Semiconductor Industry on Its Way to Reorganization

By Hajime Yamada (GLOCOM)

In the last several months, successive news on reorganization of business operations in the semiconductor industry in Japan was reported.

In March 2002, Hitachi, Ltd. and Mitsubishi Electric Corporation announced that their business operations for system large-scale integrated (LSI) circuits will be combined in April of 2003. Their plan is to inaugurate a joint venture, which will attempt to become the world's strongest system LSI manufacturer.

In June of the same year, Toshiba Corporation and Fujitsu Limited announced that they had agreed on comprehensive cooperation concerning their semiconductor business, with a possibility of business integration. Toshiba is good at image processing technology, while Fujitsu is strong in high speed signal processing. Their plan is to combine their strength to achieve supremacy in the LSI business for information home appliances.

Also in May, NEC Corporation announced the independence of their semiconductor division as a specialized manufacturer. NEC once released the news of establishing a joint company of memory LSI with Hitachi, in June of 1999. However, the joint business is not necessarily successful because of poor market timing. NEC therefore seems to have chosen another way by splitting itself on its own.

Another example is Toshiba's partnership with Sony Corporation in constructing an LSI-specialized factory when Sony had developed its PlayStation 2. These examples would show that cooperation among Japanese corporations is progressing in the semiconductor industry. Under what circumstances do companies come to cooperate with each other?

As I have described in the last report of this series, the Japanese semiconductor industry, after having enjoyed flourishing business in the 1980s, continued to lose its competitiveness in the market in the 1990s. Japanese business rapidly went downhill while Korea and other countries caught up and put the pressure on Japan in the field of semiconductor memory, to which Japanese companies kept sticking because it was their main item in the 1980s.

Meanwhile, American companies had already monopolized the market of high value-added products, including personal computer processors. After having been distressed about the new direction, Japanese corporations finally found the system LSI business as a solution. Recent announcements represent the intention of promoting the business by inaugurating joint ventures or integration.

Japan's success in the field of memory in the 1980s is often attributed to the successful National Project on VLSI research and development, which was jointly promoted by the government and private sectors in the late 1970s. It must have been through this experience of successful government-business cooperation in development of semiconductor memory that Japanese companies came to believe that the semiconductor business meant the memory business. That was the reason for the delayed conversion of business operations. It was a typical example of how a success in the past caused a failure in the next opportunity.

Can business be converted like this successfully? As a matter of fact, the future does not look rosy because some American companies, including computer processor manufacturer Intel Corporation, are also switching their business to that of system LSIs.

Various functions are required to realize a mobile phone system, including the function of transferring voice to digital signals, processing digital information such as e-mail, and transmitting and receiving microwaves. Mounting as many of these functions on a semiconductor chip as possible would lead to a cost reduction as well as to an advantage in energy saving. As this example shows, integrating many functions intricately on a semiconductor chip is where the big current of technology is advancing.

That is why American companies are moving forward in the same direction.

The course that Japanese companies selected is the same as the one American companies chose. Even looking at only two groups in Japan, namely Toshiba-Fujitsu and Hitachi-Mitsubishi, they are headed in the same direction. In other words, Japanese companies are running towards the field where market competition is increasingly intensifying.

However, finding an alternative path must have been difficult. Korean companies who went ahead of Japan in the memory business now lead soundly in the field. Therefore, Japanese companies could not possibly have chosen the memory business course.

The movement of reorganization in the semiconductor business shows that selection and concentration of business operations are progressing among Japanese companies. This situation itself should be appreciated. However, as I explained above, uncertainty toward the future in spite of the present condition is what causes management problems.