Japan's economy is killing Japanese profits

Electronic News, Feb 16, 1998 by Jim DeTar

San Jose, Calif.--It's a fallacy that the recent currency crisis in Asia is the sole cause of a slowdown in earnings for Japanese electronics companies, including Toshiba, Hitachi, Fujitsu, Nikon and Mitsubishi which all reported some difficulties in the market.

Although the currency crunch hurts, the real culprit is the continuing malaise of the Japanese economy and its effect on the semiconductor side, according to industry observers such as the Semiconductor Industry Association (SIA).

The most recent World Semiconductor Sales report from the SIA noted that, for all of 1997, sales were up in all major markets except Japan, which declined by 6.1 percent (see chart at right).

"In the last couple of years there has been a slowing of the economy in Japan. It's not directly related to chips," said SIA director of communications Jeff Weir. 'Japan's economy was sluggish long before the currency crisis. The sluggishness in Japan is a two-year phenomenon and the currency crisis is a four months phenomenon."

Mr. Weir said that the sluggishness in Japan's economy has reduced consumer sales in general, and in 4Q97, PC sales in Japan followed suit. "PC buying habits started slowing down. There has been a decline in PC sales and also peripherals in PCs.

"Japan has been a major sale market for all kinds of end products. The consumer segment of electronics is big. The microprocessor boom has been increasing largely in Japan as it did in the U.S. in the early '90s."

Mr. Weir pointed out, "Many of the microprocessors bought from American companies end up going in Japanese PCs going elsewhere. The Global Sales Report doesn't track the items that are trans-shipped."

Doug Andrey, SIA director of information systems and finance, noted that the Japanese haven't helped themselves by raising taxes in the middle of a recession.

"Domestic consumption has been hurt recently. For example, Japan raised their consumption tax on April Fool's day. The problems are across the board," affecting all chip sales into that market, Mr. Andrey said.

"The largest category of chips sold in the Japanese market is the total MOS logic category. We break that down into smaller categories. The largest single category is DRAMs at $3.9 billion (for all of 1997).

"The next largest category is microcontrollers at $3.7 billion. The ASIC segment (gate arrays, standard cell and FPGAs) is $3.5 billion, and the category of other special purpose logic chips was $2.9 billion. That category includes custom chips such as watch chips and telecommunications chips. It's a potpourri of various chips.

When Hitachi announced terminating its joint venture agreement with Texas Instruments (see story on page one). Hitachi executive managing director Yoshiki Yagi commented, "Sharp declines in semiconductors and consumer electronics depressed our business in the second half and prompted us to make a big downward revision for 97/98."

Hitachi said it expected to post a special loss of 30 billion to 35 billion yen in the year stemming from the liquidation of its U.S. joint venture with TI, Twinstar Semiconductor Inc., Mr. Yagi said.

Toshiba earned an "A-1" short-term rating for the U.S. commercial paper program of Toshiba America Capital Corp., which is guaranteed by the parent, Toshiba Corp.

The positive rating reflects the diversity of Toshiba's range of businesses, Standard & Poor's said. It noted, however, that the company faces weakening profitability. "However, weakening profitability will make it harder for Toshiba to contain capital expenditures within the limits of internal cash flows," Standard & Poor's said. Earlier Toshiba had predicted its earnings for the fiscal year ending on March 31 would be 92 percent below last year.

Similarly, Standard & Poor's lowered the short-term ratings of Mitsubishi Electric Corp. and its related entities, Mitsubishi Electric Finance America Inc. and Mitsubishi Electric Finance (U.K.) PLC, to 'A-2' from 'A-1'. The rating downgrade, according to Standard & Poor's "reflects significant deterioration in Mitsubishi Electric's earnings brought about by mounting strains on the competitiveness of the company's semiconductor and consumer electronics operations. These factors are expected to elevate the company's debt leverage to a moderately aggressive level." Mitusbishi Electric has said it expects to report a substantial loss in this fiscal year.

Much of that can be attributed to its semiconductor operations that have suffered sizable losses, reflecting both a drastic downturn in global markets as well as the company's weakened position in these markets. Meanwhile, consumer electronics businesses have suffered setbacks in overseas markets for audio and video equipment, especially in the U.S.

Mitsubishi Electric currently expects to record a net loss of approximately Y10 billion for the current fiscal year (ending March 31, 1998). In light of anticipated charges related to restructuring, however, this figure is likely to be much larger, as much as 70 billion yen. The net debt to capital ratio, which stood at 56 percent as of Sept. 31, 1997, is also expected to rise.