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Taiwan's DRAM profit came too late

In December 2006, then Elpida Memory President Yukio Sakamoto, right, and then Powerchip Semiconductor head Huang Jen-chung announce in Taipei their game plan to create the world's No. 1 DRAM player.

TAIPEI -- The good news came too late for Taiwan's chip industry. Nanya Technology, the island's largest DRAM maker, on Jan. 28 announced it had posted a net profit of 8.1 billion New Taiwan dollars ($267 million) for 2013. The last time the company notched up a net profit was in 2006. During those seven years, however, Taiwan's makers of dynamic random access memories, which once had a combined share of nearly 20% in the global market, have largely sunk into irrelevance.

Smartphone shift

Nanya's return to profitability was due mainly to a shift away from DRAMs toward chips for smartphones. In early 2013, Samsung Electronics of South Korea and other leading chipmakers started reducing their DRAM output and pouring resources into development and production of semiconductor devices for smartphones.

     The growing trend has tightened the market for DRAMs, especially those for personal computers, pushing up prices. Taiwanese DRAM makers have found themselves with a windfall.

     At the Jan. 28 press conference, Nanya Senior Vice President Lee Pei-ing said the average DRAM price rose by about 37% during the year. He expressed optimism about his company's business outlook for 2014.

     But Taiwan's DRAM makers have gone through hard times over the past several years. They have slipped from their star status in the island's industrial landscape.

     Taiwan's DRAM production began to grow in the 1990's. Taiwanese makers teamed up with Japanese and U.S. DRAM manufacturers and introduced their production technologies. They expanded their shares in the world market by undercutting larger foreign rivals like Samsung and Elpida Memory.

     Taiwanese makers dominated the lower half of the list of the world's top 10 DRAM players in 2006, accounting for nearly 20% of the global market, according to IHS iSuppli, a U.S. research firm.

     That year, Taiwan's Powerchip Semiconductor (now Powerchip Technology) announced that it would join forces with Japan's Elpida to set up a joint DRAM production venture in central Taiwan at a cost of 450 billion New Taiwan dollars. In announcing the joint venture, then Elpida President Yukio Sakamoto and then Powerchip chief Huang Jen-chung, Sakamoto's close friend, said the two companies would together become the No. 1 DRAM manufacturer in the world.

     But relatively smaller Taiwanese makers were outspent by much bigger rivals reigning supreme in the market, such as Samsung. As a global DRAM glut that emerged in 2007 drove down the unit prices of mainstay products below $1 -- they were described at the time as "cheaper than water" -- Taiwanese makers started bleeding red ink. They also lagged leading makers in chip miniaturization and development of devices for smartphones.

     The crisis of Taiwanese DRAM manufacturing was made even worse by the global recession that started in 2008. Alarmed by the situation, the Taiwanese government in 2009 unveiled a plan to create Taiwan Memory, a company to promote industry consolidation, with the help of Elpida and other partners. The government intended to persuade troubled Taiwanese chipmakers to join in. But the plan fell through due to differences in the interests and intentions of manufacturers.

     In 2012, Promos Technologies, Rexchip Electronics, the joint venture between Elpida and Powerchip, and Powerchip delisted their stocks under the weight of heavy losses. In order to survive, Powerchip had to transform itself into a contract manufacturer. Promos sold its only remaining manufacturing plant and became a DRAM design company.

     Nanya managed to remain listed thanks to massive financial support from its parent, the Formosa Plastics Group. But in January 2013, the company decided to give up developing chip miniaturization technology, the core source of competitiveness for chipmakers, on its own and to introduce manufacturing technology from Micron Technology of the U.S.

     The three remaining Taiwanese DRAM makers controlled only 5.9% of the world market in the July-September quarter of 2013. In contrast, Samsung and SK Hynix, another South Korean maker, had a combined share of 64.7%. Taiwan's DRAM saga has come to a grim ending.

Lack of uniqueness

"Taiwanese DRAM makers failed to develop a unique technology or business model," said Yukihito Sato, director of the Business and Industry Studies Group at the Institute of Developing Economies. In the same chip sector, Taiwan Semiconductor Manufacturing Company (TSMC), which became the world's first dedicated independent semiconductor foundry, is currently staging a brilliant earnings performance.

     Taiwan's IT companies grew mainly by introducing key technologies from abroad and making aggressive investments to acquire a share in the market quickly. Taiwanese makers of DRAMs and liquid-crystal displays are typical success stories powered by this strategy.

     Like Japan's Elpida, however, Taiwanese DRAM makers lost to formidable South Korean rivals. In the LCD marker, Chinese competitors are gaining ground rapidly by outspending Taiwanese players in technology and equipment investment.

     With the decline of its once thriving DRAM segment, Taiwan's IT sector is struggling to regain profitability.

     To revitalize the sector, it is crucial to nurture a new breed of growth companies driven by innovative technology and business models, such as MediaTek, a fabless chipmaker that is growing rapidly by focusing on key devices for low-priced smartphones.

     What is troubling is the apparent lack of willingness in both the public and private sectors in Taiwan to learn lessons from the downfall of the island's DRAM makers. The future of Taiwan's IT sector will be bleak if Nanya's profit recovery serves as a disincentive for reform.

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