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strong.” At the time he made the statements based on his estimate that global DRAM capacity would grow between 30% and 40% year-on-year, while demand would increase by more than 50%. 35.
Powerchip was also feeling positive and planed to pay back its huge debt with the target of becoming a debt free company by the end of 2012. At the time Powerchip aggressively targeted to lower its debt-to-asset ratio to 30% in 2011 from 75% in 1Q10 and become a debt-free company by the end of 2012. 36.
6. The Geometry Migration Race.
During the recovery phase of the up-cycle, as in previous ones, producers were mostly concerned with applying the latest process technologies in order to cut costs and expand profit margins rapidly. More importantly, laggards‟ primary concern was the expanding technology gap with the industry leader Samsung. Generally speaking, chipmakers can double the output of a 12-inch factory by migrating. to 50-nanometer technology from 75-nanometer, saving 50 percent on costs.36.
Exhibit 12. DRAM Technology Migration
Source: (SinoPac Securities. 2010)
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By 4Q09 Samsung and Hynix were leading in technology process, using 46nm and 44nm respectively, while the next closest competitors were Micron, Nanya, and Inotera which relied on the 58nm process at the time. (figure DRAM: Technology Gaps) The more advanced technology led the Korean companies to make
semiconductors at a lower cost and at greater efficiency than competitors. By the second quarter of 2010 Samsung's aggressive push into 40nm semiconductor lithography for DRAM manufacturing boosted the volume of its bit production
dramatically allowing the company to out-produce competitors and expand its lead in the global DRAM technology market. With revenues of US$3.8 billion in the second quarter of 2010, Samsung's DRAM revenues expanded by 24.3% from US$3.1 bn in 1Q, the highest growth rate among the top-five suppliers. The rise gave Samsung a 34.3% share of global DRAM revenues in the second quarter, up from 32.6% in the first. 34.
Exhibit 13. DRAM: Technology Gaps
Source: (Morgan Stanley. 2009)
Exhibit 14. Accumulated CAPEX vs. Op. Profit (2004-2009)
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Source: (SinoPac Securities. 2010)
6.1 Elpida, Rexchip and Powerchip Technology migration
In early 2010, Senior management from Rexchip (Stephen Chen, CEO), Elpida (Hideki Gomi, CTO) and Powerchip (Eric Tan, VP) announced joint construction of an R&D Center in Taiwan to focus on 40nm and below technology development starting in 1Q10. Under the announced plan For the R&D center, 45% of the
engineers were to be from Powerchip, 30% from Rexchip and 15% from Elpida. The center targeted 60-80 workers in 2010 on US$30-50 mn R&D expense and 100-120 workers on US$50-80 mn R&D expense by 2011, booked under RexChip. 37.
6.2 Micron and Inotera Technology Migration
Micron and manufacturing partner Inotera experienced operational difficulties in their technology migration process efforts during the second quarter of 2010 as Inotera faced the daunting task over the previous quarters of not only transitioning to the 50nm process node but also of migrating from Qimonda's trench technology to Micron's stack technology. Due to those difficulties Micron, posted the weakest growth among the top-five DRAM suppliers in the second quarter of 2010, with
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revenues rising by 4.1% as it struggled with manufacturing challenges at its Inotera facility. 34.
6.3 Nanya Tech and Technology Migration
Nanya Tech started to pilot-run the 40nm process in June 2010 after a test run at Micron delivered good results. Nanya Tech at the time also planned to diversify into mobile DRAM and other non-PC products. 38. Similarly to Inotera, Nanya was likely to face execution risk over the next several quarters on adopting new stack
technologies from Micron. The company was also facing Negative free cash flow with poor margins and uncertainty on outsourced capacity from Inotera, which was to be co-managed by both Nanya and Micron using Micron's new technologies. 21.
6.4 Powerchip and Technology Migration
Powerchip in an attempt to acquire funding for technology migration applied to issue up to US$179mn in global depository receipts, however as a result of the large
accumulated losses, the Financial Supervisory Commission of Taiwan in July 2010 turned down the application. Despite the setback, in the third quarter of 2010,
Powerchip decided to raise its capital expenditure for 2011 by about 40% to upgrade its production technology. The board of directors approved the proposal to increase the company‟s capital expenditure to NT$17 billion (US$533 million) from the
previously planned NT$12 billion via an increase in capital. 39. The company planed to increase capital by 650~800mn shares with the main intent of using the funds for technology migration to 63nm and 45nm. 36. Bank of America analysts, however, were worried that Powerchip was not doing enough. In a note to investors in October 2010 they noted that Powerchip hadn‟t installed any immersion tools which are must-have machines for 50nm and beyond. Thus, they feared that Powerchip‟s cost
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competitiveness might deteriorate sharply after 2011. 40.
6.5 ProMos and Technology Migration
ProMos, in order to support its migration to more advanced process technology sold an old 12-inch fab for NT$8.5 billion (US$271 million) to Macronix International in April of 2010. ProMos chairman stated that the deal would “aid ProMOS in ramping up production using Elpida Memory‟s technology in time,” The proceeds for the sale were used to purchase new equipment to migrate from 65-nanometer process
technology to 63-nanometer technology at an advanced 12-inch plant in Taichung.
The new Elpida technology was expected to enable ProMOS to make new DDR3 chips cost-efficiently beginning in the third quarter of 2010 and to rapidly ramp up mobile DRAM in the middle of the following year. Macronix, in the meantime,
which mainly produces flash chips said the transaction would help it double output in time to help ease supply shortages on strong demand for consumer electronics chips used in products such as Nintendo‟s Wii video game consoles. 35.