Identifier
Created
Classification
Origin
09AITTAIPEI59
2009-01-14 22:16:00
CONFIDENTIAL
American Institute Taiwan, Taipei
Cable title:
TAIWAN'S MEMORY CHIP SECTOR FACING RESTRUCTURING
how-toP 142216Z JAN 09 FM AIT TAIPEI TO SECSTATE WASHDC PRIORITY 0745 INFO CHINA POSTS COLLECTIVE AMCONSUL CHIANG MAI AMCONSUL HO CHI MINH CITY NATIONAL SECURITY COUNCIL WASHINGTON DC DEPT OF TREASURY WASHDC DEPT OF COMMERCE WASHDC CIA WASHDC DIA WASHINGTON DC USPACOM HONOLULU HI
C O N F I D E N T I A L AIT TAIPEI 000059
STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
ALTBACH,NSC FOR LOI, TREASURY FOR OASIA/CWINSHIP AND
MPISA,COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN
E.O. 12958: DECL: 10/24/2018
TAGS: PREL PGOV ECON ETRD CH TW
SUBJECT: TAIWAN'S MEMORY CHIP SECTOR FACING RESTRUCTURING
REF: 08 TAIPEI 01756
Classified By: AIT Director Stephen M. Young, reasons 1.4 (b) and (d).
C O N F I D E N T I A L AIT TAIPEI 000059
STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
ALTBACH,NSC FOR LOI, TREASURY FOR OASIA/CWINSHIP AND
MPISA,COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN
E.O. 12958: DECL: 10/24/2018
TAGS: PREL PGOV ECON ETRD CH TW
SUBJECT: TAIWAN'S MEMORY CHIP SECTOR FACING RESTRUCTURING
REF: 08 TAIPEI 01756
Classified By: AIT Director Stephen M. Young, reasons 1.4 (b) and (d).
1. (C) Summary. Taiwan's DRAM manufacturers are in trouble.
A combination of over-production, price drops beginning in
2007, and stagnant demand during most of 2008 has produced a
serious liquidity problem. Two of the leading producers have
looked to the Ma administration for relief. The stakes for
Taiwan are significant. The DRAM industry employees 25,000
people, just under 50 percent of all employment in the chip
production sector, and accounts for about 4 percent of
Taiwan's total exports. Without some form of assistance, at
least one of these companies could face bankruptcy next
month, with potential implications for U.S. computer makers.
Taiwan's banks have approximately NTD 70 billion (USD 2.1
billion) in loans to DRAM makers that will come due in 2009.
Although officials publicly avow support for the DRAM
industry, contacts tell us privately that restructuring the
industry overall, to include consolidation and technology
acquisition, is the administration's goal. Saving individual
firms is not. End Summary
--------------
Overcapacity, Low Prices, Lower Demand
--------------
2. (C) Taiwan is the source of approximately 40 percent of
the world's dynamic random access memory (DRAM) chips, the
most common kind of memory for personal computers. The
industry has been a vital component of Taiwan's economic
growth over the last decade. Rising prices for DRAM chips
since 2002 induced Taiwan's producers cumulatively to invest
about NTD 850 billion (USD 25 billion) in new production
capacity, following the global trend. According to Brian
Shieh, President of Taiwan's Powerchip Semiconductor Corp.
(PSC),in 2007 alone worldwide investment by DRAM
manufacturers was approximately USD 25 billion, compared to
total sales of approximately USD 35 billion. Shieh estimates
the average ratio of capital expenditure to sales in 2007 was
an extraordinarily high 70 percent or more. Normally this
ration would be nearer 45 to 50 percent.
