NEC outlines midterm plan, chip division cuts

NEC Corp., one of the world's largest electronics and semiconductor manufacturers, announced Tuesday its new midterm management plan with a sweeping reorganization of its semiconductor businesses in a bid to stay one step ahead of losses.

Its semiconductor business, under the NEC Electron Devices unit, is the worst performing of its three main divisions. When it announced its latest quarterly financial report on Friday last week, NEC reported a 28 percent drop in net sales at the unit in contrast to increases at its NEC Solutions and NEC Networks units. Worse still, the company said sales and profits at the division would be substantially less than originally planned, so the measures come as no surprise.

Among measures announced by NEC are a complete withdrawal from the DRAM (dynamic random access memory) chip business by 2004. For years the computer memory chip business was a mainstay of the semiconductor operations of many Japanese companies, but the entry in recent years by Taiwanese and Korean manufacturers and the subsequent price competition has cut profit margins considerably.

NEC began its retreat several years ago when it merged its high-end DRAM operations with those of Hitachi Ltd. to form Elpida Memory Inc. But the withdrawal really got underway earlier this year when, faced with continued losses in the business, NEC said it would close all production lines bar those at NEC Hiroshima Ltd., which exclusively supply Elpida. Tuesday, the company said it plans to sell the Hiroshima plant to Elpida and end its activities in the DRAM business, apart from those through Elpida, by 2004.

"When we analyzed and compared the chip market slump of 1985 and the current slump, we found a shocking fact," said Kanji Sugihara, president of NEC Electron Devices, speaking at a Tokyo news conference. "In 1985 the growth of electric devices was positive and just that of chips was negative. But this year, even electric devices showed a 5 percent minus growth. That has never happened in the past," he said, illustrating the nature of the current semiconductor market downturn and the reason behind NEC's exit from the DRAM business.

"But we also hope that the deeper the valley is, the higher the mountain is going to be. In other words, the market after the summer next year will change for the better, although this growth won't come near the number of 2000," he said. Sugihara added he is looking for growth next year of between 15 percent and 16 percent from this year. "That is our hope and prediction," he said.

When the market turnaround that Sugihara referred to comes, the company will be focused on system LSI (large scale integrated circuit) chips. These are devices custom-designed for a particular job, often replacing that carried out by several chips previously, and have the advantage of being smaller and lighter and consuming less power than those components they replace. Cellular telephones, personal digital assistants, portable electronics devices, set top boxes and digital still cameras are just some of the areas where these are used.

Specifically, NEC will focus its system LSI work in high-end chips, where there is less competition, and those sectors than can deliver stable income, such as microcomputers and gate arrays. NEC named seven areas as focal points for the high-end LSI business -- broadband, workstation/server, video game, mobile phone, digital audio-visual, automobile electronics and optical storage products -- all of which are showing strong growth that is expected to continue.

This concentration on the system LSI business also means NEC will spin off by October this year its optical and microwave semiconductor device operations into a new company, NEC Compound Device Ltd., which it plans to take public in the future. In addition the company also said it has been working with Thomson Multimedia SA on establishment of a joint venture in the plasma display panel (PDP) area and is currently looking for other alliance partners to help it reorganize its electronic component and liquid crystal display (LCD) operations.

All of this will impact the company's factories. In Scotland, NEC said it plans to cut monthly production capacity by almost half to 15,000 eight-inch (20-centimeter) wafers per month and reduce staff levels from 1,600 employees to under 1,000 staff. Many of its domestic plants and production lines will be reorganized, relocated or closed and it said it will freeze planned investment of 20 billion yen (US$160 million) at its Shanghai affiliate, Shanghai Hua Hong NEC Electronics Co. Ltd.

Overall, the NEC Electron Devices semiconductor division aims to cut investments by around half this fiscal year to 120 billion yen and cut staffing levels worldwide by around 4,000 people.

In its other business areas, the management plan focused less on cutbacks and more on how to grow already profitable businesses.

The NEC Networks division will, said the company, focus on four key areas: optical network systems, IP (Internet Protocol) network systems, mobile network systems and mobile terminals.

The first of these areas, optical network systems, was one of the dark areas in the company's recent financial report after carriers around the world, particularly in the U.S., put the brakes on fiber-optic network related spending. As a result the company announced plans to focus on growing business in Asia and Central and South America. NEC has already had some success in this area with the recent signing a contract to supply fiber-optic transmission equipment to Telefonos de Mexico SA de CV (Telmex), its first optical networking deal in the region.

NEC Solutions, which last week reported a 49 percent rise in systems integration business, will focus more on this sector under the new plan. Hoping to take advantage of expanding domestic spending on systems integration projects, NEC said it will target the e-government and local government sectors. It also said it wants to boost its server and storage products business through tie-ups with foreign companies such as Intel Corp., Hewlett-Packard Co. and Veritas Software Corp.

In other areas, the company said it also hopes to accelerate growth through a series of strategic investments. NEC is already an active venture capital investor in the North American market and this will be where its focus remains. Further strategic investments, including mergers and acquisitions of companies and divisions, are planned for the future.

The success of the new plan and reorganization in the semiconductor division will be measured in terms of its effect on the company's bottom line. NEC said it hopes to achieve net sales growth of 6.0 percent and operating income growth of 6.4 percent in the mid-term as a result of the measures outlined Tuesday.

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