Governments line up to bail out DRAM makers

Taiwan, Germany and South Korea all appear poised to offer some assistance to their DRAM chip makers. The need could not be greater. Long before the global financial crisis hit, DRAM makers suffered steep sales declines due to a glut of their chips.

DRAM prices are now at rock bottom and companies are cutting back production instead of making more chips at such steep losses. The next few weeks will be the best time in years to buy new DRAM.

But for DRAM companies and governments, problems have worsened. A few of these heavily indebted chip makers are running out of cash, and whereas a company failure would help rivals by wiping out some excess production and boosting prices, it could also have broader economic repercussions for the banks and investors that supported them.

"This industry is going through a critical stage," said Ben Tseng, a vice president at Taiwanese DRAM maker ProMOS Technologies.

"DRAM is a very important part of the PC industry supply chain," he added. Every PC requires several of the chips to store programs and data as they're being used. More DRAM is made every year than any other kind of chip in the world, so much so that the chips are traded on global spot markets just like commodities such as oil and gold.

The chip makers' problems are indicative of global woes. Easy lending terms and a bright view of the future prompted them to build too many new DRAM factories. Much of the new output was aimed at Microsoft's Windows Vista OS. The OS requires more memory per PC than older OSs, and DRAM companies hoped Vista would be a blockbuster, sending people scurrying to buy new laptops and PCs or to upgrade memory in existing machines.

But those hopes faded as Vista sales failed to meet expectations. A new reality set in. Without strong PC sales to soak up all the excess DRAM pouring out of new factories, chip prices plummeted and companies started losing money.

The financial crisis has added to DRAM misery by making loans harder to come by and prompting some creditors to ask for early debt repayment. Now the situation appears to be further worsening because economic woes in many countries are causing consumers to rein in spending, particularly on PCs, where most DRAM chips end up.

"The first quarter is likely to be the worst first quarter for the PC in its history," said Jenny Lai, analyst at CLSA Asia Pacific Markets in Taipei. She estimates that unit PC shipments will likely decline 20 percent to 25 percent in the first quarter.

Such a decline would spell disaster for some DRAM makers.

Taiwanese DRAM companies have been posting losses since around the middle of last year. Total losses this year for the five biggest memory chip makers hit NT$94.8 billion (US$2.85 billion) as of the end of the third quarter.

Germany's Qimonda AG made a net loss of ?1.48 billion (US$1.95 billion) in the nine months to June 30, and has delayed latest quarterly earnings report pending a hoped-for deal with the German state government of Saxony. The company will run out of cash in the first quarter of next year unless it finds new investors or a strategic partner, or the DRAM industry takes a turn for the better, it said.

There are no signs of a DRAM price upturn on the horizon.

DRAM makers globally have already shut down older factories, reduced production, and asked employees to take unpaid leave, early retirement or salary cuts to help stem losses.

The spot price of the most popular DRAM, 1G-bit DDR2 (double date rate, second generation) chips that run at 667MHz, had fallen to US$0.59 per chip on Friday, according to online clearinghouse DRAMeXchange Technology. The price is well below the estimated $1.30 to $1.50 it costs to make each chip.

"December is guaranteed to be even weaker as seasonal demand all but stops from the second week, and January 2009 will not be much of an improvement," said Gartner in its Semiconductor DQ Monday report this week.

In Taiwan, ProMOS faces the most severe cash crunch and on Wednesday said it had applied to the government for relief. The company is not alone. The government estimates that Taiwanese DRAM makers have borrowed NT$400 billion to NT$420 billion (US$12.18 billion to US$12.62 billion) from local banks to fund new factories.

The huge amount of loans has made DRAM an even bigger dilemma for Taipei. Allowing DRAM makers to fail could have serious consequences for banks on the island as well.

Taipei last month launched a task force headed by top government officials, including the vice president and premier, to figure out how best to deal with the problem. Direct cash injections have been ruled out in favor of low-interest loans and other forms of support.

"I would say there is more or less a near consensus," said ProMOS's Tseng, but he quickly added that his company is not asking for free money.

"We are asking for access to loans," he said. "This is not a handout. The government will get paid back."

Eric Tang, a vice president at Taiwan's largest DRAM maker, Powerchip Semiconductor, said a plan to defer payments on loan principal would be enough for his company, and added that "we welcome any financial assistance the government can provide."

South Korean memory chip maker Hynix Semiconductor faces a situation less dire than its Taiwanese and German counterparts, but needs cash nevertheless.

The company asked creditors for and received a pledge for additional loans of up to 800 billion Korean won (US$590.2 million). Failure to gain this injection may bring in direct government aid, South Korean Minister of Knowledge Economy Lee Youn-ho told reporters in Seoul.

The situation for Hynix is politically sensitive.

The company received a multi-billion dollar bailout in the form of loans from South Korean government-backed banks in 2001-2002 that led to anti-competition tariffs from the U.S., E.U. and Japan. The tariffs had little real impact on Hynix and have mostly been lifted, but many companies at the time grumbled that, had Hynix failed, the DRAM industry overall would have returned to health because, minus Hynix's output, DRAM prices might have rebounded.

Trade sanctions are less likely this time around because governments around the world are talking about bailouts for a variety of industries, such as the U.S. with its auto makers. But Hynix is proactively stating that the loans are coming from creditors, not the government. Creditors, though, include banks from the previous bailout.

The future of the DRAM industry, beyond bailouts, appears to be a sticking point, at least in Taiwan.

DRAM makers have already lost billions of dollars, yet with worsening global economic growth and slowing PC sales, it's not clear when the DRAM market will revive. Officials in Taipei say they're trying to determine how much money its companies will need and how long the funds will sustain them, assuming a bad economy. The government hopes to avoid putting money into a company that may end up failing anyway.

Analysts say that the failure of one or two DRAM makers could lift chip prices, but that prices may not make a sustainable recovery until PC demand revives. And a revival in PC demand in the current environment is seen as plain wishful thinking.