Elpida, Powerchip bet up to $15.5 bln on chip JV

TOKYO/TAIPEI (Reuters) Japan's Elpida Memory Inc. and Taiwan's Powerchip Semiconductor Corp. said they would form a memory chip joint venture and spend up to T0 billion (.5 billion) to take on bigger South Korean rivals.

The 50-50 venture will start with an investment of T billion to buy a factory now being built by Powerchip, Taiwan's top maker of DRAM memory chips used in personal computers, in the central Taiwan city of Taichung, the companies said on Thursday.

Elpida and Powerchip then aim to spend T0 billion to T0 billion over the next four to five years to build four plants in total, with an eye to grab market share in commodity DRAM chips and overtake leader Samsung Electronics Co. Ltd., said Powerchip President Brian Shieh.

''We will of course watch market conditions to pace our capital spending, but our ambition is to together beat Samsung, and we are prepared to be very aggressive,'' Shieh told reporters after a news conference in Tokyo.

The new plant, expected to start production in the middle of next year, will have initial capacity of 30,000 12-inch wafers per month.

When the four planned plants go online, total capacity could grow to 240,000, triple Elpida's capacity.

But while the plant is expected to gain market share for Elpida, which ranked fifth in the July-September quarter according to research firm iSuppli, Samsung is also upping the ante with plans to nearly double DRAM output in 2007.

Park Young-joo, an analyst at Woori Investment and Securities, said the new joint venture is unlikely to pose a serious threat to Samsung.

''(Elpida's) profitability falls way behind Samsung and Hynix,'' said Park. ''You need profits to sustain aggressive investment.'' A RISKY COMEBACK Powerchip shares closed down 1.6 percent on Thursday in Taipei, while Elpida shares rose 0.18 percent to 5,650 yen.

Elpida officials, like other Japanese chipmakers, harken back to the late-1980's, when companies such as NEC Corp., Toshiba Corp. and Hitachi Ltd. held top market share.

''Japanese chipmakers failed to invest in their chip business at the right time and were burdened by high costs,'' said Elpida Chief Operating Officer Shuichi Otsuka. ''Japan has the technology. Why shouldn't Japan take the lead?'' But instead of bringing a comeback for the Japan chip team, the investment could potentially mean oversupply if it triggers more capital spending by rivals in a race for market share, analysts said.

''The scale of the investment is rather large,'' said Lee Min-hee, an analyst at Dongbu Securities. ''It may not impact the DRAM market significantly over the next one or two years, but there are reasons to worry about the long-term effects, such as an oversupply.'' Still, it remains to be seen if Elpida and Powerchip will actually make the .5 billion long-term investment in an industry notorious for its frequent boom-bust cycles, said BNP Paribas analyst Eric Chen.

''Demand for DRAM looks solid next year. Even though companies talk about boosting output, I don't think there's a strong chance for oversupply as they face growing difficulty in maintaining high yields under more advanced production technology. We'll have to see how they execute.'' The joint venture will begin mass production using cutting-edge 70-nanometre processes in July-September, with the smaller circuitry allowing chipmakers to pack more power onto chips, and will jointly develop 50-nanometre processes, the companies said.

REUTERS SBA ND1758