3. (SBU) The resulting expansion of output in Taiwan,
combined with increased production in Korea, Japan and the
U.S., led to a global oversupply of DRAM. Prices dropped
significantly in 2006 and 2007. Despite limited price
strengthening in the third quarter of 2008, Taiwan's DRAM
manufacturers suffered serious losses last year. Through the
first three quarters of 2008, PSC had lost approximately NTD
32 billion (USD 1 billion). Nanya Technology lost NTD 24.8
billion (USD 775 million). The third-largest producer on the
island, ProMOS, lost about NTD 22.4 billion (USD 700 million).
4. (C) Taiwan manufacturers responded to the price fall by
reducing production. For example, PSC Vice President Eric
Tang told us recently that his firm has cut production by 20
percent, and will close down its facilities completely for an
additional week for the Lunar New Year holiday period,
effectively cutting production by 50 percent in January.
5. (SBU) Taiwan DRAM producers have also scaled back plans
for investment in new capacity. PSC, which invested USD 2.17
billion in 2007, spent about USD 840 million in 2008.
Similarly, Nanya and ProMOS reduced 2008 investment to less
than half of 2007 levels, according to data compiled by the
U.S.-Taiwan Business Council.
6. (C) Nonetheless, the cash flow crisis most of Taiwan's
DRAM makers face is not likely to disappear in the near term.
PSC's Tang told us the company estimates that the average
price per chip will strengthen to around USD 1.5 by the
second quarter of 2009, which will allow the company to
realize a net cash inflow, although it will still be far from
profitable. For ProMOS, the situation is more dire, since
the company has approximately USD 300 million in convertible
bonds due on February 14. If the company is not able to
secure a significant infusion of capital, it may not be able
to pay off the bonds and could face bankruptcy.
-------------- --------------
Official Commitment to Assist Industry, Not Firms
-------------- --------------
7. (C) President Ma Ying-jeou, Premier Liu Chao-shiuan, the
Chairman of the Council on Economic Planning and Development
(CEPD),Chen Tain-jy, and Economic Minister Yiin Chii-ming
have all stated publicly that the administration will not
allow Taiwan's DRAM industry to fail. Minister of State Chu
Yun-peng recently told us the Ma administration will support
the DRAM sector, with the overall goal of consolidation
through the merger of smaller firms with larger ones to
increase their competitiveness. CEPD's Chen told us (reftel)
the administration wants to encourage strategic international
alliances for Taiwan's DRAM companies, including a major
consolidation, combining the advanced technology of foreign
partners with Taiwan's strength in production capacity.
Separately, though, CEPD Senior Economist Regina Chyn told us
a bailout of the DRAM sector has not yet been finalized,
noting that the Ma administration has been criticized by
politicians, labor unions and the media for helping the high
technology sector instead of traditional industries.
8. (SBU) On December 16, Ministry of Economic Affairs (MOEA)
Vice Minister Shih Yen-shiang, who is overseeing official
assistance to the industry, issued a press statement
outlining the administration's position. Shih reiterated the
importance of the DRAM industry to Taiwan's overall economy,
and pledged official support. However, the key message
conveyed in the statement is that the administration's
principal objective is improving the competitiveness of the
sector in the long term, not rescuing individual firms in the
short term. This point has generally been overlooked by
mainstream commentators and the media.
9. (C) Shih's statement identified the criteria MOEA would
use to evaluate assistance proposals from DRAM makers. These
are: facilitating development in Taiwan of chip production
technology, increasing Taiwan's international
competitiveness, and ensuring the most efficient use of
taxpayer funds.
10. (C) Officials of MOEA's Industrial Development Bureau
(IDB) told us recently that use of public sector capital to
assist any DRAM manufacturers would require Legislative Yuan
(LY) approval. Since the LY session ended on January 13, it
seems that any assistance involving expenditure of government
funds could not happen until the LY reconvenes in early to
mid-February. In the absence of other forms of intervention,
it is unclear whether the administration will allow a ProMOS
bankruptcy.
--------------
Manufacturers Seeking Bailout
--------------
11. (SBU) Both PSC and ProMOS submitted proposals to MOEA for
assistance to deal with their current cash flow shortage.
