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The Great Escape, Part II: How These Companies Exited the…
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28 May 2009
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The Great Escape, Part II: How These Companies Exited the DRAM Business
Case Histories of Significant DRAM Market Withdrawals
This article continues our earlier discussion about the same topic from last week, entitled "...Part I."
It includes highlights of the most significant departures from the DRAM business over the past two decades, and describes, in broad terms, the experience of these DRAM makers in the market, historically and the events that led to their departures. In some cases, details relevant to today's 'prospective DRAM players' are noted, as well as some of the 'behavioral attributes or special situations' that make these cases noteworthy.
We have found, in preparing this discussion, that the internet provides a wealth of (undigested) fact and opinion about each of these companies; what is discussed below is believed to be accurate, but not comprehensive by any means.
There is much to be gleaned from these "DRAM exit" histories that is useful for any company, but especially useful to companies that find themselves with large exposures in commodity products, in tumultuous times and in volatile markets. The exits are not always (or ever) clear, but there is quite a range of outcomes from situations that might outwardly look much the same...managing the exit can make a world of difference in the financial impact. What constitutes 'the business' or 'the assets' varied widely from case to case, and, as one can see, not all 'exits', in retrospect, were at all optimized given the options faced.
Case History #1: UTC sells Mostek division to Thomson...to SGS Ates, which shuts it down:
Mostek was founded in about 1968, out of TI, and located right down the road near Dallas. Like TI, they were a vital force in the early DRAM business during the 1970s, and made many valuable technical contributions (See subsequent Mostek IP licensing discussion, below). They were the original 'Standalone Memory' company, dominated by DRAMs, though they did have some small positions in SRAMs, Zero power SRAMs (which also spun out competitors like Benchmarq), EPROMs and Mask ROMs. They were also innovators in communications chips and were a Tier II player in MPUs. But forever and always, DRAMs was their glory. In 1979, in a fit of 'we MUST be in the semiconductor business' that swept over the industry, Mostek was bought by United Technology Corp. (UTC) for $345M, on the flimsiest of pretexts that their Carrier Air Conditioning equipment would eventually need to join the micro-electronics age. (Yes, I know, this sounded just as flaky then as it does today. But it was a good indication of UTC's naivete, which eventually factored into Mostek's demise.)
The decision looked very smart, as Mostek rode the semiconductor and DRAM up-cycle in 1979-80, making the UTC buyers look like geniuses. The 1981-82 downturn caused some significant distress, financial and emotional, and showed cracks in UTC's commitment. The next cycle, running from 1982 into 1984, restored their confidence. But 1985's crash brought huge pains to Mostek. They had been a very significant DRAM play, having about 11% share in a DRAM market whose power and market share was far more widely dispersed that today's concentration. But continued losses and incredibly low DRAM prices brought pain and suffering and showed UTC that they had placed the wrong bet, and that 'the chip business, and DRAMs in particular' was a different kind of business than their other mainstream businesses, such as jet aircraft engines, elevators and air conditioners. In mid-1985, after a major upheaval within UTC, UTC's management decided to unload their Mostek Division, which they did at a bargain basement price of about $105M to the French electronics concern, Thomson CSF. This was a painful and decisive action; the sale took place at the bottom of the industry's worst-to-date cycle when asset prices were rock bottom. (Gaining compensation for "IP" licensing was not a recognized business activity...profit center...yet, until TI pioneered in 1986-87. But Thomson was decisive, UTC took their several hundred million dollars worth of lumps, and moved on.
Mostek struggled under the management of Thomson for a while, weathering one layoff after another as the downturn dragged on for years. It was then combined with SGS-Ates in 1987, to make what is now ST Microelectronics, or STM.
STM did two things: They shut down what remained of Mostek's position in DRAMs, but saved and used its Texas facility, along with small product lines like specialty SRAMs. More importantly, someone then said, "Let's take a look at Mostek's patent portfolio", which had been kept in some kind of locked drawer for a good while, and they found valuable DRAM and other memory IP, which netted STM about $450M over the course of the next few years, in license fees from other DRAM makers and downstream players.
