Recent Trends in Technology-Driven Companies -Part 2-

By Hajime Yamada (GLOCOM)

Recently, the semiconductor industry is suffering. Toshiba Corporation, NEC Corporation and Hitachi, Ltd., all major manufacturers, will likely have total deficits of over 600 billion yen as of March, 2002. In order to survive this depression, various plans including closing down of some plants and reducing personnel have been announced one after another.

For example, Hitachi published the following plans: The company will reduce semiconductor processing lines from 19 to 12 by August 2002, and will fold13 assembling plants into 8 by September of the same year, as well as cutting back on its 3100 employees, including those transferred to other departments, within this fiscal year.

As a matter of fact, the semiconductor industry has experienced such weak markets in the past. Waves of prosperous times and bad days, which are called Silicon cycles, arrive alternately every several years. A large deficit was recorded during 1996 to 1998 period, for example.

The main product of Japan's semiconductor industry is memory, i.e. dynamic random-access memories (DRAMs). In the late 1970s a national project was launched in Japan and established manufacturing technologies of DRAMs. Around 1985 Japanese companies were so strong as to compete with the U.S. in world market share, and sold 64k DRAMs, the main items of such Japanese companies, and 256k DRAMs, which just started trading in the U.S. As a result of Japan's good sales, such companies as Intel Corporation, the originator of DRAM, Advanced Micro Devices, Inc. (AMD) and Motorola were forced to withdraw from the DRAM markets. In the late 1980s Japanese companies had increased their share of the world market as much as 90 percent.

A DRAM is a large-scale integrated circuit (LSI) with simple structures, and it is characteristically possible to reduce costs for production of DRAMs dramatically by mass-production effects. The larger the market share grows, and the more DRAMs are produced, the lower the provided products cost. However, because a DRAM is fairly easily manufactured owing to its simple structures, another characteristic is that only purchasing of new manufacturing equipment would enable massive supply of DRAMs for the market. Therefore, Korea and Taiwan followed Japan's success by heavy investments in the latest manufacturing lines and got ahead of Japan to supply products to the market.

In other words, companies compete in the DRAM market by their "physical strength," such as labor costs and capital funds. Manufacturing the newest DRAM is said to cost 20 billion yen per factory. On the other hand, Intel and Texas Instruments Inc. shifted their business basis to microprocessor unit (MPU) and signal processor businesses, respectively. MPUs and signal processors have complicated circuits, and what matters for these products is designing capabilities. In short, these two companies succeeded in competing by design ability or "brains," after transferring to another market.

Taking pressure by Korea and Taiwan into consideration, opinions that Japanese companies should move to the "brain" market were repeatedly expressed. Especially, during the depression in the late 1990s, many talked about complete withdrawal from the DRAM market. However, the personal computer market then started to grow rapidly and the demands for DRAM sharply increased. Those semiconductor manufacturers that tried to gain an immediate profit could not move away from the DRAM market.

The Japanese semiconductor industry is moving toward filing a suit against Korean makers for dumping. However, as far as the Japanese companies compete in the market of "physical strength" their future does not look prosperous. Even if the offensive from Korea is settled, Chinese will certainly start to go into the same action within a few years.

Some of the Japanese companies became aware of this, and started new strategies.

Oki Electric Industry Co., Ltd. has kept its business in the black with semiconductors. The company employs a "legacy strategy." "Legacy strategy" is to use old technology comparable to legacy, and concentrate on the conventional type of product fields in order to make certain profits. The price of 128M DRAMs declined suddenly and has become the source of the deficit for semiconductor manufacturers. However, what Oki Electric Industry is dealing with are 4 or 16M DRAMs used for printers or audiovisual apparatus. Oki Electric Industry stays in the black because there are few competitors in this field. The company also deals with "medium-technology" products that are a step behind high technology. In this field, the company has a large share of such products as LSIs for telecommunications, which works to lessen noise. What is important for Oki Electric Industry is not the manufacturing technology but the design technology. It is said that within the last two years about a hundred software engineers were transferred to the semiconductor department from other departments such as telecommunications and computers.

Mitsubishi Electric Corporation is also progressing satisfactorily. Pulling force of the transformation from disproportionate emphasis on DRAM was a multi-chip package (MCP) product loaded into cellular phones. An MCP consists of flash memories and static random-access memories (SRAMs) in one package. In 1998 the sale of DRAM from Mitsubishi was 90 billion yen, twice as much as that of MCP, which generated 45 billion yen. In the fiscal year of 2000 however, the situation was reversed when DRAM sold 80 billion yen while MCP sold 142 billion yen. The company plans to maintain the top share in the domestic market by specializing in large capacity products for high-functional portable phones. Other than MCPs, Mitsubishi Electric produces characteristic products such as optical semiconductors, the world's top selling large-size power semiconductors, and large-shared microcomputers used for home electric appliances, and yet drastically limits manufacturing items in each field.

Oki Electric Industry and Mitsubishi Electric have experienced great success with the sales of DRAMs. However, these companies eventually recorded a large deficit in the same market. Then they recovered their business by switching products. It is a contrast to other companies that were slow to get out of difficulties of the DRAM market. There will be no success if the company is managed as an extension of the past. Rather, the examples shown above demonstrate that it is important for a company to establish a new strategy according to the change of circumstances and to promote it.