While MOEA officials declined to reveal any details of the
proposals, they told us recently that media reports that MOEA
had "rejected" the PSC and ProMOS proposals were inaccurate.
According to these officials, MOEA merely "returned" the
proposals to the respective firms with a request for
additional information on how each would actually contribute
to improving the competitiveness of Taiwan's DRAM industry
and securing the development of production technology on the
island.
12. (C) PSC's Tang confirmed that MOEA had not approved his
firm's proposal for assistance. He indicated that MOEA
wanted to see "more details" about how PSC and its Japanese
partner Elpida would jointly develop DRAM manufacturing
technology in Taiwan. (Note: Under current practice,
Taiwan's chip manufacturers lease this technology from their
Japanese, Korean or U.S. partners. End Note.) According to
Tang, MOEA wants industry to take the lead in crafting a
restructuring plan, adding that the ministry is pressuring
both PSC and Nanya to negotiate a merger with ProMOS. Tang
said neither PSC nor Nanya (nor their foreign partners) are
interested in such a deal, since no one wants to incur
ProMOS's heavy debt. He claimed that PSC was no longer
seeking official assistance and instead would sell certain
assets to raise cash in the short term. However, media
reports on December 10 quoted PSC Chairman Frank Huang urging
Taiwan authorities to provide PSC NTD 10 billion (USD 303
million) in loans to help the firm deal with its liquidity
problem.
13. (C) The head of the information technology section of IDB
told us that PSC's proposal did not meet MOEA's criteria of
enhancing Taiwan's competitiveness and facilitating on-island
technology development. Later, on January 12, MOEA issued a
press statement saying the proposal from ProMOS did not meet
the ministry's strategic goals. According to the statement,
MOEA will invite ProMOS, PSC and Rexchip (a joint venture
between PSC and Elpida) to consult jointly with the ministry
on alternatives for restructuring the sector.
--------------
Comment
--------------
14 (SBU) Solving the challenges facing Taiwan's DRAM sector
could have major implications for Taiwan's banks. The
failure of any one of the island's DRAM manufacturers could
also disrupt the supply chains of U.S. manufacturers of
notebook and desktop computers. It could also possibly
affect U.S. firms such as Applied Materials and ASML, which
manufacture chip production equipment. Media coverage of the
ongoing bailout saga seems focused on the possibility of an
infusion of government money into one or more of the
suffering companies. Our conversations with administration
officials, however, suggest that MOEA is reluctant to
intercede directly to save any individual firm, and instead
seeks a long-term restructuring that would better position
Taiwan's DRAM industry to compete globally. End Comment.
SYOUNG
STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
ALTBACH,NSC FOR LOI, TREASURY FOR OASIA/CWINSHIP AND
MPISA,COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN
E.O. 12958: DECL: 10/24/2018
TAGS: PREL PGOV ECON ETRD CH TW
SUBJECT: TAIWAN'S MEMORY CHIP SECTOR FACING RESTRUCTURING
REF: 08 TAIPEI 01756
Classified By: AIT Director Stephen M. Young, reasons 1.4 (b) and (d).
1. (C) Summary. Taiwan's DRAM manufacturers are in trouble.
A combination of over-production, price drops beginning in
2007, and stagnant demand during most of 2008 has produced a
serious liquidity problem. Two of the leading producers have
looked to the Ma administration for relief. The stakes for
Taiwan are significant. The DRAM industry employees 25,000
people, just under 50 percent of all employment in the chip
production sector, and accounts for about 4 percent of
Taiwan's total exports. Without some form of assistance, at
least one of these companies could face bankruptcy next
month, with potential implications for U.S. computer makers.
Taiwan's banks have approximately NTD 70 billion (USD 2.1
billion) in loans to DRAM makers that will come due in 2009.