In several stages, from the onset of the 1985 DRAM crisis (which also took down Intel and Inmos, as well a convinced a number of small DRAM dabblers to "cease and desist."...ITT, National Semi, ATT, Fairchild and AMD...and more), UTC-Thomson-STM-Mostek went from 11% DRAM market share to 0%, putting about 10,000 workers out on the street, and costing a few hundred millions of dollars of losses to whoever owned the company at the time. Then STM made it all up with their "DRAM IP closet" discovery and licensing initiative. STM also bought Inmos in 1989, with its DRAM and SRAM designers (and Transputer MPU), and fabs in Colorado and UK, and remained competitive in SRAMs for a while longer.
STM was the "Great Semiconductor Consolidator" of the era, and did so quite profitably. They liked memories, too, but only from a distance, and only as something that periodically depressed other company's share and asset prices, and gave ST huge benefits upon acquisition. Indeed, except for a modest position in Slow SRAMs and Mask ROMs in the early 1980's Video Game bubble, STM themselves stayed out of commodity memories almost entirely, until 1987, when they joined the EPROM fray, which product line they retained even through the morphing of EPROM business to NOR flash in the early 1990s, which they only a year ago, merged into Numonyx.
Case History #2: Intel's Painful Exit, 1985:
Along with TI, Mostek, and some Japanese efforts (Hitachi and NEC, mostly) Intel did more to develop the early DRAM marketplace during the 1970s than anyone. Always strong on technology and weak on low-cost manufacturing ("Intel could not ship an empty package for $5 if they had to."), they were frequently first to the new generation of DRAM, locked up key accounts, then retreated or coasted once the higher-volume, lower-cost manufacturing set moved in. During the cyclical upturn through 1984, Intel maintained about a 4-5% DRAM market share, but they were already on the retreat when the market turned south in the waning days of 1984. Here, again, Intel had (prematurely, it turned out) tried to muscle the DRAM market over to CMOS versions, as an innovative and leadership specialty part ("I have seen the future, and it is CMOS"), in place of the historic NMOS at the 64K to 256K densities; It was a right technology direction, but one generation too soon: The 256K mainstay DRAM remained NMOS, though Vitelic and NMB made scads of money selling 256Mx1 CMOS DRAMs as parity DRAMs for x9 DIMMs populated with CMOS 1Mb DRAMs in 1988-90. (This departure episode is very well covered in Intel Founder Andy Grove's book, "Only the Paranoid Survive".
Soon, CMOS took over at the 1Mb generation with the rise of Toshiba, but without Intel.
Case History #3: Inmos Swept up by STM, vanishes from DRAMs, 1987
Inmos was something of an Anglo-American Intel near-look-alike, and certainly carried forward their memory mantle. They had strong technical teams, good DRAM designers, top flight high-speed SRAMs, and their own 'Transputer', an 'MPU' that was way ahead of its time, but which failed to gain traction in the market. The memory design team was in Colorado Springs, where the memory products were centered; the MPUs were done in Bristol, Wales, UK, and had their own fab there.
Inmos was beaten up badly in the 1985 downturn, and a new Government in England forced the sale of the Government stake as a part of its privatization program. Thorn-EMI (yes, the record company) picked up the Inmos option, and became a significant IP holder of Inmos DRAM and SRAM patents. But the patents were about all that survived the turmoil of the late 1980s, the fabs were abandoned, the staff cut loose, and eventually Inmos was sold to, and rolled up into ST Microelectronics in 1989.
Case History #4: LG Shotgun Wedding, "Married" to Hyundai, 1999
Not unlike what we have seen in Taiwan in the past decade, and emphatically, today, "Everyone wants to make DRAMs", and when the Koreans entered the chip business in a big way in the early 1980s, they were no different. Samsung was the best-established from the start, and after licensing Micron's 64K DRAM, everything thereafter was home grown. Hyundai and Lucky-Goldstar (to be LG Semi) relied heavily on licensed designs and technologies until their own in-house capabilities were adequate.
