On a state of full alert against the impact of the global financial tsunami, the Taiwanese government is closely watching the island`s DRAM (dynamic random access memory) makers, fearing that any further deterioration in their business situation might trigger a full-blown financial crisis.

The island`s four major DRAM makers incurred losses amounting to a staggering NT$90.8 billion (US$2.8 billion at NT$33:US$1) in the first three quarters of this year: NT$32 billion (US$970 million) for Powerchip Semiconductor, NT$24.8 billion (US$752 million) for Nan Ya Technologies, NT$11.5 billion (US$348 million) for Inotera Memories, and NT$22.5 billion (US$682 million) for ProMos Technologies.

The ocean of red ink has brought into question the ability of the DRAM makers to repay NT$420 billion (US$12.7 billion) in bank loans that will come due beginning next year. Such a default would mean a severe drubbing for the lending banks, and the disruption of Taiwan`s financial market.

In light of this danger, the government has put the DRAM industry at center stage in the business relief program it has worked out to soften the impact of the financial crisis. Opinions are divided as to whether the government should come to the rescue of the industry. There is no doubt about its importance to the local economy, however, since it employs more than 18,000 people and chalked up a production value of more than NT$230 billion (US$7 billion) in 2007, accounting for 16% of the output of he local semiconductor industry.

Vice President Vincent Siew remarks that the government cannot afford to stand on the sidelines and watch such a vital industry collapse. Other observers note that with its huge bank loans, the collapse of the DRAM industry would spark major financial turmoil. Therefore, the Ministry of Economic Affairs (MOEA) is considering helping DRAM makers refinance their bank loans and carry out consolidation.

Other watchers, though, fear that government intervention might hamper the functioning of the market mechanism in consolidating the industry by weeding out weak players. It would be very difficult for the government to mediate mergers among local DRAM makers, for example, as all of them have technological or capital links with foreign partners.

Technology Independence Needed

Vice President Siew notes that the core problem of the local DRAM industry is its lack of independent technology, as a result of which it can only reap thin profits during good times and risks losing its entire capitalization in bad times.

Without their own technology, local DRAM makers are less able to withstand the drastic business fluctuations that characterize the industry. This problem does not beset manufacturers like Korea`s Samsung, for instance, which is still doing a good business during the current market downturn.

The global DRAM market is now mired in a gross imbalance between supply and demand caused by the mushrooming of 12-inch wafer plants and the rapid upgrading of manufacturing processes to the nanotechnology level. These developments have greatly expanded output, while the expansion of demand has been limited by the global economic downturn and the worse-than-expected performance of Microsoft`s Vista software.

As a result, DDR 1 Gb DRAMs are now selling at just US$1 each. This is less than half the cost of making the devices, which is about US$2.5, and a mere fraction of the US$5-6 selling price two years ago, when the manufacturing cost was US$3.

Taiwanese DRAM makers, backed by Japanese technology, moved into the global market when Japan retreated from it in response to intense competition from Korean manufacturers. The Taiwanese suppliers have carved out a prominent position in the industry over the years and now boast a 20% share of the global market, thanks to their strong manufacturing capability.

But this achievement has come at a price. During the period from 2001 to the third quarter this year, the Taiwanese DRAM industry incurred accumulated losses of NT$18 billion (US$545 million); the local flat-panel industry, by contrast, earned profits totaling NT$187 billion (US$5.7 billion) from 2001 through 2007.

Local DRAM makers are facing formidable challenges. To remain competitive in the market they will have to continue upgrading their technology in order to cut manufacturing costs, and to do that they will have to invest tens of billions of NT dollars for each technology generation-and that in the face of today`s horrendous losses. Inevitably, some of them will not survive the drastic shakeout that seems sure to come.

(by Philip Liu)