Taiwan hopes to avoid US-style bail-out for DRAM industry

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The Taiwanese government stands ready to help its ailing DRAM industry but hopes to avoid U.S.-style capital injections, the island's president said Wednesday.

"The plight of the DRAM industry is very much known to the government and we are taking effective measures to help," Taiwan's President Ma Ying-jeou said in a news conference with foreign journalists. "We will be very careful about doing the kind of capital injection the U.S. is doing," he said.

The U.S. has opted to use cash injections into major banks such as Citigroup and Morgan Stanley to help them survive the current economic downturn. Since starting that plan, the U.S. auto industry has also asked the government for money, and some pundits fear they won't be the last group to seek assistance.

In Taiwan, the global financial crisis has hurt DRAM companies the most so far. The island's DRAM makers started losing money around the middle of last year due to a chip glut that sent prices plunging. The worldwide slowdown has exacerbated their troubles by making it harder to obtain loans, and now threatens the global PC market, where most DRAM chips are used.

Taiwan's DRAM industry accounts for around a quarter of the global DRAM supply and companies on the island have become important partners to foreign DRAM makers, such as Micron Technology of the U.S., Japan's Elpida Memory and South Korea's Hynix Semiconductor.

The four main Taiwanese DRAM makers, Powerchip Semiconductor, ProMOS Technologies, Nanya Technology and Inotera Memories, have reported combined net losses of NT$90.8 billion (US$2.71 billion) for the first nine months of this year.

Taiwanese officials have talked about offering loans to or making capital injections in the chip makers through the island's National Development Fund in recent weeks. But the president's comments on Wednesday show that no consensus has been reached so far on how best to proceed.

Taiwan is faced with no easy problem.

DRAM makers on the island built expensive new chip factories over the past few years as money remained easy to borrow at low rates. Their building activities contributed to a global glut in DRAM chips, which sent prices tumbling.

Mainstream 1G-bit DDR2 (double data rate, second generation) DRAM chips traded at US$0.64 on Wednesday, according to memory chip clearinghouse DRAMeXchange Technology. Prices of the chips were already at unprofitable levels at the end of 2007, when they stood at US$1.90 each.

In a report titled "Haemorrhaging Cash," CLSA Asia Pacific Markets analyst Bruce Lu, said the current DRAM price remains far below cash costs, and he expects Taiwanese DRAM makers to continue losing money in the near- to mid-term.

He also warned against a government bail-out.

"Cash outflows will be more severe than the market's expectations and cash requirements are likely to dwarf government and industry estimations," he said.

Still, there's more at stake than just the chips, factories and the thousands of jobs the DRAM industry provides to people in Taiwan. Taiwanese banks have also loaned DRAM makers around NT$420 billion (US$12.6 billion), according to Taiwan's economics ministry, and would be pressured if the DRAM makers defaulted on those loans.

"We understand very well how much weight the DRAM industry carries in Taiwan," Ma said. "Their fall would not only affect the IT industry but also our banking system as well. We understand that very well. The premier and even the vice president, Vincent Siew, are involved in trying to figure out a plan for their survival." Siew is well respected in Taiwan for his work on business and economic issues over a long political career.

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