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.