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Price pressure buckles chip venture

Texas Instruments and Hitachi terminate joint chipmaking due to severe financial pressures.

A major joint memory chip venture between Hitachi and Texas Instruments (TXN) has been crushed under the weight of tumbling memory chip prices.

The two companies cited the fact that the pricing for memory chips has fallen below production costs, rendering the Texas-based venture financially infeasible.

Also, in Japan, the home of the many of the world's largest memory chip manufacturers, the price debacle is manifesting itself in new woes for Japan's leading electronics companies. Both Hitachi and Fujitsu are reporting depressed earnings tied to the memory chip glut.

Prices for the most widely used memory chip, called Dynamic Random Access Memory or DRAM, plummeted throughout 1997 due to oversupply. DRAM is used as the main memory in all personal computers shipped today.

Declining profits at Hitachi as well as a continuing oversupply condition contributed to the end of the joint venture with Texas Instruments (TI), according to the two companies. The venture, dubbed Twinstar Semiconductor, began operations in 1996 to produce 16-megabit DRAM chips in Richardson, Texas. Its opening came just as a devastating price decline for DRAMs began.

That decline prevented the $500 million project, which produces about 3 million chips per month, from building the adequate cash reserves necessary to sustain ongoing operations, the companies said. TI will form a new subsidiary that will buy Twinstar's assets and hire all of its employees, with both Hitachi and Texas Instruments expected to record special charges.

"Certainly there is oversupply. There is more product availailable than what the demand is taking, although demand is still quite strong," says Stephen Cullen, senior DRAM analyst for In-Stat.

In Japan, Hitachi's net profit is expected to plunge 70 percent from previously predicted levels to about 30 billion yen ($241 million) on falling microchip prices and a foreign exchange loss from the decline in Southeast Asian currencies, according to the Nihon Keizai Shimbun, Japan's largest business daily.

In related news, Fujitsu became yet another casualty of the memory price crash. Its profit will nosedive nearly 80 percent during the fiscal year, dragged down by a steep fall in memory chip prices and damage sustained from the Asian currency crisis. Japan's largest computer maker said that it forecast a profit of 10 billion yen ($80.6 million) for the year ending March 31, 1998, down from its earlier estimate of 46 billion yen ($370 million).

Fujitsu and other Japanese companies such as Toshiba and NEC are already planning on cutting capital spending on chip fabrication facilities by 10 to 20 percent in the coming year.

The spending cuts will mostly impact 64-megabit DRAM production plants that have yet to come online. 64-megabit memory chips are widely expected to replace 16-megabit chips in servers and workstations in the second quarter of 1998, and later in PCs and notebooks.

The delayed plant openings aren't likely to make an impact until the start of the next decade, when a shortage of 64-megabit DRAMs could begin to appear, according to analysts.

Asian companies are expected to continue to lose money in the near term as they try to gain market share--with the positive side effect that they will also boost holdings of stronger foreign currencies to insulate themselves from currency fluctuations that could further erode revenue from memory chip sales.

Reuters contributed to this report.