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Analysis: Qimonda folds, who's next?

Posted: 27 Jan 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Qimonda insolvency? DRAM? market shakeout?

Although Qimonda AG's Jan. 23 filing of insolvency did not come as a surprise to the chip industry, it should serve as a caution that the company may not be the only victim of the ongoing shakeout in the DRAM market. The reasons are as complex as the consequences.

There was no single factor that drove Qimonda into the abyss. Rather, it was a combination of at least three factors, each one representing a potentially deadly danger by itself.

The first is the current oversupply in the DRAM market, which has generated massive price pressure. The second is the global economy downturn; the third is the financial crisis which triggered the downturn.

In Qimonda's case, however, the financial crisis had an additional effect: It dried up the possibility to invest in innovation and production equipment that would have enabled the company to keep pace with rivals.

Small player in big market
Qimonda was simply to small a player in the DRAM market to benefit from economies of scale, said market researcher Malcolm Penn of Future Horizons. "In this market, there is no room to be small," Penn said. "One needs economies of scale." The lack of scale contributed to investors' disinterest in Qimonda, he added. "Qimonda suffered from serious underinvestment. This led into a graveyard spiral which they could not escape."

From the perspective of the global DRAM market, it will be beneficial if one or several players fold, Penn added. However, besides the fact that Qimonda is insolvent the German DRAM manufacturer might be the first victim of the DRAM oversupply, but certainly not the last. "Several other companies will go the same way," Penn predicted. "A lot of Taiwanese companies are in the same position as Qimonda."

In terms of technology, Qimonda was in better shape than was its funding position. However, the company's promising buried word line technology came too lateand it might have been an obstacle in potential takeover negotiations, Penn said. "This technology is rather unique, and hence difficult to integrate in a potential investor's manufacturing landscape."

Ripple effect
While Qimonda's demise may be a relief to some in the DRAM market, it could be catastrophic for the semiconductor industry in Dresden, Germany. Qimonda is the largest chipmaker in the region, ahead of Qimonda's parent company Infineon Technologies, microprocessor manufacturer Advanced Micro Device and a handful of minor chip vendors, including ZMD and X-Fab. Along with AMD, Qimonda runs a semiconductor mask center which now faces an uncertain future. In addition, dozens of suppliers and service companies in the region depend on the semiconductor industry.

Parent company Infineon also might be hit by Qimonda's bankruptcy. Infineon still holds 77.5 percent of Qimonda shares. While the company has entirely written off the market value of its DRAM subsidiary, it can't rule out future liabilities. In a statement, the company said it had increased its provisions for pending antitrust and security law claims as well as for other potential future liabilities.

Infineon has set aside funds in the triple-digit million euro range for such cases at a time when Infineon is itself suffering from the crisis in the automotive industry, one of its largest customers.

Chips and politics
For the European IC industry, Qimonda's insolvency marks the beginning of a major shakeout since other companies are in a similarly weak position, Penn said. "The entire European semiconductor industry could face a similar situation," adding that "NXP is in a pretty bad shape and Infineon is still trying to restructure."

The Qimonda saga is to a certain extent a political one given the fact that large Asian semiconductor companies continued to expand manufacturing capacity. They apparently were encouraged or even funded by their governments.

Whenever the discussion turns to the reasons for the DRAM oversupply, industry insiders behave like many players in the Harry Potter saga: They hint at facts but decline to spell out the details. Many privately believe the culprit is Samsung, and that the Korean government continued to fund its expansion plans even when the DRAM market is saturated.

"This is where it becomes political," Penn said. "This is the economical equivalent of World War III."

- Christoph Hammerschmidt
EE Times Europe

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