Taiwan's DRAM Bailout

13 January 2009—Suffering from a glut of production capacity, slumping demand, and enormous debt, Taiwan’s DRAM industry is looking to its government for a rescue. Who will get how much money won’t be known until early February, but one thing is clear: The Taiwanese government is making the acquisition of critical technology a main condition for the bailout.

”We’ve discussed future directions with local DRAM makers, stressing that acquiring key technologies from foreign partners is the top priority,” Premier Liu Chao-shiuan said at a press conference on 30 December.

The global DRAM industry got into this predicament because it engaged in a production-capacity arms race that led to oversupply and falling prices just as demand for its products weakened. Taiwan, which has 22 percent of the global DRAM market, was a big participant in that arms race. Total investment in the island’s 11 operating 12-inch DRAM plants over the past decade exceeds NT$850 billion (US $25.754 billion), according to Taiwan’s Ministry of Economic Affairs (MOEA). But now those investments are becoming losses. As of November 2008, the collective debt of Nanya Technology, Inotera Memories, Powerchip Semiconductor, and Winbond stood at NT$431 billion.

In mid-December, the MOEA mapped out strategies to prop up the struggling DRAM industry. The ministry’s short-term plan aims to help DRAM makers extend their loans and adjust terms of payment. Long-term plans encourage consolidation, including both mergers of local DRAM makers and government-backed collaborative R&D.

According to Chao-Yih Chen, director general of the Industrial Development Bureau under the MOEA, local DRAM firms that seek the government’s assistance for their collaboration with foreign enterprises would have to make sure their partners’ intellectual property could be acquired and that an independent innovation capability could be built. ”Why should the government bail local DRAM makers out if they are reluctant to enhance independent innovation capability?” Chen said at a press conference on 6 January.

Some key technologies that Taiwanese DRAM makers would like to acquire from foreign partners include processes for making transistors and components with features smaller than 50 nanometers, for use in the newest variety of DRAM—DDR3 SDRAM (double-data-rate three synchronous dynamic random access memory)—and for use in NAND flash memory fabrication. With such technologies acquired overseas, local makers believe they could develop more-advanced technologies, such as a 35-nm process, within five years.

The government’s response to its first bailout request shows how seriously it is taking technology acquisition. In late December, Powerchip submitted a bailout proposal to the government that involved cooperation with its Japanese technology partner, Elpida Memory. But Powerchip was told to revise and resubmit the proposal because according to the government, the proposal did not provide a full guarantee that the Taiwanese company would acquire key technologies from Elpida after it received the bailout.

Similarly, Nanya, along with its U.S. partner, Micron Technology, is asking the government to shift at least NT$100 billion in bailout funds. Nanya and Inotera, both affiliated with Taiwan’s petrochemical giant Formosa Plastics Group, are seeking a fundamental change in their DRAM technology. A DRAM cell consists of a transistor and a capacitor. The capacitor may be built in a trench dug out of the silicon, or it may be stacked above the silicon in the chip’s wiring layers. Nanya and Inotera are terminating their cooperation with their German partner, Qimonda, upon full development in mid-2009 of the 58-nm trench-process technology. Now the two are desperately seeking financial support in a bid to jointly develop stack-process technologies with Micron that have features smaller than 58 nm. Sources at Inotera say that 60 percent of existing equipment will have to be retrofitted, which would be a challenge without a bailout from the government.

In addition to closer technological ties with foreign firms, the government is encouraging mergers among local DRAM makers. Chen says that a proposal involving the acquisition of loss-ridden ProMOS would be welcome. The Formosa Plastics Group says it would consider acquiring ProMOS, adding to its DRAM holdings Inotera and Nanya.

In an attempt to raise prices and slow the pileup of excess inventory, Taiwanese firms are cutting production drastically. The official goals announced for the first quarter of 2009 have Powerchip cutting production by 25 percent, ProMOS by 30 percent, and Inotera by 20 percent. However, according to inside sources, who declined to be identified, the real targets are double those announced. Those sources say that major DRAM makers have more than three months of inventory.

In another cost-cutting measure, employees of Taiwan’s big DRAM firms have been required to take days off without pay, resulting in salary cuts of 10 to 20 percent. Inotera announced it will lay off 5 percent of employees, or roughly 150 workers, this month. Nanya already dismissed 120 workers in December.