TAIPEI, Taiwan Hynix Semiconductor Inc. and Infineon Technologies AG are exploring ways to cooperate with each other, adding an unexpected twist to the consolidation machinations percolating throughout the DRAM industry.
During a trip to Japan this week, Infineon's chief executive officer, Ulrich Schumacher, told a local newspaper that he was looking into ways for Infineon and Hynix to "join hands and put to use our technology and management resources."
A Hynix spokeswoman would not comment on the report and Hynix creditors said they were not aware of any talks. However, a spokeswoman at Infineon confirmed Schumacher's words but played them down. "There is nothing new to that statement in the sense that we have already confirmed that we are in talks not necessarily negotiations, but talks with Hynix and Taiwanese DRAM manufacturers," she said. "There is no detailed plan as of yet."
The South Korean chip maker's effort to function under a suffocating $6 billion in debt sent it into negotiations with Micron Technology Inc. in early December, but those negotiations came to a standstill earlier this week because of a disagreement over price. Micron is reportedly offering around $2.5 billion for Hynix's DRAM operations, while Hynix's creditors want close to $5 billion.
Infineon has been putting out feelers for DRAM alliances ever since its failed bid to take over Toshiba Corp.'s DRAM operations. The deal crumbled when Micron swooped in and offered Toshiba a complete exit from the commodity DRAM industry, a sweeter pitch than the joint-venture arrangement suggested by Infineon.
The German chip maker has approached a handful of small memory makers in Taiwan about alliances, including Winbond Electronics and Nanya Technologies, but nothing concrete is on the table. Infineon already runs a joint venture in Taiwan with Mosel Vitelic: a 12-inch wafer fab called Promos Technologies that is in the process of ramping up to 5,000 wafers per month and anticipates producing at least 9,000 per month by year's end.
Now that the talks between Hynix and Micron are in limbo, the Korean company is likely to explore the potential of other relationships. "If the deal with Micron fails, then they need another partner," said Gee Soo Kim, a Seoul-based memory analyst with Nomura Securities. "Infineon would be a possible candidate. However, the problem is that Infineon has no cash, so I expect that if they do something it will be a strategic alliance and not a merger or acquisition."
Such an alliance would do little to improve oversupply in the market because capacity would not likely ratchet down. Only a Micron-Hynix deal could achieve this, Kim said. Yet the divisions over price apparently run deep. Micron is not likely to substantially increase its offer for risk of shareholder rejection and the Korean government, which backs Hynix's main creditor banks, has not clearly indicated whether it is willing to suck up a substantial loss.
Complicating matters for both sides is the recent spike in DRAM prices. During the last two months, memory chip prices have climbed closer to the break-even point after the industry's disastrous performance in 2001. Analysts have speculated that Intel Corp.'s release of a double-data-rate (DDR) chip set and its ramp of the Pentium 4 have sent prices artificially higher as OEMs and system integrators boosted orders to assure adequate supplies.
Nevertheless, the hint of better times is creating divisions at Hynix. The creditors who essentially control the company are at odds with Hynix top management over the worth of the company, and they are also bickering among themselves about the strength of their hand in the Micron negotiations.
Despite the latest snag, there is still optimism on the Hynix side that the two will return to the bargaining table. Earlier this week, after being elevated to the post of Korean commerce minister, Hynix's former reform committee chief, Shin Kook-hwan, said talks hadn't fully "collapsed" and that he still expected "some form of cooperation" with Micron.
"The question is, do they want to sell at a fire sale price or not," said Don Floyd, a memory analyst with Lehman Brothers. "Clearly, the company's management is keen to sell at the price we've seen $2.5 [billion] to $3 billion but the creditors maybe feel the price is too low. There is also a lot of posturing going on. Everybody wants to walk away feeling they got a good deal."
Earlier this week, Hynix tried to feed the buzz about a DRAM shortage by saying it would focus on top customers because of a temporary shortfall in supply. The announcement was received by competitors and analysts as more of a marketing gimmick, a way to sustain higher memory pricing now that the deal with Micron may be in jeopardy.
The shortage that Hynix spoke of is most acute in the company's supply of DDR graphics DRAM. But that is expected to tail off once Intel releases its integrated graphics chip set in April, allowing OEMs or end users to forgo add-in cards. Additionally, the tight supply for DDR in PC main memory should abate in the second quarter, according to a preliminary January estimate from International Data Corp.
And even with better times expected, pricing would still need to increase nearly 50 percent for Hynix to cover its fully loaded cost of producing chips. Currently, 128-Mbit SDRAM sells for about $3.40 a chip, close to the $3.50 cited as Hynix's bare-bones manufacturing cost.
But with marketing, testing, R&D investment and interest expenses, the true cost is calculated at more than $5 a chip. Infineon's cost, for example, is $5.50 a chip, a spokeswoman said. About 80 cents of that is pegged to development of a new 300-mm wafer plant.
"Hynix is probably about the same as Infineon, so their cost will very likely be around $4.50 or a little less, plus the interest cost, which used to run around $1 per chip," Floyd said. "That was always kind of a joke when they were selling [DRAM chips] for 80 cents and the interest cost alone per chip was a dollar."
Optimistic estimates of 128-Mbit PC133 SDRAM pricing top out at $7 to $8 per chip by year's end. But even that would be too late. Currently, the company is already behind on the upgrade of its facilities, analysts said, allowing even much-smaller companies in Taiwan to beat it in the 300-mm wafer race. Hynix said on Tuesday (Jan. 29) it is transitioning to .15-micron technology, but analysts think less than 30 percent of the capacity is at that node.
Hynix's 2001 loss is estimated at just over $3 billion.