Japan chip plant may hit rivals, profits

By Jennifer Tan and Kiyoshi Takenaka

HONG KONG (Reuters) - Japanese electronics makers may muscle aside smaller rivals by pooling resources for a huge new chip plant, but analysts say the heightened competition could also put profits out of reach for years.

Faced with too many players spreading resources too widely, a consortium of Japanese firms wants to wrestle back to the center stage of the global chip market, which Japan ruled in the late 1980s when NEC Corp. (6701.T: Quote, Profile, Research, Stock Buzz), Toshiba Corp. (6502.T: Quote, Profile, Research, Stock Buzz) and Hitachi Ltd. (6501.T: Quote, Profile, Research, Stock Buzz) were the world's top three players.

Last year, none of those firms were in the top ranks.

Hitachi, Toshiba and Renesas Technology -- a venture between Hitachi and Mitsubishi Electric Corp. (6503.T: Quote, Profile, Research, Stock Buzz) -- said in January they would study the feasibility of setting up a contract microchip-making business, taking aim at a market dominated by Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC)

(2330.TW: Quote, Profile, Research, Stock Buzz).

The project could cost $867 million and begin operations in 2007, according to some reports.

"The Japanese getting into the foundry business is incrementally negative for TSMC, which should see a little bit more price competition," said Goldman Sachs analyst Donald Lu.

"The impact will not be disastrous. We don't expect any actual loss of market share for TSMC, but it could be a real pain in the neck."

Macquarie Securities analyst Warren Lau agreed.

"TSMC's size is such that it's enjoying a lot of economies of scale. It would be difficult for a new entrant to compete on an equal footing."

Foundries such as TSMC, United Microelectronics Corp. (2303.TW: Quote, Profile, Research, Stock Buzz), Singapore's Chartered Semiconductor Manufacturing Ltd. (CSMF.SI: Quote, Profile, Research, Stock Buzz) and China's Semiconductor Manufacturing International Corp. (0981.HK: Quote, Profile, Research, Stock Buzz) supply custom-made chips for other semiconductor firms.

PROFITABILITY AN UPHILL BATTLE

While TSMC may remain relatively unscathed by Japanese rivals, the impact on smaller makers could be pronounced.

"Customers may use TSMC as their first supplier, and place other orders with UMC or Chartered. But with the Japanese coming on-line, they could switch to the Japanese as a second supplier," said Goldman's Lu.

Chartered Chief Executive Chia Song Hwee said the new foundry could make it harder for rivals to expand their Japanese business, but this was still a small percentage of total revenues anyway.  Continued...