Japan’s Chips Are Down, Not Out
The first floor of NEC’s most sophisticated semiconductor plant stands empty, its future at the mercy of turbulence in the global chip industry.
“Five years ago, we had a plan for that space,” explained Yuji Sugita, a manager at NEC Kyushu Ltd., about an hour’s train ride from the city of Fukuoka on the island of Kyushu. “Now we’re not sure what will happen.”
Like others in Japan’s domestic semiconductor industry, electronics giant NEC, one of the world’s largest semiconductor makers, is scrapping floor plans, rejiggering production schedules and reshaping corporate strategy as the industry boom of the last several years comes to a close.
Although recent headlines have focused on the bilateral spat over renewal of the U.S.-Japan semiconductor agreement that expires in July, Japanese manufacturers have much bigger worries. They are getting squeezed between U.S. companies, which rebounded from a slump in the early 1980s to take the lead in high-end chip technology, and extremely aggressive competitors in South Korea and Taiwan.
South Korea’s Samsung Electronics Co., which enjoyed an after-tax profit of $3.2 billion last year, is now the leading producer of dynamic random access memory chips (DRAMs), territory the Japanese once dominated. The DRAM market as a whole is expected to contract slightly this year after a long stretch of frenzied growth.
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But Japanese semiconductor makers are determined to battle it out on both fronts, using their technological and manufacturing strengths to attack the high end of the memory market--for emerging 64-megabyte DRAMs and next-generation 256-megabyte DRAMs--while simultaneously improving their position in logic chips, the custom-made devices that control the operations of electronic products.
Stepping up the technology ladder, especially in logic products, will be no easy feat. It requires huge capital investments and strong alliances with chip customers, an increasing number of whom are in the United States. It also means competing more directly with Intel Corp., whose powerful microprocessors--the queens of all logic chips--command about 80% of the personal computer market.
So while Micron Technology Inc. and a few other U.S. manufacturers have put expansion plans on hold in light of the weak market--the U.S. Semiconductor Industry Assn. predicts the world chip market will expand just 6.7% this year, compared with 42% in 1995--most major Japanese firms are forging ahead with multibillion-dollar investments in research and production.
Together, Japan’s top 11 semiconductor companies are projecting capital expenditures of close to $12 billion for the year ending March 1997, up from $11 billion the previous year.
Hitachi Ltd. last week announced it was joining a consortium to build a $1-billion chip plant in Singapore. The company is also moving forward on a joint-venture chip facility in China and a $1.1-billion factory in Japan to produce 64-megabyte DRAMs. Matsushita Electronics is boosting its capital budget for semiconductor production to $1.14 billion, up 40% over last year.
NEC plans to invest $1.9 billion in its plants this year, targeting its operations in Hiroshima and Britain. And it is embarking on a $2-billion, 10-year project to create a state-of-the-art research facility at its Sagamihara plant. “New Building C,” as the facility is known, will focus on developing micro-fabrication technology so sophisticated it could draw 1,000 lines on a strand of hair.
After that, depending on the global chip market, NEC executives say, they will expand their chip production operation in Roseville, Calif., which is producing 4- and 16-megabyte chips as well as logic chips.
All of this spending seems risky in light of the fact that 4- and 16-megabyte DRAM prices have plunged more than 50% over the last year. Still, some fear the Japanese are not moving fast enough.
“Japanese makers have lost ground against the U.S. by being slow to develop a strategy which focuses on either memory chips or microprocessors,” Tsuyoshi Kawanishi, a senior advisor at Toshiba Corp., told a Japanese newspaper recently. “At the same time, Japanese manufacturers are trailing Asian manufacturers in terms of production efficiency.”
Clark Fuhs, a senior analyst at Dataquest, a San Jose-based research company, said the Japanese are going through a difficult, although predictable, transition from one generation of technology to the next. “What you are seeing right now is the setting up of the next generation of DRAM producers,” he said.
All six leading Japanese chip makers are scaling back profit expectations for the coming year. NEC, Matsushita and others are also reducing production of 4- and 16-megabyte DRAMS, focusing their resources on the next generation of technology.
Fujitsu said last week that it would delay the opening of a chip plant in Oregon and reconfigure it to make 64-megabyte memory chips rather than 16-megabyte. NEC has also begun shipping sample 256-megabyte DRAMs--capable of storing 1,000 newspaper pages--and has scheduled mass production for 1998.
