Shakeout seen in Japan's IC industry

And much like their U.S. and European rivals, many Japanese chip makers are quietly moving towards a fab lite strategy, as the traditional integrated device manufacturing (IDM) model remains under pressure. In fact, Japan is once again mulling over plans to form a national foundry company, after a similar effort failed in recent times.

The question is whether or not Japan is too late to devise the fab company — or make the painful shift towards a fab lite strategy.

In an example of the vast changes taking place in Japan, Sanyo Electric Co. Ltd. will sell its semiconductor operations as part of a restructuring plan, analysts said. Reports have surfaced that loss-ridden Sanyo has sold its chip unit to Advantage Partners LLC, a private equity firm that specializes in buyouts in Japan. On its Web site, Sanyo declined to comment on the reports.

Other second-tier chip players — such as Epson, Oki, Sharp and Sony — are also possible candidates to jettison their respective chip units in the future, analysts said. Sony Corp., for one, has been rumored to sell some of its chip lines, particularly the fab that makes the Cell microprocessor, to Toshiba Corp. for 100 billion yen ($870 million), according to reports.

The move could signal Sony's eventual exit in semiconductor manufacturing. But for now, Sony — as well as NEC Electronics, Renesas and others — are quietly moving towards a fab-lite strategy.

Shozo Saito, corporate senior vice president for Toshiba (Tokyo) and the president and CEO of Toshiba's Semiconductor Company, declined to comment on the company's reported talks with Sony.

In a recent interview with EE Times, Saito observed that Japan's semiconductor industry could experience another major shakeout. "The small companies could quit the business or sell to somebody else," he said.

Japan's changing and shaky landscape is somewhat reminiscent of the early part of the decade. At the time, several major electronic conglomerates in Japan merged their troubled semiconductor units amid losses in the arena.

The most notable companies that emerged from the shakeout were Elpida Memory Inc. and Renesas Technology Inc. In 1999, NEC Corp. and Hitachi Ltd. merged their DRAM units to form Elpida. And in 2002, Hitachi and Mitsubishi Electric combined their chip units to form Reneses.

Going forward, Japan's IC industry is ripe for some new and radical changes, said Akira Minamikawa, an analyst with iSuppli Corp. in Japan.

The tier-one players in Japan — such Elpida, NEC Electronics, Renesas and Toshiba — are expected to remain intact and could survive the latest storm, Minamikawa said.

Several specialty players — or vendors with huge captive bases — will have a place in the industry, including Fujitsu, Matsushita and Rohm, he said. But the future is less clear for the semiconductor units of Epson, Oki, Sharp and even Sony, he said.

The problems are clear in Japan: the stodgy IC companies are generally bloated in terms of headcount and product portfolios. Many of these products are also best described as sleepy and low-margin lines.

Japan's IC makers "need to shrink their product portfolios and focus," he said. "When you look at the companies, the management and support divisions are too big."

Indeed, one of the problems in Japan is the so-called guaranteed life-time employment policy. The policy is "good for employees," he said, but it leads to inefficiencies, loss-ridden products and lackluster profits.

Many of Japan's electronics conglomerates continue to have vast and breath-taking portfolios. They are involved in cell phones, displays, ICs, TVs and even nuclear power plants.

The question is whether that broad-based and vertically-integrated business model is outdated. To be sure, though, the IDM model is under extreme pressure in Japan. Like in Europe and the U.S., the big IDMs —such as Freescale, NXP, ST and TI — have shifted towards a fab-lite model and embraced the foundries as a means to reduce R&D and production costs.

Japan's chip makers still desire "the IDM model, because of the IP issues," Minamikawa said. In some respects, this makes sense, given that many Japanese companies want to keep design and manufacturing under one roof. They are also heavily dependent on proprietary ASICs, ASSPs and related products, which can't be easily duplicated in the foundries.

And in general, the conservative Japanese companies want to keep their prized production in-house, and, to some degree, they don't exactly trust the silicon foundries due to the IP issues.

But whether they like or not, Japan's IC industry is moving towards a "fab-lite" model. "Japanese companies are going to become fab-lite, especially Renesas and NEC," Minamikawa said. The exception to the rule is Toshiba, which is funding its fab efforts thanks to the NAND boom, it was noted.

The question is what direction Japan will go in the future. The nation's chip makers could continue to hold on to their crumbling IDM models. They could continue to form alliances amongst themselves.

The companies could also move in a more radical direction. They could move towards a fab-lite model and embrace the dreaded foundries. Or else, they could form alliances with foreign companies.

