Though there were no details, the Ministry of Economic Affairs indicated last week that the government supports a bailout of local manufacturers of dynamic random access memory (DRAM) chips given the implications of the sector’s collapse.
Investors welcomed the government’s stance and boosted shares of major DRAM firms by an average 30 percent this week, shrugging off concerns over a new accounting rule for inventories, effective Jan. 1, that will likely undercut gross margins.
At a press conference on Tuesday, Vice Minister of Economic Affairs Shih Yen-shiang (施顏祥) said that in light of the DRAM sector’s national importance, the government wanted to use the global downturn to “turn a crisis into an opportunity.”
Shih said that the government’s aim was to help DRAM makers build homegrown technology and boost international competitiveness.
It is an important policy and enunciates a vital development goal for the industry. But questions could be raised over whether the bailout will reach optimal effectiveness if it also hurts the ability of other industries — such as struggling flat-panel-display manufacturers — to access government aid.
Local DRAM makers have invested more than NT$850 billion (US$26.13 billion) in the last 10 years, creating an industry supply chain that ranges from upstream chip manufacturing to downstream packaging and testing, as well as module production.
Many say that the DRAM sector is important because the nation’s output accounts for 22.4 percent of the global market, a figure second only to South Korea. When it comes to profitability, however, local DRAM players have suffered from several quarterly losses amid a glut. The industry’s gross margins will likely remain thin in light of significant competition in this highly commoditized and volatile market.
Government figures show the nation’s top five DRAM makers posting combined losses of NT$93.87 billion in the first nine months of the year. Worse still, the combination of global credit crunch and economic slowdown this year has resulted in DRAM makers securing fewer loans as well as suffering chip prices below cost. To date, aggregated debt in the industry stands at NT$431.3 billion, and some firms are on the brink of bankruptcy.
The government said its short-term plan was to help DRAM makers extend loans and adjust terms of payment while marking funds for the cash-strapped sector in exchange for stakes in the companies.
As for the long term, the government said it welcomed consolidation and stressed that it would not confine consolidation to mere mergers of existing players, but also include collaborative research and development as well as joint manufacturing.
A collapse of even one company could cause substantial job losses up and down the chain and even endanger the operations of creditors. The government’s support is thus better than nothing.
But the government must keep in mind that its role is also to look after the interests of other important industries — and especially those of taxpayers.
To prevent DRAM companies from squandering bailout funds, the government needs to carefully review company proposals on the revamping of operations. It must also ask the companies to develop a pragmatic approach so that industry consolidation can be facilitated and so that taxpayer dollars will enhance the sector’s competitiveness — whether in terms of production capacity or next-generation technology.
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