tradeoff, reportedly, would be Elpida listing on Taiwan’s stock market.

The deal might also rope in ProMOS as well, but there’s a catch — the company needs Taiwan authorities and local banks to partially forgive its massive debt (NT$73.7B, aka US$2.52B, aka ~¥210B).

For its part, Powerchip wants to get out of commodity DRAM (making it <50% of its overall business by year’s end vs. 67% in 4Q10), to focus on its other areas: LCD drivers, CMOS sensors, NOR and NAND flash, power management, and wafer foundry. The company has a 300mm fab capable of 120K-130K wafer starts/month, and owns a 35% stake in Rexchip equal to about 28K wafer starts/month.

The deal puts Elpida squarely in the top 3 DRAM producers, neck-and-neck with (and potentially surpassing) Hynix in terms of output capacity. With the combination, Elpida will tally roughly 130K wspm in Taiwan (80K from Powerchip and 50K from Rexchip. It also could absorb 20K wspm from ProMOS Technologies.

"All in all the move appears mildly positive for both companies," says Jim Handy with Objective Analysis, in a statement. Elpida increases its capacity basically for no cost; Powerchip gets out of the DRAM storms and gets leaner by reducing associated costs.

Elpida had tried to catalyze all the Taiwanese DRAM players (then six) into a single alliance, but pushback from execs and the demand-squeezing recession torpedoed such a deal. But as DRAM prices have sunk precipitously in recent months, the gap has widened between the top DRAM suppliers and Taiwan firms — they can’t pull together enough funds to either pay down debt or reinvest in process technology development to keep up with the market leaders. Finally, in late December 2010, Powerchip chairman Frank Huang secretly visited Elpida’s Sakamoto, who offered what he termed a "last chance" offer to phase in Powerchip’s DRAM operations, according to the Nikkei daily.

Elpida CEO Yukio Sakamoto has been quoted as saying only two, maybe three DRAM players will emerge after the next M&A shakeout, and key to anyone’s survival will be emphasis on mobile DRAM. (Not surprisingly, Elpida has shifted almost all of its Hiroshima output to mobile DRAM, with PC DRAM being procured from Taiwan partners.)