Businessweek: Chip Makers On The Edge

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of a fair price for the property. This method has been used when an imminent threat to or need for land requires quicker action than would be possible if compensation had to be determined first. The underlying principle applies to the auto crisis. To stabilize a vital sector of the economy, Congress could take the assets of the automakers in peril and place them immediately in the hands of a receiver who would then cut new deals with workers, dealers, and suppliers. Eventually, the receiver (who might be the proposed "car czar") could, on behalf of the government, sell the new entity in the marketplace, as is, or with a continuing government subsidy. DIVIDING THE MONEY

The "takings" legislation would provide for a post -confiscation judicial hearing, where a court would determine the value of the assets the government seized. That amount would be transferred to the corporate shells of the former automakers. Or, if a court ordered, part of the payment could go to others whose rights were compromised by the seizure. The companies could then enter bankruptcy, where secured and other claimants would fight over the cash. The bankruptcy code is well suited to officiate in a contest for limited assets. This contest would be separate from auto production, which would not be disrupted in the imbroglio. A legislative taking wouldn't be a panacea. Renegotiation with needed workers and dealers, among others, is an inevitable cost of continuing to make cars. However, the unions would no longer cling to the hope of preserving their current contracts. Unwanted dealers could not hold up the redeployment of assets. And there would be no uncertainty over whether unsatisfied secured creditors might force liquidation. Quick action might preserve a viable portion of the U. S. auto industry, i BW i Adler, the Charles Seligson Professor at New York University School of Law, teaches and writes about bankruptcy and corporate finance.

CHIPMAKERS ON THE EDGE Awash in inventory, global companies are in deep trouble—and some are seeking bailouts

By Bruce Elnhorn HONGKONG

Overcapacity. Looming bankruptcies. Government bailouts. The U.S. automobile industry? No, this is the global semiconductor industry, producers of the chips that power everything in today's economy from cell phones to smart infrastructure. While so much attention has been focused on American automakers, the convulsions in the chips business may have just as broad implications and possibly more strategic significance for countries around the world. In recent years, Intel, Samsung, and many lesser-known companies have pumped huge amounts of money into new production facilities. They saw rich opportunities in making chips for the growing crop of digital devices, from iPhones and BlackBerrys to electric utility monitoring systems. But now as the worldwide economy slows, demand for those chips has fallen off a cliff. Companies that sank billions into new factories are running them at half capacity or less, and losing a bundle.

BIG SPENDERS Capital expenditures by world's memory-chip producers , „ BILLIONS OF DOLLARS

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Data: Merrill Lynch

BUSINESSWEEK I DECEMBER 29, 2008 I JANUARY 5, 2009

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The situation is "desperate," says Daniel Heyler, head of global semiconductor research for Merrill Lynch in Hong Kong. The semiconductor industry has always been cyclical, and if these were normal times there would be a brutal shakeout with the weakest players shut ting their doors or selling out. But this downturn looks different from those of the past. Chip produc tion is more global than ever before, with many of the largest facilities in Asia. Many governments see semiconductor production as strategically important to their economies. So some governments are providing financial support to local companies. This will mean lower prices for chip customers, but it could cause serious pain for chip companies that compete without government support. "The last thing you want to see is governments rescuing less-competitive companies," says Avi Cohen, head of research at Avian Securities in Boston. "The supply never goes away." Overcapacity is a growing problem. On Dec. 16, the market research firm iSuppli issued an alert to clients that semiconductor inventories are likely to balloon to $10.2 billion at the end of December, up from $3.8 billion at the end of September. The government bailouts began this month. China's biggest chipmaker, Semiconductor Manufacturing International, cut a deal to receive $170 million from a state-owned company. In

NEWS

products. Cheap chips, for example, could also make it easy for anyone to store an entire photo collection on a mobile phone. Semiconductor companies in the U.S. are a bit more insulated than those in Asia. Intel, the world's largest chip company by revenue, has been hit by the economic downturn, but it benefits from its focus on making microprocessors, the brains of PCs. Its only real competition in that business is Advanced Micro Devices, and AMD has struggled to keep up because it can't match Intel's heavy investments in the latest production technology. Texas Instruments and Qualcomm don't compete in the commodity memory business, either. They pro duce chips that let cell phones make wireless calls, among other products. The turmoil in the global chips industry is likely to last a while. Still, consolidation looks inevitable, especially among the memory chip makers. In the meantime, if Taiwan, Germany, and others keep givingfinancialsupport to local companies, chipmakers elsewhere will be faced with a tough decision: They can either compete on an uneven playingfieldor cede the terrain. "There are no choices that do not involve significant pain at this point," says Dale Ford, senior vice-president

Germany, the state of Saxony offered Qimonda $206 million in support, although it's not clear the pact will be finalized. And in Korea, a consortium of state - owned and private banks are expected to provide Hynix Semiconductor with about $600 million in new loans. "One country starts considering a bailout, and then it kind of spreads," says Christian Heidarson, senior research analyst with Gartner in Hong Kong. "Nobody wants to see their industry being lost to another country." CONSOLIDATION INEVITABLE?

Taiwan may have the most at stake. The country has fostered a large and lucrative chip industry, with giants such as Taiwan Semiconductor Manufacturing doing cutting-edge work on par with Intel and IBM. Now, 1 however, several of the country's largI est chipmakers are in serious trouble. [ A handful of companies that make ' memory chips, which manage data on PCs and store information on digital cameras and mobile phones, may go 1 out of business without a government bailout next year. "It's unbearable," says Frank Huang, chairman of Powerchip Semiconductor, Taiwan's largest memory manufacturer. "Right now no [chip] company can make a profit. The government must support this industry." On Dec. 16, Economic Affairs Vice-Minister Shih Yen-Shiang said the government is considering aid I for chip companies.

The stocks of memory chip makers have already been pounded by the twin concerns of the economic downturn and government bailouts. Singapore's Chartered Semiconductor Manufacturing, Germany's Infineon Technologies, and Boise (Idaho)-based Micron Technology have all seen their shares tumble at least 75% this year. Competition is most brutal in memory chips because production is standardized and chips are considered commodities. Companies splurged on new production in recent years, investing a total of $33 billion in 2007. Because 70% of their costs are fixed, there's little reason to cut back production. So even as demand has fallen, the big Asian memory companies continue to flood the market. "That's why you are seeing rock-bottom prices," says Merrill Lynch's Heyler. For customers, plummeting memory prices may lead to more innovative

atiSuppli. IBWI

-With Arik Hesseldahl in New York, Cliff Edwards in San Francisco, and Jack Ewing in Frankfurt —

Business Exchange Read, save, and add content on BW's new Web 2.0 topic network Chips: The New Economics Steep fixed costs are a big problem for chipmakers. So when demand falls, many keep cranking out chips to cover their overhead. In "The New Economics of Semiconductor Manufacturing," Harvard's Clayton Christensen looks at managing the pressures. To read Christensen's article, go to http://bx.businessweek.com/ semiconductors/reference/

DECEMBER 29, 2008 I JANUARY 5, 2009 I BUSINESSWEEK