January 19, 1998 (TOKYO) -- The worldwide IC market is expected to attain two-digit growth in 1998, while Japan's IC makers, most of which were hit by deficits due to the rapid fall in the price of DRAMs, are facing a severe challenge marching into the 1998 market.

Nikkei Microdevices interviewed top executives of more than 30 major IC makers in Japan, Asia, the United States and Europe on their corporate strategies for 1998 and found that only Japan's IC makers might be left behind in the march of global progress.

Various Indexes Imply Japan is the Sole Loser

Most of Japan's top IC maker executives said they would target an annual growth of 15-20 percent in IC production for 1998, the same level as worldwide IC market estimates.

But their estimates were optimistic: the growth might remain under 10 percent. Koichi Suzuki, vice president of Toshiba Corp., pointed out that a two-digit growth is desired, but one-digit is realistic.

Contrary to Japanese makers in low spirits, overseas IC makers are aggressive.

In addition to U.S.-based makers, which lead in world markets, Taiwan makers are growing rapidly, too, although their worldwide market share is still small. European makers are being reinstated as competitors, having overcome one-time hardships. Even Korea, which is facing severe DRAM setbacks, has determined bail out policies.

Region-by-region studies show that makers are bullish in their sales plans this year, and many of them estimate an annual growth of 30-50 percent. Only Japanese makers estimate a modest growth of 10 percent, with subtle uncertainties (See Chart 1.). Although these are target values and their business scales differ region by region, there is a notable difference in spirit among them.

We can find a similar trend in their market shares. Japanese makers' worldwide share has decreased since its peak in 1988, and will follow this trend throughout 1998. The reason is that the growths of investments in Japan in 1996 and 1997 were behind those in other regions(See Chart 2.). The volume of investment returns are proportionate to sales within a year or two.

Regarding the investments in 1998, Japanese makers say they will maintain the same level as the previous year, at best. By contrast, even Taiwan makers are daring to invest more than 8 trillion yen (US$60.6 billion) over the next 10 years.

Japanese Makers Lack Product Edge

Japanese IC makers lack a strength in specific products. In 1998, 64M DRAM chips will become mainstream. Major makers in Japan will attain a monthly production capacity of 10 million chips by the end of 1998.

But U.S. makers such as Micron Technology Inc. and Korean makers will catch up with them soon, and price competition will become more severe.

Vanguard International Semiconductor Corp. of Taiwan, which joined the DRAM business just three years ago, said the cost reduction of a 64M DRAM unit to US$10 by the end of 1998 will be the condition of survival. Few Japanese makers can afford to reduce the price to this level.

DRAM-embedded logic circuit chips, on which Japanese makers have been working aggressively, have become the focus of severe competition following moves by Korean makers and Siemens AG of Germany in the arena.

Japanese makers also are making efforts to develop system-on-silicon technology or a system chip that integrates many functions, including memory and microcontrollers, on one chip. But overseas makers are traditionally strong in this field, and makers in the United States and Europe dominate the IC market for communications devices and network equipment that be the future center of IC consumption.

Low Spirits, No National Project, Off-Shore Outsourcing

Overseas IC chip makers are aggressive, enjoying industry fostering policies on a national or regional basis.

Incentives for Taiwan makers include a five-year tax holiday after a company starts posting a profit. Its Silicon Island Project will start in 1998. Taiwan aims for a worldwide market share of 8 percent in 2005.

Korea will start a long-term national project in 1998 to develop its semiconductor industry in non-memory sectors. The country will firm up plans this year and execute the project from 1999 through 2010.

Europe also has a project to make the EC's industry more competitive, and it recently was extended to include system-on-silicon technology.

Japan has no national project that matches those of overseas IC makers.

Japanese makers are increasingly producing ICs in their overseas plants or commissioning overseas makers as foundries to produce them.

Since 1997, Fujitsu Ltd. has commissioned Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) to produce its DRAMs, and Toshiba Corp. has contracted Winbond Electronics Corp. of Taiwan. Hitachi Ltd. has increased the volume of 16M and 64M DRAMs manufactured by LG Semicon Co., Ltd. of Korea.

Regarding production by overseas makers on a commission basis, NEC Corp. said this strategy would weaken the company's production technology in the long run.

Problems Are in Management, Not Technology

As to whether Japanese makers' technology is behind that of overseas makers, many domestic and overseas makers answered, "No," that the problem is poor management.

Japanese makers, for example, tried to firm up a production standard for MPEG2 chips in 1994, but only wasted time in fruitless discussions. At the same time, U.S. and Taiwan makers decided the standard and then conquered the market.

The key to bring back high spirits to Japanese IC makers may be quick decision-making and forceful management that can push business forward.