Japan lines up national chip champion

Three Japanese semiconductor manufacturers including Panasonic and Fujitsu are in talks to merge their operations to create a national champion chipmaker that would be backed by the government, according to people familiar with the matter.

The discussions, which are still preliminary, could result in the second state-sponsored consolidation in Japan’s struggling electronics sector in recent months. The industry is facing tens of billions of dollars of losses this year and a number of well-known companies have announced plans to restructure.

People briefed on the talks said the Innovation Network Corporation of Japan, a government-controlled investment fund that backed a similar three-way merger of touchscreen display makers last August, is negotiating to invest in the proposed new business.

Japanese electronics groups have been hurt by the soaring value of the yen, competition from lower-cost producers in South Korea and Taiwan, and unwieldy business structures that have them making hundreds or even thousands of products – with some offering everything from washing machines to nuclear reactors.

The industry has consolidated to some extent in recent years, but progress remains slow. In sectors such as semiconductors, where large capital requirements and narrow profit margins make it especially important to build up scale, the fractured nature of Japan’s industry has put it at a particular disadvantage.

The latest consolidation effort centres on general-purpose semiconductors known as large-scale integrated chips, or system LSI, which form the electronic brains of devices ranging from mobile phones and video game consoles to automobiles.

Panasonic and Fujitsu would spin off their system LSI businesses – which in both cases are small but unprofitable parts of their overall operations – and combine them with those of Renesas, a specialised semiconductor manufacturer. Renesas is itself the product of past mergers between the LSI businesses of Hitachi, NEC and Mitsubishi.

The deal would leave Toshiba as the only diversified Japanese electronics group with a sizeable system LSI operation. Japan’s last maker of dynamic random-access memory (D-Ram) chips for computers, Elpida Memory, is also struggling and its creditors are urging it to consider tying up with a US or Taiwanese rival.

“This won’t be the last merger we see this year. We will see more consolidation in both Asia and Europe,” said Richard Doherty, president of Envisioneering, the technology research company. “As chips get smaller, you can fit more chips onto each [silicon] wafer, and you produce more from each fab [chip factory]. Unless your market doubles, you just don’t need as many fabs. By 2040 one fab could produce all the chips needed,” he said.

It is unclear how much INCJ would invest in the new LSI entity. Japan’s Nikkei business daily on Wednesday said the fund, which was set up in 2009 with up to Y900bn ($11.7bn) of mostly government funds to invest, was looking to inject “several tens of billion” of yen in capital.

In the deal last August, it invested Y200bn in Japan Display, a combination of the touchscreen businesses of Toshiba, Sony and Hitachi, and took a 70 per cent ownership stake.

The INCJ, Panasonic, Fujitsu and Renesas declined to comment.

Kimikazu Noumi, a former banker who runs the INCJ, told the Financial Times last year that one of the fund’s goals was to accelerate a restructuring of Japanese industry and bolster viable but fragmented sectors against foreign competition.

All three companies involved in the LSI talks have faced financial or operational problems. Panasonic, which is forecasting a record Y780bn net loss for the fiscal year ending in March, said in October that it would scale back its semiconductor division and shift its focus from general-purpose chips to specialised products such as image sensors.

Renesas came to the world’s attention last year after its main factory north of Tokyo was badly damaged by Japan’s earthquake in March and forced to shut down for three months.

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