Taiwan DRAM consolidation: Where's the money coming from?

12/01/2009

Rupert Hammond-Chambers,
US-Taiwan Business Council, Arlington, VA USA

Cabinet reshuffles are common in Taiwan, and the recent cabinet turnover should be viewed in the context of a chastened President Ma Ying-jeou, whose poor handling of relief operations after typhoon Morakot warranted a fresh set of faces at the top. His plummeting popularity has undermined his broader agenda—rapprochement with China and the prospect of inking a cross-Strait free trade agreement.

Ma's new cabinet has been filled predominantly with conservative technocrats and academics. This was evident when new Minister of Economic Affairs' Shih, in his opening press conference, reiterated support for the Taiwan Memory Company (TMC) and consolidation of Taiwan's DRAM sector.

The Taiwan government is placing great stock in TMC and its partner, Elpida, as a consolidation vehicle, and in creating a company with the economies of scale to better weather cyclical downturns and to take on the Koreans. TMC submitted an application this fall to tap new government funds, which the Legislative Yuan then rejected over disagreement as to the return on investment for Taiwan's taxpayers, further exacerbating the government's vision for capitalizing this effort. If such funds would have been approved, they would have assisted in launching operations, and would have provided equity for investments in vulnerable legacy businesses, such as Powerchip. Companies that already use Elpida technology make logical acquisition targets for TMC, and are less attractive to such groups as Nanya/Inotera, who use Micron technology.

The government has clearly taken a somewhat ad hoc approach to its plan for TMC, and challenges remain unaddressed.

The first is the US$12 billion debt owed by the DRAM industry to Taiwan's state-owned banks. With the economic downturn and a drop in chip demand, coupled with serious overcapacity problems, this looming debt will come to a head at the end of the year. Businesses such as Powerchip and PROMOS will be grappling with repayment or finding new creditors in a highly challenging credit market.

Taipei's macroeconomic financial situation is also not good. The government is already scheduled to borrow a record amount to cover next year's budget shortfall. The situation has been further exacerbated by typhoon Morakot reconstruction funding.

There appears to be a presumption within the government that the TMC initiative will not meet any industry competition for acquisitions of distressed assets and other opportunities. Yet the Micron alliance that includes Nanya and Inotera is in a strong position to compete for assets and customers, challenging the government's ability to control the process. Nanya owner Formosa Plastics has deep pockets and strong government connections, well able to fend off even a government backed start-up such as TMC; and, Micron's technology is some of the world's most advanced.

Taipei's plans can receive a boost if DRAM prices hold steady, keeping production profitable. Cyclical demand and the introduction of Windows 7 should help sales. That said, the medium to long term picture is highly conditional on a return to sustained growth from the G3 economies and China, and there is simply no guarantee that will take place.

In addition, if global economic expansion starts to take hold, there will be strong pressure on the DRAM companies to fire up their currently mothballed production lines. That could easily pitch the DRAM price below the profitability mark, and the industry's challenges would remain acute and unaddressed.

It seems likely that, in the end, TMC and Elpida will manage to acquire and/or merge with PROMOS, Powerchip, and Rexchip to form one major Taiwan player built on Elpida's technology. Micron, Nanya, Inotera and Winbond could make up the second and competing group.

Finally, recent U.S. government interest in the funding mechanisms being employed by the Japanese and Taiwanese governments through Elpida and TMC adds further pressure to an unsteady process.

But the Taiwan government faces real challenges in raising the capital for this consolidation effort, and it will expect the DRAM debt to be repaid to its state-owned banks. This leaves a huge hole in the plan, with little clarity at this time from the Ma government about how all of these goals will be paid for.

Rupert Hammond-Chambers, president, US-Taiwan Business Council, Arlington, VA USA; 703-465-2930; [email protected]

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