Elpida begins reorganization in Tokyo court: Analysts weigh in

February 27, 2012 — Elpida Memory Inc. (Tokyo: 6665) resolved to file a petition for the commencement of corporate reorganization proceedings at today’s meeting of the board of directors, and filed the same with the Tokyo District Court. Elpida’s consolidated subsidiary, Akita Elpida Memory Inc., also saw the commencement of corporate reorganization proceedings, and there is a possibility that claims against the said company may not be collected. Nikkei called the bankruptcy protection filing "the largest corporate failure among Japan’s manufacturers since the end of World War II" (Dow Jones, http://e.nikkei.com/e/fr/tnks/Nni20120227D27JF576.htm).

Tokyo District Court has immediately rendered the temporary restraining order to restrain any repayment, etc., the comprehensive prohibition order to prohibit any execution and the supervision and examination order. Under the court’s supervision and Atsushi Toki, Attorney-at-Law and the Supervisor and Examiner appointed, Elpida will begin to rebuild its business. The company stated, "If we continue the business by ourselves, we will face cash shortage soon. Moreover, we assumed that, if we left this situation and then cash shortage would become reality, the corporate value of our company must significantly fall, there must be no way to be supported by any sponsorship, and the people concerned such as the creditors must suffer more inconvenience. Therefore, we are obliged to decide that we will aim for the restructuring of our business under the proceedings of the Corporate Reorganization Act and filed the petition as of today."

The filing ends "prolonged speculation" about how Elpida was going to raise enough funds to repay large loans due from April. Elpida’s debts amounted to 448.03 billion yen as of March 31, 2011, reports Nikkei. Elpida’s 2011 IC sales were down 39%, dropping it 6 spots in the rankings, according to a recent IC Insights report.

Elpida was established in December 1999 to make dynamic random access memory (DRAM) semiconductor chips in Japan (initial trade name was NEC Hitachi Memory Inc. until 2000), with development operations for DRAM products since April 2000. Elpida expanded into foreign markets and was listed on the Tokyo Stock Exchange in November 2004. It established a joint venture company, Tera Probe, Inc., specialized in wafer probe testing, in 2005. Other businesses of Elpida include Akita Elpida Memory, Inc., a wholly owned subsidiary to take on the back-end process for DRAM and Rexchip Electronics Corporation, a joint venture company for front-end process that was subsequently acquired as a subsidiary.

"Elpida, while strong technically, has suffered because of the 2011 DRAM price collapse and Japan’s strong yen," report Jim Handy and Lane Mason of Objective Analysis.

Elpida has a wafer fab in Hiroshima, Japan and one (the Rexchip fab) in Taiwan; both are 300mm and each have 100,000 wafers per month (WPM) capacity. "Elpida could sell off some of its assets, potentially the Hiroshima fab, to pay off creditors and even sell some additional 300mm fab equipment," theorized Sterne Agee’s Vijay Rakesh and Mark Kelley.

Elpida cites sluggish DRAM growth in personal computers, as well as an increase of the capacity of DRAM per unit, for its overcapacity after 2006-2007 capital expenditures on wafer fabs and equipment. "At the beginning of 2007, the price of DRAM started falling sharply and, combined by a significant decrease of demand for the products due to the global economic downturn begun in the fall 2008, such price further declined. In the fiscal year ended March 2009, we were forced to experience a significant deterioration in business results compared with the previous year," Elpida’s statement reads. Objective Analysis does not expect a supply/demand balance in the overall DRAM marketplace until 2013, or possibly later if NAND gains share in PCs.

DRAM chip prices may rise in the near term after Elpida filed for bankruptcy protection, Taiwanese memory chip vendors said. The remaining players in the DRAM market will benefit from reduced supply with a boost in pricing and revenue in H2 2012, according to the IHS iSuppli Memory & Storage Service. IHS conservatively estimates that 2012 DRAM revenue will exceed $30 billion, compared to the previous forecast of $24 billion.

Figure. If more than 25% of Elpida’s manufacturing capacity is taken offline, the global average selling price (ASP) for all DRAM shipments is projected to rise to $1.21 by the end of 2012, up 15.5% from $1.05 at the end of H1. The figure shows global ASP for all DRAM shipments (global DRAM revenue divided by gigabit shipments). SOURCE: IHS iSuppli Research.

Related stories: SMIC, Elpida settle 200mm wafer claims and Elpida shifting output to Taiwan, blames yen and ASPs

In June 2009, Elpida received an approval on the business restructuring plan under the Act on Special Measures Concerning Revitalization of Industry and Innovation of Industrial Activity from the Ministry of Economy, Trade and Industry in order to maintain superiority in technology and to increase the productivity. Japan’s trade and industry minister Yukio Edano called the 2009 bailout decision a "sensible one," but noted that this time "things are different," Nikkei reports, http://e.nikkei.com/e/ac/tnks/Nni20120227D27JF580.htm. Today, circumstances are worse for Elpida with a strong yen against the US dollar and the steep fall of the price of DRAM products with fierce competition in the DRAM industry. DRAM demand also stagnated due to the great flood in Thailand in 2011.

Given that Elpida has already established itself as a major DRAM suppler for smartphones and tablets, if the Japanese vendor exits the market, only Samsung Electronics Co. (KSE:005930) and Hynix Semiconductor Inc. (KSE:000660) will remain in the mobile DRAM market, resulting in a DRAM oligopoly, hypothesized TrendForce in a new report.

Akita Elpida was established in July 2006 as a wholly owned subsidiary of Elpida, taking over the semiconductor backend process businesses from Akita Electronics Systems Co. Ltd. and Akita Semiconductor Co. Ltd., a subsidiary of Akita Electronics, both of which were Hitachi Ltd. group companies. Akita Elpida has so far collected its claims for accounts receivable of approximately 700 million yen from Elpida monthly. However, now that facing the situations that Elpida is set to rebuild and the collection of the accounts receivable has become difficult, and as a result of which the prospect of its future financing has become uncertain, Akita Elpida has decided to rebuild its business pursuant to the procedures under the Corporate Reorganization Act. The total amount of liabilities (Balance sheet as of March 31, 2011) is 7,961 million yen.

Powerchip is a DRAM foundry for Elpida in Taiwan, and Elpida’s bankruptcy could mean further ripple effects, warned Sterne Agee’s analysts. Elpida’s bankruptcy could further cut 2012-13 DRAM equipment capex and the capex of OEM-foundry partners.

Of the remaining DRAM manufacturers, Micron is the only one that is likely to take over other companies’ DRAM businesses, asserts Objective Analysis, noting that Hynix and Samsung build all their own capacity. Taiwan’s DRAM players are in a position similar to Elpida’s, and more consolidation or similar drastic actions could occur soon in Taiwan’s biggest three DRAM makers: Nanya, Powerchip, and ProMOS.

Learn more at Elpida Memory’s news page, http://www.elpida.com/en/news/index.html.

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