All three companies rose up in the rankings during the 1988-89 shortage and benefited from the Japanese Stall (Lost Decade) as the industry rolled into the 1990s, gaining huge market share in DRAMs in 1992-95. But the market fall-off, and the ensuing Asian Financial crisis in Korea in the late 1990s sent shudders throughout the Korean electronics business. Many industries were 'rationalized' at the point of a gun by bankers and government. Samsung gave up its nascent automobile business. A government-forced marriage combined LG Semi and Hyundai into a single DRAM company in 1999, renamed it "Hynix", and combined all technical assets and once-disparate process roadmaps to merge 18 months hence (about 2000/01) in a common technology view and product set. LG Semi disappeared; even LG's creditors had a hard time finding someone in the new Hynix organization to pay them. It was rough running for a while, and not without casualties.
But the worst was yet to come: Barely settled down, Hynix emerged right on the cusp of the 2001-03 industry downcycle, which caused more than $25B in memory industry losses. The new Hynix was a mainstream DRAM maker, but also had some positions in SRAM and ROMs. But even by 2000, virtually all memory of LG Semi had vanished into the larger and more powerful Hyundai operation.
"We are not alone!:"
LG Semi was not the only DRAM casualty in the 1998 downdraft. With 1998 industry-wide DRAM sales of $14B generating a loss of $12B, TI's new management decided to pack it in, selling their operation to Micron. And Japan, after a very tough decade of receding influence and declining market share, began their prolonged march to the exit with the spin out and establishment of Elpida from NEC's and Hitachi's DRAM operations, both market leaders a decade earlier in the "K" densities, about which we'll have more to say below.
Case history #5: TI sells DRAM operations to Micron, 1998:
TI was one of the most important DRAM pioneers back in the 1970s, but like all US companies, steadily gave up ground to the Japanese, one DRAM generation after another, during the 1980s. The downturn of 1985 pressed them severely, and resulted in their 'Muscular IP Defense and Licensing Strategy', launched in 1986-87, and which netted them more than $2B is licensing fees and royalties over the next decade, as their seminal DRAM patents were licensed to all comers.
But the 1998 DRAM market blitz, again driving huge TI losses, and a sudden change in TI's Top Management brought on by the sudden death of TI Icon and CEO, Jerry Junkins a year or so earlier, led to their 'Creative DRAM Escape'. Even today, this exit sets the standard for a comprehensive and non-lethal departure from a fierce and unforgiving market. This allowed TI to leave behind major risky market positions and cash requirements, and bring the New TI organization to life in other areas that had been neglected for years, an altogether too common situation in DRAM companies...feed the beast to starve the babies
In 1998, TI sold its DRAM operation to Micron for cash and stock. This was the most successful exit, from a financial point-of-view, that the DRAM market has ever experienced. TI gave up its DRAM business, gave Micron a ten-year holiday on TI DRAM IP (just now expired in early 2009). TI unloaded its DRAM fabs in the US and Italy, its share of TECH JV in Singapore, and its DRAM JV with Kawasaki Steel (KTI) in Japan, plus an empty fab in the Dallas area. TI had just signed on Samsung and Toshiba for ten-year DRAM royalty bearing license deals in 1998, too, and though they gave up a substantial flow (~5% of sales) from Micron, it was much smaller an assured income loss than what they retained from other DRAM makers.
Micron assumed the debt to the Italian government that dated back to the establishment of the Avezzano fab, and gave to TI a boatload of Micron stock (which was trading at about $20 at the time) in payment for TI's fab assets. TI then loaned Micron enough money to get a head start on moving the fabs to the Micron 0.21um process node. Micron made huge gains in share price and DRAM market share in the next two years, and easily paid back the debt. TI proceeded to liquidate the shares over the next few years, as well, at prices sometimes as high as $90+ (Micron's 2000 peak share price was $94.50...it's now selling in the $4.50-$5.00 range.)
