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Taiwan Memory Company (TMC), Part III

Comments(0)"EDIT: I have corrected Etron's 2007 P& L entry to show a net profit of 39M instead of 13M. Thanks and apologies to my Etron readers who noticed this discrepancy."

“Let’s wait a while more; the problem will take care of itself!”
In the past two years, Taiwanese memory companies that are being considered as candidates for government-driven consolidation have posted losses of about $5.3B on sales of $15B...with more losses coming day by day, as we roll through the toughest DRAM market ever in 2009.

The fullest exposition of the government plan, which has been percolating for about four months already, was disclosed on Friday, 6 March 2009. It did not instill confidence that the ‘shotgun-marriage’ was either imminent (it may take six more months), or was even an eventuality, or that it would be successful in any way except in keeping the Taiwanese firms alive to play another day... provided they are alive when the actual consolidation contract is ready to be signed.

The details about technology transfer are still not being made public, or maybe still undecided; how much government cash will be involved is also not clear, even though the $6B number has been bandied about for months now. (Latest word is that, once the huge bill for “Taiwan DRAM maker salvation” hit the lawmakers, they downsized the operation, hoping to keep government investment under $1B.) Elpida’s and Micron’s respective roles are still unclear and yet to be determined. As well as how the existing shareholders will be compensated for their diluted ownership share is unclear. Rexchip either is or is not included in the list of consolidation candidates. The Founding Fathers gave themselves an extraordinarily long ‘tie-it-all together’ window of six months, in addition to the approximate four months, already invested in discussion.

But if the market stays as bad as it is, ‘natural forces’ will perform their own brutal triage of DRAM makers, and not just the Taiwanese. Who has enough money to ship a $1 bill with each 1Gb DRAM they sell for 85 cents...for the next six months and 4B units of 1Gb DRAM? In fact, memory makers are losing money about 3-4 times that fast at the present time... about $2-3B per month, and perhaps 75% of those losses are among DRAM makers. Indeed, maybe the ‘six months’ clause is a clever exit strategy for the Taiwanese government, as the crisis resolves itself with bankruptcies, free-market consolidations and the ‘natural’ closing of fab doors. Many Hsin Chu citizens, formerly employed in the local high-tech industries, are now outside looking in, waiting for the rebound. As they got deeper into the discussion of costs and prospective consequences, they certainly realized the difficulty in doing what they hoped to achieve... making the industry sustainably whole without hurting anyone’s feelings.

Taiwan Memory Company Financials, all Q08
(All Values in Millions of Dollars)

    Sales         Sales Sales
Company   4Q08 3Q08 2Q08 1Q08   2008 2007
Etron   38 63.4 62.3 76   239.7 436
Inotera   252 342 313 280   1187 711
Macronix   170 240 168 156   734 744
Nanya   187 365 308 291   1151 1613
Powerchip   171 475 563 473   1682 2360
ProMOS   127 246 307 247   927 1458
Winbond   115 161 207 209   692 980
Sum   1060 1892 1928 1732   6613 8302


    Profits         Profits Profits
Company   4Q08 3Q08 2Q08 1Q08   2008 2007
Etron   -5.5 -3.4 -6.0 -0.9   -15.8 39*
Inotera   -200 -129 -105 -133   -567 -101
Macronix   25 67.3 27.4 24.5   144 143
Nanya   -316 -278 -235 -280   -1109 -209
Powerchip   -750 -476 -245 -310   -1781 -391
ProMOS   -250 -256 -181 -256   -943 -113
Winbond   -105 -28 -41.2 -56   -230.2 -141
Sum   -1602 -1103 -786 -1011   -4502 -773

* Corrected number from Etron Corporate Office.
Bold Faces in Profit Table are Denali Estimates
NT$/US$ used in conversions were: 1Q, 31.4; 2Q, 31.0; 3Q, 31.5; 4Q, 32.8
Taiwanese PSC, ProMOS and Etron have reported sales but not their profits for 4Q08
Although Etron is a fabless memory maker, it's product line crosses all those who are in line for Taiwanese Government "assistance", and so will also be impacted in the marketplace.

I am reminded of another DRAM “crisis,” which grew out of the late 1980s DRAM shortages, and the Japanese emergence as a broad competitor to US technical supremacy, esp. in DRAMs. 1985’s DRAM market drove all U.S. companies, except Micron, to the exits, and every day had U.S. claims of "Unfair Trading Practices" lodged at the Japanese. In 1987, a DRAM shortage developed that was (or was not) deliberately engineered by the Japanese to put the final nail in U.S. DRAM maker’s coffin. High prices called into play the need for another U.S. DRAM maker, and an initiative led by IBM’s Sanford Kane, sought $1B in funding (things were cheaper then) to build a new DRAM company around IBM’s ‘donated’ DRAM technology. It was christened “US Memories.” But before they could put it all together, again, natural market forces saved the day: brought DRAM prices down from the stratosphere, made for abundance again, and “US Memories” quickly disappeared into the back pages of the industry’s history books before it even invested its first nickel. I was at the meeting when they finally pulled the plug on the “US Memories” idea; everyone sighed, turned and walked out the door. It was over.

So, too, we may see this for Taiwan Memory Company. Indeed, my bet is that Micron-Nanya-Inotera, plus some additional back-up help from Formosa Plastics (Nanya’s successful parent) will emerge as a very competent DRAM entity, with more technical participation by Nanya, and based in Taiwan. Also, it is likely that Elpida will have to find financial sustenance elsewhere, perhaps go back to Japan and knock on a few more doors.

Hynix, which lost $2.5B in DRAMs and NAND in 3Q and 4Q08 combined, seems to be in the care of its bankers and owners (debt holders), who are reluctant to write it off or refocus its strategy — “We have come too far than to give up now.” They should talk to SanDisk shareholders, who, when the stock was trading at $15 last year, declined an offer of $25 from Samsung... and now it trades at $9.22; or Spansion, which was delisted from NYSE last week, and was last trading at 2 cents a share, despite $2.3B in sales in 2008, strong market positions and a good IP portfolio. Waiting for a sunnier day is often is often a mistake.

Samsung (whose reported memory financials I have some suspicions about), certainly has sister divisions in high-end phones and LCD displays, which can generate cash to buy time for DRAMs and NAND Flash to recover...but only up to a point. Samsung is good, they are not God.

It is not a safe bet today, to assume that ‘we’re in a cyclical industry, and it will come back, eventually.' Cash is king, and will be for a while. And, after two VERY tough years in DRAMs, and maybe one more coming in 2009, every part of the operation is bare bones and reduced to the essentials: no more money for fabs and the next gen 50nm processing, no money for design shrinks, no money for developing new DRAM markets, “hold that DDR3 design”... no new hiring, no bonuses, no raises...

In any case, as Yogi always said, ‘It ain’t over ‘til it’s over’.


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