Abstract

Outlook for the Japanese IC Industry amid Global Financial Downturn

Japanese consumer electronics and home appliance products in the past were well accepted in worldwide markets. These product markets in Japan were also large. Japanese IC suppliers have been focusing more on domestic clients and have been quite passive on exploring overseas market opportunities. Taking Renesas and NEC Electronics as an example, domestic sales accounted for 56% of the combined revenues of Renesas and NEC Electronics in 2008, and overseas sales only accounted for 44%. The Japanese semiconductor market only accounts for 20% of the global semiconductor market, highlighting the need for Japanese semiconductor companies to develop overseas markets. In addition, Japanese IC suppliers focus on developing high-performance and high-price products and are not specialized in the development and promotion of value-line products. Affected by the global financial turmoil, mature markets have entered recession, while emerging markets continue growing. In the future, aside from some exceptions, such as the success of the iPhone, low-price products are expected to become market mainstream. Japanese IC suppliers' regional market and product segmentation strategies are not in line with current trends. As a result, their operations are expected to be affected, impacting their market share in the short-term as well. If Japanese suppliers do not take this chance to adjust product strategies and corporate structure in order to cope with market changes, they can only attempt to retain the domestic market, which has little room for growth, while their global share is expected to continue on a downward trend.

The Possibility of Outsourcing Production

To date, Japanese semiconductor makers have focused on the IDM business model. They only outsource production to foundries when they have insufficient capacity. However, due to sluggish demand resulting from the global financial crisis, in-house production capacities become large burdens. Even though Renesas and NEC Electronics have been in talks regarding capacity restructuring, including closing and selling production lines, these two companies have not yet revealed any new production strategies. In addition, they also announced their plans to reduce equipment procurement costs, hinting that they could outsource production. Meanwhile, as procurement costs for advanced production technologies are expected to increase significantly compared to previous technologies, whether the combined company will continue the IDM business remains to be seen. In recent years, several major IDM companies such as TI and STMicroelectronics have been moving toward fab-lite operations. Meanwhile, Fujitsu Electronics also announced that the company will outsource 40nm logic chipset production to TSMC. In the future, if the combined company will continue to cut equipment procurement costs and decides to move toward the fab-lite model, the company could choose to outsource production.

The Combined Company Expected to Join IBM Camp

Renesas and NEC Electronics have different R&D partners in the development of process technology. Their cooperation plans for 32nm process technology development, which were set before the Renesas-NEC Electronics merger was announced, will remain intact. For 22nm process technology development, the two companies will likely abandon their separate strategies and work together. Currently, NEC Electronics belongs to the IBM camp with members including AMD, Chartered, Freescale, Infineon, Samsung, STMicroelectronics, and Toshiba. The IBM camp includes most leading IDM companies and is one of the largest of its kind in the industry, with its technology R&D capability equivalent to Intel and TSMC (Taiwan Semiconductor Manufacturing Company). Should the merger go through, the merged company is likely to continue to work with the IBM camp. If the merged company joins the IBM camp, Panasonic - Renesas' former partner in process technology - will need to look for a new partner.

Pressure on Renesas and NEC Electronics' MCU Rivals

The automobile MCU market in Japan has been a monopoly. The impact of customer overlaps on the NEC Electronics-Renesas merger remains to be seen. However, the NEC Electronics-Renesas merger, with economies of scale, will likely create more pressure for competitors such as Freescale and Infineon. At the same time, for companies who intend to enter the automobile MCU market, entry barriers will continue to remain high due to market dominance and automobile technology specifications.

Appendix

List of Companies