Powerchip To Phase Out Own PC DRAM Sales; To Make Chips For Elpida

Taiwan's Powerchip Technology Corp. (5346.OT) struck a preliminary deal with Japan's Elpida Memory Inc. (6665.TO) on Monday to phase out sales of its own computer memory chips and produce dynamic random access memory chips used in computers exclusively for the Japanese chip maker.

The deal, subject to the signing of a final agreement, highlights the competitive nature of the commoditized DRAM industry where steep price declines over the past year have left many DRAM makers posting losses. As it announced its agreement with Elpida on Monday, Powerchip also said it swung to a fourth-quarter net loss of NT$8.33 billion. (US$284.30 million). The deal with Elpida will allow Powerchip, which has been bogged down by a heavy debt burden of NT$60 billion, to focus on the production of less commoditized chips to sell to other chip makers.

The agreement "will also allow both companies to focus on their core competencies; Elpida's sales and marketing and technology development strengths and Powerchip's manufacturing efficiency and process technology strength," the Japanese company said in a statement.

Elpida, Japan's sole maker of DRAM chips, said the deal will allow it to increase DRAM output without any fresh capital investment.

Elpida said it now buys half of what Powerchip manufactures at its fabs in Hsinchu, Taiwan. Powerchip has a monthly production capacity of 80,000 wafers for commodity DRAM, and licenses from Elpida the right to distribute the other half under its own brand. Powerchip also has the right to buy about 30,000 DRAM wafers produced by Rexchip Electronics Corp., a joint venture between Powerchip and Elpida, the Japanese company said.

"Powerchip aims to gradually become a contract DRAM chip maker," said Powerchip Chairman Frank Huang at a news conference. Huang said the company isn't planning to transfer any shares or plants to Elpida under the agreement.

To improve its profitability, Powerchip plans to increase its production of speciality DRAMs and NAND flash chips that are widely used in smartphone and consumer electronics.

"Our future is to grow with the smartphone and tablet market as the PC market's growth is shrinking," said Huang, "We expect demand for NAND flash to double this year and it (industry) is likely to see a shortage in the second half."

He said the company will cut its production capacity for PC DRAM to 45% oF total production capacity by the end of this year from 67% last year.

Weak chip prices have hurt Powerchip and other Taiwan DRAM makers' earnings. Rival DRAM makers Nanya Technology Corp. and Inotera Memories Inc. in Taiwan both reported earlier this month that they swung to a net losses in the three months ended Dec. 31.

Huang said chip prices are likely to hit bottom in the current quarter but it remains unclear when demand from the PC segment will pick up. Powerchip said it plans to spend NT$13 billion on expanding its production capacity for NAND flash chips and liquid-crystal-display driver chips this year. Its capital spending for last year totalled NT$7 billion.

"The transformation (into a DRAM contract chip maker) can shield Powerchip from DRAM price volatility in the spot market. Its effort to increase the revenue contribution from NAND Flash and LCD Driver IC will also improve its profitability," said Joyce Yang, an analyst at DRAMeXchange.