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Tuesday, February 17, 2009

Bailouts for tech, too?

Thus far in this economic downturn, we have only seen financials and automakers receive bailout funds.

I have been thinking about writing a post on how the technology sector is not begging for bailouts and how that is a sign of better management and more resilient business models.

Now comes word that DRAM producers are asking the Taiwan government to help consolidate the local industry and bailout the major players. It appears Korea is thinking of doing something similar.

Trouble in memory chips --

Things are so bad for the DRAM vendors that Gartner estimates that they lose money on every PC that is shipped. They say it amounts to a $27.40 loss per PC, leading ultimately to a total loss among major vendors on the order of $2.8 billion in the fourth quarter of 2008 alone. According to iSuppli Corp., DRAM vendors lost a combined $7 billion in 2008 and are expecting to see a further 15% revenue decline in 2009.

So it's clear that things are pretty bad in the commodity semiconductor sector and it looks like the affected companies are taking a page from the playbooks of the bank and auto CEO's. Here are the prime examples as described by EETimes:
"In Taiwan, DRAM maker Powerchip Semiconductor Corp. is pleading for a bailout from the Taiwanese government, while ProMos Technology Corp. and Nanya Technology Corp. are reportedly seeking similar measures. Powerchip's partner, Elpida Memory Inc., may end up rescuing the company via an acquisition.

In Korea, Hynix Semiconductor Corp. is seeking help from its creditors, but there are conflicting reports that the company is seeking a bail-out from the government. And in Germany, Qimonda AG could ask for help."
A bad precedent?

The technology sector has been known for its Darwinian characteristics. Companies rise and fall and come and go according to the dictates of the market. Waves of technology innovations create new winners and consign those companies who can no longer compete to the dustbin of history.

The success of the U.S. technology industry can be attributed to this rough and tumble environment where creativity and invention are rewarded, capital is allowed to quickly move to the places where it can do the most good and companies in trouble don't hang around too long.

Asking for a bailout overturns the whole notion that when it comes to tech, the market knows best. Propping up unprofitable companies would be a radical step in the technology industry. And in the case of the DRAM vendors, it's something not everyone thinks would be welcome.

"Widespread government support for the industry would be a disaster: It would just prolong the current downturn rather than forcing the vendors to further reduce production or causing consolidation," said Andrew Norwood, research vice president at Gartner Inc., in a report.

Almost sounds like he's talking about banks and their toxic assets...

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