Hitachi, TI put end to memory JV

Electronic News, Feb 16, 1998

Richardson, Texas--The decision by Hitachi to withdraw from its TwinStar Semiconductor Inc. DRAM joint venture last week is yet another indication of the ailing state of Japan's electronics industry and the continued slide of DRAM prices. It also demonstrates how opportunities are emerging for U.S. and European companies as Japan's economic malaise continues.

The two companies jointly revealed intentions to scrap the two-year old partnership. Once they pay off the debt incurred to-date by TwinStar, TI said it intends to form a wholly-owned subsidiary that will purchase TwinStar's assets and hire its employees.

TwinStar began limited operations back in 1996. "The facility went into production at the same time prices began falling," said Leslie Cole, a spokesperson for TI. "It was never able to maintain adequate cash reserves. Because of the financial pressures being exerted on TwinStar, both companies felt now was the best time to discontinue operations."

Although Hitachi last week acknowledged a rough financial quarter, several industry analysts said the decision to abandon the JV was less a reflection of financial woes in Asia as it was an acknowledgment of the burden of DRAM overcapacity. "I think it makes a lot of sense, given today's market conditions," said Mario Morales, manager of semiconductor research at IDC. "TI, in the long run, eventually will probably exit the (DRAM) market. Clearly, it is a DSP company and that's really their focus. The DSP market is going to grow and TI is always on the lookout for additional capacity."

"By having total control, it gives TI the chance to build some other parts," said Steve Cullen, senior analyst for market research company In-Stat. "DSP comes to mind." Mr. Cullen said it made more sense for TI to make TwinStar a subsidiary than for Hitachi to do so because the fab is located in Texas.

Not all analysts agree that this move means TI will hasten its exit from the DRAM market, or that the TwinStar fab will stop producing DRAM and start producing DSPs anytime soon. "I don't think TI will change what portion of their business is in DRAM," said George Iwanyc, industry analyst at Dataquest. "Is TI adding capacity or are they adding DRAM capacity? This isn't a big change for the industry, it just changes who is holding the capacity." The TwinStar facility is a very advanced DRAM fab and could be converted to DSP production in one to six months.

Both TI and Hitachi hold 36.4 percent of the equity interest, with the remaining equity interest held by other investors. Plans call for the legal entity known as TwinStar to be dissolved by the end of 1Q98. Operations would then be transferred to the new TI subsidiary, which will likely keep the name of TwinStar. TI and Hitachi will each recognize special charges on quarterly financial statements to compensate for this deal, although the amounts of these charges have not yet been determined, according to Terry Kubo, a spokesperson for Hitachi. Mr. Kubo described the charge Hitachi expects to report only as "a huge amount of money."

"This decision was definitely made because of the unexpected price decline of DRAM and is not directly connected to Hitachi's financial program or the Japanese economy," Mr. Kubo said.

"This difficult decision was driven by a number of factors impacting the DRAM business," said Tadashi Ishibashi, executive managing director of Hitachi. "With the combination of severe price declines and overcapacity in the DRAM market, this action was the best solution for all concerned."

According to Mr. Morales of IDC, the future may hold more cutback announcements. "The market is clearly oversupplied and pricing remains too low," he said. "I think we will begin to see more cutbacks, and more aggressive cutbacks by Japanese and Korean companies."

Hitachi and TI first announced plans for the TwinStar JV in August 1994. The proposed action to dissolve that partnership is contingent upon approval of TwinStar's stockholders and lenders and Hart-Scott-Rodino antitrust review, TI said.