Execs chastise Japanese chip makers
By Paul Kallender
EE Times
February 16, 2001Notes: Elpida Memory Inc. was created by merger of DRAM operations of NEC and Hitachi. This article deals with much more than the chip industry.
TOKYO - Elpida Memory Inc. plans to become one of the world's top three DRAM suppliers by mid-decade, and will consider an initial public offering to help achieve that goal, according to Hidemori Inukai, the company's vice president and general manager, speaking at the Industry Strategy Symposium 2001 this week in Narita, Japan. Inukai was one of several ISS speakers who lamented the declining position of Japanese chip makers in the 1990s and called for a radical rethinking to regain lost ground.
In his presentation at the symposium, Inukai pointed to a slide that showed the world's top five DRAM makers, and said the memory industry now favors only giants. While Samsung Electronics' market share percentage may be pushing into the lower 20s - higher than most analysts predict - and Micron Technology is also growing strongly, Inukai said Elpida's 13.6 percent share was looking increasingly puny.
But to grow, Elpida faces a crucial problem, he said: cash. "Our line is only 50 percent the size of Samsung's. We need to raise funds."
Elpida's IPO is not imminent, but Inukai suggested that one could be in the offing two years from now when the company will be ready to assault its provisional market share target of 17 percent in 2004, he said.
Elpida is thinking big because the scale of recent consolidation of DRAM players has created a market of oligopolies that will continue to force out or consume second-tier manufacturers, he said. Industry analysts have stated that memory makers need to maintain a market share of at least 10 percent if they are to attain the productivity and economies of scale needed to survive in the DRAM market. Elpida was created by merging the DRAM divisions of NEC Corp. and Hitachi Ltd., precisely to gain the market mass needed to compete.
Now that 10 percent rule is being rewritten, Inukai suggested.
"In 1998 there were 23 companies producing DRAMs," he said. "Last year there were only 15. There is more consolidation ahead."
Rethink required
On top of the recent withdrawal of other suppliers from this memory sector, a larger specter haunts Elpida's bid to stay in the game: the disastrous 12 years that have seen Japan's global semiconductor market share fall back to its 1988 level of 30 percent. Calling the decade one of "drastic inversion" for the industry, Inukai was not alone in his call for a reexamination of strategies by Japanese companies.
In speech heavily critical of Japan's practices related to employment, management and regulation, Yukio Sakamoto, president of Nippon Foundry Inc., blamed Japan's ebbing tide of semiconductor preeminence on high taxes, slow decision making, mollycoddling in customer-client relationships, the tyranny of the 24 percent profit line and even racism. Japanese tax, including local and corporate levies, amounts to 43 percent, or 8 percent higher than in the United States, 12 percent higher than in Singapore and 18 percent higher than in Taiwan, Sakamoto said. Electricity costs about twice as much in Japan as in those other nations, he said. In addition, "by the time you have your plant built, the market has already gone," he said.
Japanese semiconductor makers have a predilection for wanting the best spec for everything, and every general manager wants to build his own fabrication facility, Sakamoto said. Management overrules engineers and chooses suppliers based on traditional corporate ties, while being hooked on break-even strategies that assume it will take years for components to make a profit. Though management understands the need to promote system-on-chip technologies, it doesn't understand how to make "cash cow products," Sakamoto said. Cozy customer relations and a lack of market pressure has created a Japanese semiconductor industry "too kind" to survive.
Uncomfortable silence
"Japanese companies are kind to their employees and their customers. You should be ready to bleed," Sakamoto told a silent audience.
Unique as Japan's only foundry, NFI's foreign employees also suffer racism, Sakamoto said, telling of one employee, an experienced driver, who has "failed" his Japanese driving test five times while his "beautiful wife" - with little driving experience - received one immediately. Japan is still institutionally racist to foreign workers, he suggested, and should follow
the U.S. model of allowing immigration to stimulate the economy with talented workers. "You need a different blood mix," he said. "Japan will never win in this situation."
Another unusual swipe came from Takeshi Natsuno, executive director of NTT Docomo's gateway business department, and the celebrated father of the popular i-mode cellular service. Natsuno criticized Japan's electronics companies for being unable to use the Internet's potential to form a wired Japan. The i-mode service now has over 19.2 million subscribers, no thanks to managers at NTT or to companies like Panasonic and Sony, which had wanted to burden the handsets with expensive screens and a rich array of features, Natsuno said.
The i-mode system has become a success, Natsuno said, because it was marketed to the lowest common denominator and used simple Internet protocols and existing terminal technologies.
"We deliberately forbade words like 'Internet,' 'connectivity,' 'browser' and 'multimedia,' " he said. "The Ganguro [girls with very dark tans, died blonde hair and heavy makeup] can't understand what in the world these terms mean."
But the most compelling criticism came from Sony Corp. chairman and chief executive officer Nobuyuki Idei, who said the 1985 Plaza Accord - which revalued the yen at 240 to the U.S. dollar - sabotaging Japan's competitiveness. Idei called the 1990s "the decade that Japan lost" with vertically integrated businesses, a threefold rise in the value of the yen, extensive subsidies by the Korean government, and a failure to understand the potential of broadband networking in the late '90s. "ISDN is not broadband," he quipped.
Compound failures
Amid confusion about how to take advantage of the wired world, Japanese industry had so far failed its potential audience by not connecting digital television services to the Internet. This follows Japan's failure to create a motherboard industry in the 1990's - a gap eagerly grasped by suppliers in Taiwan, Idei said. At present, Japan has again lost its way and is not creating a generation of internationally marketable hit products that unite multiple technologies, said Idei, who downloaded pictures from a camera mounted in his watch and flashed them onto a giant screen.
"We need to have ubiquitous computing and a ubiquitous network," he said. "We can't beat the U.S. if we limit ourselves to the PC and the Internet."
Calling for a new generation of wearable computing technologies, Idei admitted that Sony's creativity in finding new products and its foray into the semiconductor business had opened him up for criticism too. "People now say we are getting closer to becoming Toshiba," he said.
But Idei took hope from Japan's work on optical networking technologies and from signs that some companies were willing to break out of their vertically integrated structures. Brushing past Sony's own troubles with Sony Picture Entertainment, he said Sony has developed an integrated management model where different divisions talk to each other. The way forward, he said, was for Japanese semiconductor companies to unite their companies horizontally and push for "soft alliances," such as the one between Sony, Toshiba and Toyota, which he described as "dating without getting married."
As Idei urged Japanese semiconductor companies to find new ways to grow, Elpida president Kenji Tokuyama said he has ruled out his company's taking part in the DRAM consolidation, at least for the time being. "We don't have any alliances on the cards, but the IPO is a probability," he said.
Meanwhile, Elpida will continue to focus on more traditional near-term strategies to achieve a multiplicity of objectives, vice president Inukai said. First the company plans to concentrate on capturing the high-end workstation and server market, then to achieve the lowest cost commodity products while simultaneously developing non-PC DRAMs for the mobile market.
To do this, Elpida plans fast, yearly shrinks that springboard off the company's new 300-mm fab. A $1.6 billion investment, the 57,500-square-meter facility will have an initial production of 20,000 wafers a month, he said. Elpida also wants to move fast to volume production of 0.13-micron products.
According to a chart presented by Inukai, about 40 percent of the company's memories will be made in that process in the fourth quarter of this year. "We were the first company in the world to come out with 0.13 micron and this was a result of our joint venture [merging NEC and Hitachi's DRAM operations]. We are proud of that," he said.