Tuesday, February 16, 2010

Taiwan unveils DRAM plan

Caught between a rock and a hard place, Taiwan unveils creative DRAM plan

(A version of this story ran in the International Herald Tribune, in March 2009)

TAIPEI -- With the creation of the government-backed Taiwan Memory Company, Taiwan is experimenting with a novel way to save a flailing, but strategic, industry.

If successful, it could be a model for other governments looking to balance the protection of key industries against market realities, amid the worst global downturn in decades.

As consumer demand in the key U.S. market shrinks, Taiwan's memory chip industry has been the island's hardest hit, with at least two dynamic-random-access memory (DRAM) companies facing bankruptcy.

That poses a sharp dilemma for the Taiwan government –- similar to the one the U.S. government faces with its auto industry -- said analysts, economists, chip-firm employees and a government official interviewed here in recent days.

If the government gives uncompetitive firms no-strings-attached bailouts, it could face a financial black hole and taxpayers' wrath.

Do nothing, though, and the result could be a banking sector crisis, the loss of chip factories to foreign rivals, and social upheaval caused by thousands of lost jobs.

"This is one of the clear motivations when the government is looking at the DRAM sector," said Tony Phoo, a Taipei-based economist with Standard Chartered. "It wants to prevent this from morphing into something that could get out of hand and have serious repercussions -- not just on the [memory chip] industry, but on the job market more broadly, and potential risks to the system."

Middle way

So the government is taking a middle way. It's creating a potential lifeboat for the island's sinking memory chip firms. But it's insisting they fend for themselves until it's ready -- and has made clear that firms will only get help on the government's terms.

John Hsuan, the chip industry veteran tapped to lead the new company, last week told reporters that it would not merge Taiwan's six DRAM firms, and there would be no bailout. "The purpose of Taiwan Memory is to make Taiwan's DRAM industry more competitive," he said, according to local media.

The plan -- the broad outlines of which were unveiled in the last two weeks -- would create a new government-backed firm producing DRAM chips, which are used in many popular consumer electronics devices.

Like other observers, the government has concluded that Taiwan's memory chip industry lacks the proprietary technology it needs to compete. Taiwan firms lease technology from foreign partners, which has left them at a crippling disadvantage in the downturn.

So the new firm plans to first secure technology patents from a foreign partner, either Japan's Elpida or the U.S.' Micron.

After a round of fundraising (the government says it will limit its own stake to under 50%), it will then "invite" Taiwan's struggling DRAM firms to cooperate in the new venture.

Taiwan's top two memory-chip firms have criticized the scheme, and said they won't play along. They say they expected a rescue plan, while the government is creating yet another, rival firm in an already overcrowded sector.

No good options

But analyst Iris Guo, at Yuanta Securities in Taipei, says that for at least two firms -- ProMOS and Powerchip -- cooperating with TMC may be an offer they can't refuse.

Both companies are in dire straits financially, lurching from one emergency loan to the next, just a convertible-bond maturity date or two away from bankruptcy.

The firms owe massive debts, mostly to state-controlled banks. Guo said that the debts total NT$300 billion (US$8.7 billion) or about 3% of GDP, with ProMOS and Powerchip together holding about half that amount. A default of that magnitude could send shock-waves through the island's financial sector.

"It's very hard for the government to just let these companies go under," said Guo. "If they did, local banks may have to write down many bad debts -- they'd be hit very hard. So the government is concerned about the impact on the financial system."

An official from the Ministry of Economics' Industrial Development Bureau, who did not want to be named because of the sensitivity of the DRAM industry plan, confirmed that concern in a phone interview.

The official, who is involved in the planning for Taiwan Memory, added that if the government didn't step in, chip factories owned by struggling firms like ProMOS and Powerchip could well end up in foreign hands -- perhaps gobbled up by industry giant Samsung, of South Korea.

"If Samsung gets ProMOS or Powerchip, then what will happen?" the official said. "It will dominate the entire DRAM industry."

Human costs

The government can't overlook the human costs of industry failure, either. Taiwan's DRAM industry employs more than 20,000 people, the official said. ProMOS alone employees some 5,800, with many more family members dependent on those jobs.

"Can we keep those people warm and fed? There's a social aspect to this," said ProMOS spokesman Ben Tseng, in a phone interview Thursday. "We're saying, help the company get through this critical stage, and there's hope the company will grow healthy again and pay back the government ... For the taxpayer, this should be considered an investment or a loan -- not a handout."

Tseng said the government had raised hopes of a rescue, only to dash them later by telling firms that for now they're on their own.

"The turn of events in the past two or three days caught a lot of people off guard. We're looking to see whether we are part of the overall plan."

In the meantime, ProMOS has slashed payroll costs and output. They've not renewed the contracts of hundreds of foreign contract workers, who have now returned to their southeast Asian homes. The firm hasn't laid off any Taiwanese staff. But like many of the island's firms, it's forced them to take unpaid vacation -- six or eight days per month for every employee. Executives have taken pay cuts.

Gloomy mood

Powerchip has taken similar measures. On his way home from work from Powerchip's headquarters in a technology park an hour south of Taipei one early evening last week, a 31-year-old employee said he had four days of unpaid vacation this month, and heard that might be increased to six unpaid days in April.

The mood among Powerchip employees was "gloomy," said the employee, who did not want to be quoted by name discussing the company's current situation.

"Of course I'm afraid, but my boss said it's no use being afraid -- only the bosses higher up can solve the problem."

Even this employee, though -- a potential direct beneficiary of a bailout -- expressed some skepticism about the government's scheme. It's planned investment in the new firm wasn't big enough, he said. (Taiwan Memory's Hsuan has said he hopes to limit government investment in the new firm to NT$30 billion, or about US$870 million).

And the key problem now is that DRAM prices are too low due to a supply glut and falling demand, he said. Benchmark DRAM prices have plunged about 65% since peaking last summer.

If prices don't come back up, the employee said, "no matter how much money the government spends, it will be useless."

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