In any event, Japan's IC companies have come to a harsh realization: Unlike the past, "we can't do everything by ourselves," said Junshi Yamaguchi, executive vice president and board member for NEC Electronics (Kawasaki).

To solve the problem, Japan's IC makers have formed a complex array of alliances. IBM, Sony and Toshiba have an alliance to develop the Cell processor. NEC, Sony and Toshiba are separately developing leading-edge process technologies.

Matsushita and Renesas have a similar process-technology alliance at the 45-nm node. "In Japan, collaboration has become very important," said Satoru Ito, chairman and chief executive of Renesas (Tokyo).

Recently, Ito said the company has no intention of getting out of the process technology race. It is "our policy is to have our own process [technology] beyond 45-nm," he said in recent months.

But will Japan's chip makers embrace the foundries to the extent of Freescale, NXP, ST and TI? To some degree, DRAM specialist Elpida has embraced the fab/foundry model. While it boasts its own fabs, the Japanese memory company has foundry-like alliances with SMIC and Powerchip.

Sony relies on TSMC for foundry work, but most of Japan's chip makers have relatively little business with the foundries — for now. But at 32-nm, Japan may have no choice but to work with the foundries.

Renesas, NEC Electronics and Toshiba insist they will continue to adhere to the traditional IDM model, that is, until the 32-nm node in the 2009 time frame. At that time, fabs could run $5 billion or more and process-technology R&D will soar out of control.

Several Japanese chip makers own newer 300-mm fabs. They are also are saddled with a plethora of older fab capacity. But in reality, the prospects look dim to develop new and costly 32-nm processes. "The profits are still too low in Japan," iSuppli's Minamikawa said. "They don't have enough money to invest in leading-edge technology."

"The 32-nm node will be very challenging," NEC Electronics' Yamaguchi agreed. "As for the 32-nm node, we don't know [about our own plans]."

Some executives in Japan have dropped hints about dusting off a plan to form a national foundry company. In 2005, five Japanese semiconductor manufacturers reportedly reached a basic agreement to establish a joint fab company.

But recently, the ill-fated plan failed when vendors could not agree on the terms. Hitachi, Matsushita, NEC Electronics, Renesas, and Toshiba were the five players talking about the alliance.

Some are skeptical about the formation of a new national foundry venture, especially after the dismal failure of the most recent effort. Also worth watching is the fate of the second-tier chip players in Japan.

Take Sony. The company's woes have been well-documented, especially the lackluster sales for the PS3 game machine. The machine was expected to fund the development of the next-generation, 45-nm Cell processor.

It was also expected to fund its new fabs, which now appears to have evaporated. In fact, the company "may be selling its fab to Toshiba," signaling that Sony's days are possibly numbered in semiconductor manufacturing, said iSuppli's Minamikawa.

In contrast, consumer-electronics rival Matsushita Electric Industrial Co. Ltd. will remain in the semiconductor business — albeit as a niche player. "Panasonic has a huge captive demand," he said.

Possibly beating its rivals to the punch, Matsushita last summer claimed that it has begun making chips, based on its new 45-nm process technology. Its fab is located in Uozu, located in the Toyama Prefecture.

Two other vendors, Fujitsu Ltd. and Rohm Co. Ltd., also have their places in the IC industry. Given its strength in discrete ICs, "Rohm will survive," he said.

Fujitsu has carved out a decent niche in ASICs, communications chips, among other lines. The company also has a foundry business, which has experienced mixed results. "From a utilization point of view, it's ok," he said, "but the profits are not so good."

"We put too much emphasis on [semiconductor] production volume expansion over the past three years," said Fujitsu President Hiroaki Kurokawa in recent times. "We've switched to a strategy in which we'll hold off on capacity expansion until as long as possible until demand requires."

Fujitsu started operation of a 300-mm wafer line on a 65-nanometer process in April but is holding capacity at 1,000 wafers a month until the second half, when it will double capacity to 2,000 wafers.

The fate of Oki Electric Industry Co. Ltd.'s chip unit is less clear. Oki appears to be divesting some units. ChipX Inc. recently acquired Oki Semiconductor Co.'s U.S. ASIC business. And Wipro Technologies has signed an agreement with Japan's Oki to acquire Oki Techno Center Singapore (OTCS), a wholly-owned subsidiary focused on wireless design and intellectual property.

In any case, "consolidation" could become the new theme in Japan's IC industry, Minamikawa said. If not consolidation, IC vendors "will make changes," he added.