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Asian crisis clouds manufacturers' future

Faced with falling prices, Asian manufacturers are struggling to right themselves amid a regional economic downturn that's forcing them to make some potentially momentous decisions.

Faced with falling prices due to oversupply, Asian computer component manufacturers are struggling to right themselves amid a regional economic downturn that's forcing them to make some potentially momentous decisions.

Makers of memory chips and hard disk drives in Japan, South Korea, and Singapore have recently announced large capital spending cuts or layoffs, citing sluggish markets.

In many cases, however, underlying factors such as the need to address debts exacerbated by currency crisis have been equally important, and Asian companies' need to retrench could mean lasting consequences for the PC industry.

"Most countries were producing too much but the world wasn't paying attention until the currency crisis arrived," said Ibrahim Warde, a correspondent for Le Monde Diplomatique who follows the Asian economies.

In the memory market, the Korea Semiconductor Industry Association today said South Korean chipmakers will reduce capital investment by some 35 percent this year, reacting to still-weak prices 16-megabit DRAM (dynamic random access memory).

But debt-laden Korean firms, including market leaders Hyundai, Samsung, and LG Semicon, have also been crippled by Japanese demands for cash on goods necessary in the production process. The suppliers are refusing to honor letters of credit from Korean banks, themselves hard hit by currency devaluation and a shortage of foreign reserves.

Japanese firms too have cut back their capital spending, albeit on the lesser rate of about 10 percent. Toshiba, NEC, Fujitsu, and others also cited the low price of DRAM chips, which slid throughout 1997 because of oversupply, to the point where spot market prices became lower than the cost of manufacture.

Yet the Japanese firms were also reacting to the Korean travails, using the opportunity to put off capital spending, Dataquest analyst Bruce Bonner earlier told CNET's NEWS.COM. "Now that the South Koreans aren't the hyper-competitive force they used to be because they have to watch their pennies, their competitors can pull back their discretionary spending," he said.

The spending cuts mostly affect 64-megabit DRAM production plants that have yet to come online. 64-megabit memory chips are widely expected to begin replacing 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.

Pricing pressures have also hit the hard drive market. Last week market leader Seagate said it would lay off 10,000 employees at its Singapore plant to bring spending under control and offset sluggish sales. Rivals Quantum and Western Digital too have said they will trim production.

Asian-based vendors like Fujitsu, Maxtor, and Samsung have said they are increasing production, however, and have been pricing aggressively in hopes of gaining market share. This will likely hinder the attempt to restore a supply and demand balance to the storage sector, Gillian Munson, an analyst with Morgan Stanley Dean Witter, said in a research report.

Munson believes increased Asian production will continue to wreak havoc on the sector in 1998.

LCD makers too face the specter of oversupply. Because Asian demand for notebooks is down, Japanese and Korean firms are finding that they have boosted capacity too quickly, according to Dataquest analyst Martin Reynolds.

Chipmaking giant Intel has been hit with the same problem, facing cancellation of orders for notebook processors in part because of sluggish Japanese demand.

However, LCD makers may have a way out, as desktop LCD screens are expected to begin appearing as the price continues to drop toward $1,500 and below. Though that's several times the cost of a notebook screen, Reynolds believes desktop users will pay the premium because a computer can be replaced while the monitor is retained, whereas when one replaces a notebook the screen goes with it.