Chuck Goto, an electronics analyst with Smith Barney International Inc. in Tokyo, predicts the Japanese will have a tough time cutting into Intel’s territory and will end up focusing mostly on the more sophisticated memory chips.
“I think there’s very little chance Japan can penetrate that end,” he said. “So the options left for Japan are to stick with memory and some ASIC [application specific integrated circuit] devices.”
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The changes taking place at NEC, Japan’s leading semiconductor firm, mirror what’s happening elsewhere in Japan. At NEC Kyushu, which employs 3,500 people, NEC just spent $420 million to establish an 8-inch-wafer manufacturing line for 16- and 64-megabyte chips. The move from 6-inch to 8-inch wafers makes it possible to produce twice as many chips at a time--but also makes it harder to keep them defect-free.
Chip making is essentially a photographic process in which a silicon wafer is cleaned, etched, baked and chemically coated to create a high-technology pancake loaded with tiny metallic circuits.
Reducing production costs is critical if NEC wants to stay ahead of its Asian neighbors; within two months, the 8-inch-wafer line will be fully automated, using robots that require no lunch or coffee breaks. And the Kyushu plant has reduced the rejection rate on the 8-inch line to about 10%, from 20% to 25%.
Increasing manufacturing efficiency is just part of the equation, though. “To produce just memory chips is easy,” explained Tamotsu Goto, president of NEC Kyushu. “We want to change the priority of our production line so we can shift depending on demand.”
One key to expanding into new, higher-tech markets is involvement in international “design-in” programs, in which electronics and semiconductor companies work together to design next-generation products. Once a new product has been designed with a certain company’s logic chips, that virtually guarantees a stream of chip orders for the life of that product--a much different dynamic from that of in the commodity memory-chip business, where different vendors’ products are essentially interchangeable.
NEC has sought out alliances with a few foreign firms: AT&T;, Silicon Graphics, National Semiconductor, Sundisc and Samsung. The hope is to find new relationships such as the one with Nintendo: NEC supplies about 30% of the chips that are the heart of Nintendo game systems and will be supplying 64-megabyte chips for the newest game machine, set to debut June 23.
Just last week, San Francisco-based Sun Microsystems said it had selected NEC, Mitsubishi Electronics America Inc., Samsung Electronics and LG Semicon Ltd. to build microprocessors based on Sun’s “PicoJava” microprocessor design. The chips are expected to go on sale next year.
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U.S. officials are worried that without a new semiconductor agreement, the Japanese electronics firms and other major semiconductor users will return to their cozy network of Japanese suppliers, particularly if the semiconductor market remains soft.
But Yuichi Haneta, a senior vice president in NEC’s semiconductor division, said hidden market barriers are not just a Japanese problem. He claims Japanese firms have a tough time selling to the Big Three auto makers in the United States: “As long as we can show our performance, the [U.S. market] is generally open,” he said. “But in the automobile industry, we may have a problem. It is more open to government pressure.”
Haneta said his company’s future depends on the global market, making it impossible to go back to the domestically oriented strategy that existed before 1986 when a few large computer firms dominated the market.
Just three years ago, NEC sold 43% of its chips domestically and 35% overseas. Today, the situation is reversed, with 48% shipped overseas and 35% going to Japanese customers. The remainder goes to company affiliates.
Haneta has never been posted overseas. But he is no stranger to the U.S. semiconductor industry and travels to the United States at least once or twice a month. When asked whether he goes to visit his company’s plant in California, this Japanese executive makes his priorities clear.
“No, I’m visiting my important customers,” he replies.
* U.S. TRADE PACT
Japan is softening its stance. D8
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Chipping Away
Japan’s semiconductor industry is scrambling to revise its operations in response to more competitive world market. A look at the top five semiconductor producers in Japan, ranked by fiscal year production, in billions of dollars:
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Rank Company 94-95 95-96 96-97* 1 NEC $10.3 $11.1 $12.5 2 Toshiba 9.4 9.6 9.8 3 Hitachi 8.2 9.1 8.9 4 Fujitsu 5.3 5.6 5.7 5 Mitsubishi Electric 5.0 5.2 5.2
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* Projected
Source: Denpa News
