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Asian chip makers cut production

Major Japanese and Korean chipmakers will be cutting production of low- to medium-capacity dynamic RAM chips to shore up sagging profit margins because of a drop in U.S. demand.

Major Japanese and Korean chipmakers are saying that they will be cutting production of low- to medium-capacity dynamic RAM chips in order to shore up sagging profit margins because of a drop in U.S. demand.

The Nihon Keizai Shimbun, Japan's largest business daily newspaper, reports that Hitachi, Samsung Electronics, and other semiconductor makers plan to cut back production of 4- and 16-megabit DRAM (dynamic random access memory) chips by 20 to 30 percent this month due to a sudden and unexpected drop in the book-to-bill ratio.

The widely-used ratio compares new chip orders to prior sales. For July, chip companies received $85 in new orders for every $100 in shipment. According to Bill McClean, vice president of consulting firm Integrated Circuit Engineering, the unexpected drop shows a continued oversupply of chips.

"The industry is greatly over capacity. Manufacturers so aggressively added capacity in 1995 that they've overshot the market. They are now limiting production to firm up pricing, which has been basically cut in half or worse in the last six months," McClean says.

The main market for the chips, personal computers, isn't really to blame for manufacturers woes. "The personal computer market is still very strong," McClean said. "It's just that growth was at 20 percent last year, and this year it is expected to grow by 15 percent, so the growth is slowing." Still, he added, chip overcapacity is the main culprit.

The shutdown of production lines, reportedly the first in several years, will not impact the marketplace until September or later. The demand for chips is expected to increase again for the Christmas season, but inventories will still be high enough that production or prices won't be that affected.

McClean said he expects chip prices to continue to decline into 1997, but that the rate of price cuts will level out as chip inventory declines.

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