Although officials publicly avow support for the DRAM
industry, contacts tell us privately that restructuring the
industry overall, to include consolidation and technology
acquisition, is the administration's goal. Saving individual
firms is not. End Summary
--------------
Overcapacity, Low Prices, Lower Demand
--------------
2. (C) Taiwan is the source of approximately 40 percent of
the world's dynamic random access memory (DRAM) chips, the
most common kind of memory for personal computers. The
industry has been a vital component of Taiwan's economic
growth over the last decade. Rising prices for DRAM chips
since 2002 induced Taiwan's producers cumulatively to invest
about NTD 850 billion (USD 25 billion) in new production
capacity, following the global trend. According to Brian
Shieh, President of Taiwan's Powerchip Semiconductor Corp.
(PSC),in 2007 alone worldwide investment by DRAM
manufacturers was approximately USD 25 billion, compared to
total sales of approximately USD 35 billion. Shieh estimates
the average ratio of capital expenditure to sales in 2007 was
an extraordinarily high 70 percent or more. Normally this
ration would be nearer 45 to 50 percent.
3. (SBU) The resulting expansion of output in Taiwan,
combined with increased production in Korea, Japan and the
U.S., led to a global oversupply of DRAM. Prices dropped
significantly in 2006 and 2007. Despite limited price
strengthening in the third quarter of 2008, Taiwan's DRAM
manufacturers suffered serious losses last year. Through the
first three quarters of 2008, PSC had lost approximately NTD
32 billion (USD 1 billion). Nanya Technology lost NTD 24.8
billion (USD 775 million). The third-largest producer on the
island, ProMOS, lost about NTD 22.4 billion (USD 700 million).
4. (C) Taiwan manufacturers responded to the price fall by
reducing production. For example, PSC Vice President Eric
Tang told us recently that his firm has cut production by 20
percent, and will close down its facilities completely for an
additional week for the Lunar New Year holiday period,
effectively cutting production by 50 percent in January.
5. (SBU) Taiwan DRAM producers have also scaled back plans
for investment in new capacity. PSC, which invested USD 2.17
billion in 2007, spent about USD 840 million in 2008.
Similarly, Nanya and ProMOS reduced 2008 investment to less
than half of 2007 levels, according to data compiled by the
U.S.-Taiwan Business Council.
6. (C) Nonetheless, the cash flow crisis most of Taiwan's
DRAM makers face is not likely to disappear in the near term.
PSC's Tang told us the company estimates that the average
price per chip will strengthen to around USD 1.5 by the
second quarter of 2009, which will allow the company to
realize a net cash inflow, although it will still be far from
profitable. For ProMOS, the situation is more dire, since
the company has approximately USD 300 million in convertible
bonds due on February 14. If the company is not able to
secure a significant infusion of capital, it may not be able
to pay off the bonds and could face bankruptcy.
-------------- --------------
Official Commitment to Assist Industry, Not Firms
-------------- --------------
7. (C) President Ma Ying-jeou, Premier Liu Chao-shiuan, the
Chairman of the Council on Economic Planning and Development
(CEPD),Chen Tain-jy, and Economic Minister Yiin Chii-ming
have all stated publicly that the administration will not
allow Taiwan's DRAM industry to fail. Minister of State Chu
Yun-peng recently told us the Ma administration will support
the DRAM sector, with the overall goal of consolidation
through the merger of smaller firms with larger ones to
increase their competitiveness. CEPD's Chen told us (reftel)
the administration wants to encourage strategic international
alliances for Taiwan's DRAM companies, including a major
consolidation, combining the advanced technology of foreign
partners with Taiwan's strength in production capacity.
Separately, though, CEPD Senior Economist Regina Chyn told us
a bailout of the DRAM sector has not yet been finalized,
noting that the Ma administration has been criticized by
politicians, labor unions and the media for helping the high
technology sector instead of traditional industries.