In doing this deal, TI kept a good cash flow from the extensive patent portfolio, actually had a capital gain on the sale of about $100M, cleared huge assets and liabilities off their balance sheet (turning them into cash and stock), washed their hands of a painful 25-year voyage in DRAMs...and caught the 'mobile phone wave' with their newly-invigorated DSP and analog circuits operations.
TI never would have risen to be the #3 or #4 chipmaker they were in 2008, with DRAMs in their product portfolio. Indeed, they would more likely have followed Mostek and Inmos into the grave or consolidation with a healthy and rich suitor.
Case History #6: Hitachi-NEC merge to make Elpida, 1999:
After watching their DRAM market share peak in the late 1980s at about 70%+, Japanese DRAM makers then watched their prospects steadily wither away in the aftermath of their own stock bubble's bursting. After more than a decade of 'can't do anything wrong' and steady gains across most market segments, inside and outside chips and electronics, the Nikkei Stock Index dropped from more than 40,000 in 1989, to under 10,000 in the worldwide recession of 1990-91. Market share, investment and Japanese confidence followed in like retreats.
During the DRAM run-up in 1992-95, which it reached a still-record $40B in DRAMs, Japan's DRAM makers, with huge problems at home, excessive caution and facing the SIA's Trade Warriors at every step, gave up ground to Korea. When 1998 brought the then-worst-ever DRAM market and its losses about matching total sales, NEC and Hitachi decided to spin out and combine their respective DRAM units, which they did by the end of 1999.
The parents, properly, gave the kids a head start: DRAM technology rights, some legacy DRAM fabs and designs and capital to get running. Against a stiff headwind in 2001-2, they finally aligned their products in a uniform process, and launched their new E-300 fab. NEC and Hitachi held majority stakes in the new Elpida venture, but gradually liquidated large portions over time. Also in 2003, Mitsubishi, which had remained as a standalone Japanese DRAM maker, joined Elpida.
Recently, Elpida has been anointed the IP 'Provider of Choice' for Taiwan's Memory Company (TMC) initiative, but the fact that the venture remains stalled, and the company remains cash constrained, leaves Elpida in a still-precarious position. As Japan's sole DRAM maker today, they command some special attention with Japanese bankers and within the industry; how deep the pockets are of those 'interested parties' remains to be seen.
Case History #7, IBM Micro exits DRAMs, 1999:
Despite having 'one of their boys'...Robert Dennard...invent the DRAM in 1968, from the very start at IBM there was always a 'business vs. technology' conflict about being in the DRAM business. IBM made DRAMs from the earliest DRAM days for their internal systems, which parts were not wholly compatible with Industry Standard (I.S.) DRAMs. This gave IBM systems some performance advantages, they thought, but made them price non-competitive in times when oversupply in the larger merchant market drove DRAM prices below manufacturing costs. Internal price benchmarking made the Natives look bad against 64Ks for 50 cents in 1985, and $6-8 1Mb in 1990-91.
IBM's coming out into the merchant market in 1993 leveled the playing field, and forced I.S. DRAM product designs that could be used both inside IBM, and sold to the merchant market. Some systems inside IBM still used proprietary DRAMs, custom specs or unique packages. But the Microelectronics Division now had the larger merchant market to sell to, so scale was no longer limited by internal DRAM demand.
This disagreement dipped below the surface during the initial DRAM upturn 1993-5, when even IBM's DRAM Gross Margins rose close to 70% in the waning days of 1995. But there were still currents of "Strategic Confusion of Purpose" that were happening concurrently all along. DRAMs were starved for prime development resources, they sold off a DRAM fab in Germany in 1994, they were shackled by confused cost accounting methodologies that obscured DRAMs' true profit contribution, and DRAMs were frequently used to fill fabs, and make up for the ASIC businesses' difficulty in launching its own Merchant ASIC business.
