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Hitachi, Mitsubishi Consolidate LSI in Venture

In an effort to remain competitive in a chip market that requires increasingly shorter development cycles, Hitachi and Mitsubishi Electric, respectively Japan's third- and fourth-largest chip makers, Thursday moved to consolidate their system large-scale integrated (LSI) circuit operations under the banner of a new company.

"Over the past few years, the semiconductor business environment has been characterized by new-product release cycles that are increasingly shorter, as can be clearly seen in the personal computer and mobile telephone markets," the companies said in a statement Thursday. "There is a strong need to reduce the time required to move the semiconductors in those products from development to production. Under these circumstances, Hitachi and Mitsubishi Electric decided that their semiconductor operations should operate autonomously as a new company too further accelerate decision-making on such issues as funding, capital investment and so forth."

The new $7 billion firm, dubbed Renesas Technology, will open its doors on April 1, 2003, with Hitachi holding a 55 percent stake and Mitsubishi holding 45 percent. The two companies expect Renesas, which would become one of the largest semiconductor firms in the world, to pull in more than 900 billion yen (about $7.3 billion) in sales in fiscal year 2003.

Hitachi and Mitsubishi initiated discussions about Renesas (derived from Renaissance Semiconductor for Advanced Solutions) earlier in the year, and came to an agreement on March 18.

Both companies' semiconductor operations will migrate to Renesas, including microcomputer, logic, analog and discrete devices and memory (such as flash and SRAM). The exception is DRAM. Instead, both companies will merge their DRAM operations with Elpida Memory, a joint venture by Hitachi and NEC.

Koichi Nagasawa, Mitsubishi's president of semiconductor operations, will take up the reins as chairman and CEO of Renesas, with Hitachi's Satoru Ito, president and CEO of semiconductor and integrated circuits, taking on the mantle of president and COO.

The move comes in the midst of uncertain times for the integrated circuit industry. While flash and wireless chips remain strong, sluggish PC sales continue to serve as a drag on the industry, despite signs in July and August that the industry was in the midst of an upswing.

In fact, the Semiconductor Industry Association on Tuesday said chip sales in August were up 14 percent year-over-year -- the first double-digit increase from the industry's cyclical low in 2001 -- and 2.2 percent sequentially. Only the Americas seemed to resist growth, according to SIA's numbers, showing -0.7 percent sales month-to-month and -0.8 percent sales year-over-year.

"The August data confirm that the semiconductor industry is in the midst of a broadly-based upturn," SIA President George Scalise said in a statement Tuesday. "After 5.6 percent sequential growth in the first quarter of 2002 and 5.8 percent growth in the second quarter, the double-digit year-over-year increase in August sales is yet further evidence of a sustained and durable recovery."

Yet a day later, U.S. firm AMD Wednesday blamed the struggling PC market for dismal third quarter numbers, and warned that it anticipated a "substantial operating loss for the quarter." And in early September, semiconductor bellwether Intel narrowed the range of its guidance to the lower end of the range it forecast in July, though it pointedly noted that the figures still lined up with expectations. Intel cited microprocessor sales that were trending toward the lower end of the normal seasonal pattern as a major factor, though its flash sales remained strong.

One of the hardest hit sectors of the industry remains DRAM, a commodity market which has been savaged by sinking prices. The Elpida deal is the latest in an industry trend of consolidation for DRAM makers, touched off last year by the failed multi-billion-dollar effort to join Hynix Semiconductor with Micron Technology.

Both the SIA and research firm IDC agree that wireless chips remain the strongest part of the industry.