8. (SBU) On December 16, Ministry of Economic Affairs (MOEA)
Vice Minister Shih Yen-shiang, who is overseeing official
assistance to the industry, issued a press statement
outlining the administration's position. Shih reiterated the
importance of the DRAM industry to Taiwan's overall economy,
and pledged official support. However, the key message
conveyed in the statement is that the administration's
principal objective is improving the competitiveness of the
sector in the long term, not rescuing individual firms in the
short term. This point has generally been overlooked by
mainstream commentators and the media.
9. (C) Shih's statement identified the criteria MOEA would
use to evaluate assistance proposals from DRAM makers. These
are: facilitating development in Taiwan of chip production
technology, increasing Taiwan's international
competitiveness, and ensuring the most efficient use of
taxpayer funds.
10. (C) Officials of MOEA's Industrial Development Bureau
(IDB) told us recently that use of public sector capital to
assist any DRAM manufacturers would require Legislative Yuan
(LY) approval. Since the LY session ended on January 13, it
seems that any assistance involving expenditure of government
funds could not happen until the LY reconvenes in early to
mid-February. In the absence of other forms of intervention,
it is unclear whether the administration will allow a ProMOS
bankruptcy.
--------------
Manufacturers Seeking Bailout
--------------
11. (SBU) Both PSC and ProMOS submitted proposals to MOEA for
assistance to deal with their current cash flow shortage.
While MOEA officials declined to reveal any details of the
proposals, they told us recently that media reports that MOEA
had "rejected" the PSC and ProMOS proposals were inaccurate.
According to these officials, MOEA merely "returned" the
proposals to the respective firms with a request for
additional information on how each would actually contribute
to improving the competitiveness of Taiwan's DRAM industry
and securing the development of production technology on the
island.
12. (C) PSC's Tang confirmed that MOEA had not approved his
firm's proposal for assistance. He indicated that MOEA
wanted to see "more details" about how PSC and its Japanese
partner Elpida would jointly develop DRAM manufacturing
technology in Taiwan. (Note: Under current practice,
Taiwan's chip manufacturers lease this technology from their
Japanese, Korean or U.S. partners. End Note.) According to
Tang, MOEA wants industry to take the lead in crafting a
restructuring plan, adding that the ministry is pressuring
both PSC and Nanya to negotiate a merger with ProMOS. Tang
said neither PSC nor Nanya (nor their foreign partners) are
interested in such a deal, since no one wants to incur
ProMOS's heavy debt. He claimed that PSC was no longer
seeking official assistance and instead would sell certain
assets to raise cash in the short term. However, media
reports on December 10 quoted PSC Chairman Frank Huang urging
Taiwan authorities to provide PSC NTD 10 billion (USD 303
million) in loans to help the firm deal with its liquidity
problem.
13. (C) The head of the information technology section of IDB
told us that PSC's proposal did not meet MOEA's criteria of
enhancing Taiwan's competitiveness and facilitating on-island
technology development. Later, on January 12, MOEA issued a
press statement saying the proposal from ProMOS did not meet
the ministry's strategic goals. According to the statement,
MOEA will invite ProMOS, PSC and Rexchip (a joint venture
between PSC and Elpida) to consult jointly with the ministry
on alternatives for restructuring the sector.
--------------
Comment
--------------
14 (SBU) Solving the challenges facing Taiwan's DRAM sector
could have major implications for Taiwan's banks. The
failure of any one of the island's DRAM manufacturers could
also disrupt the supply chains of U.S. manufacturers of
notebook and desktop computers. It could also possibly
affect U.S. firms such as Applied Materials and ASML, which
manufacture chip production equipment. Media coverage of the
ongoing bailout saga seems focused on the possibility of an
infusion of government money into one or more of the
suffering companies. Our conversations with administration
officials, however, suggest that MOEA is reluctant to
intercede directly to save any individual firm, and instead
seeks a long-term restructuring that would better position
Taiwan's DRAM industry to compete globally. End Comment.
SYOUNG