The mainstay of the DRAM operation was a Triad formed of IBM, Siemens and Toshiba in 1993, which used the trench cell to build a common 16M DRAM platform that reached production in about 1994. IBM played the lead, and engineers from all three companies led the charge at IBM's Essex Junction plant, and at the R& D and Development line in Fishkill NY. From this, each company also used its own production facilities to make and sell DRAMs to the merchant market.
IBM and Siemens shared a DRAM manufacturing operation in France, and in spring of 1996, a JV production facility was announced between IBM and Toshiba at Manassas VA. The timing could not have been worse for this venture, Dominion Semiconductor, which started DRAM production in about the middle of 1997.
The DRAM business was good until the last days of 1995, but prices dropped fast in early 1996. As the internal strategic battle went on within IBM, both the French JV and Old Dominion continued to cautiously ramp DRAMs. Neither was sufficient scale to get down the cost curve, IBM's reluctance to commit to DRAMs hindered their ability to shrink designs, build market share, or be anything but a 'Summer DRAM Maker'. Their share, which was about 7% in 1993-94, drifted steadily downward towards 2-3% as they equivocated. All systems were paused in 1998, and in 3Q99, they finally pulled the plug, wrote-off assets and withdrew from their Siemens and Toshiba JVs; France was shuttered and converted to logic, and the ownership of Dominion was transferred to Toshiba, which continued to make DRAMs. IBM's 1998 licensing of DRAM technology to Nanya was transferred to Siemens, which relationship continued until Qimonda's recent filing for Bankruptcy protection.
Overall, IBM took charges of more than $1.2B at the time, which, when added to operating losses for 1996-99, totaled more than $2.5B from the end of 1995.
Case history #8: Toshiba sells DRAM operation to Micron, 2002:
Toshiba was the DRAM market leader at the 1Mb generation in the late 1980s/early 1990s. Like most Japanese DRAM makers, they had mixed-to-down results during the 1990s, hampered by cash shortages and a 'failure of confidence' in the early days of the "Lost Decade". In 1993, after falling somewhat behind the pack (notably Samsung), they formed a DRAM development venture, Triad, with IBM and Siemens with most development centered at IBM's facilities in the US. In 1996, they formed Dominion Semiconductor, a DRAM production JV with IBM located at an IBM site in Manassas VA; this was their only chip production facility outside Japan since an early 1980s Silicon Valley acquisition.
They continued to run DRAMs in their Japanese fabs and at Dominion through the 2000 upturn, and the business was good. Process technology was advanced from 0.25um to 0.21um and touched 0.18um in production in all facilities. But their extremely strong position in the emergent NAND flash market, and their persistent difficulty keeping their Dominion fab current and up to scale, led them to seek out Micron as a buyer in late 2001 (downturn). This deal was closed in early 2002; the NAND flash wafers and production, which has begun to displace DRAMs in Dominion, were moved to Flash Alliance fabs (Toshiba and SanDisk JV) in Japan. DRAMs, which used the IBM-Toshiba trench DRAM, were at first continued at Dominion for about a year, but then halted and the facility was idled while it was retooled for 300mm wafers, the Micron process flow, and a more advanced technology node. Toshiba's production of NAND continued its ramp in Japan, profitably, and Toshiba escaped relatively free after some modest write downs and one-time charges.
Micron, on the other hand, spent some considerable time and money getting the Dominion fab into production in their own technology. Of Micron's acquisitions of TI, Qimonda-Inotera and Toshiba DRAM operations, this was likely the least successful, in terms of high cost and difficulty aligning the process flow with their own product.
Toshiba, once rid of a 'foreign fab' and their DRAM business, went on, with their technology and fab partner SanDisk, to NAND greatness. Of course, once Hynix and IMFT joined the NAND hunt and ramped up production, along with Toshiba's own overly ambitious investment plans, glutted the NAND market in 2008 and made it...as bad as DRAMs!.