Chipmakers seen at bottom of slump

Chip stocks move ahead of a rebound in demand for the goods that use chips

By CNN's Alex Frew McMillan

HONG KONG, China -- Asia's chipmakers responded Thursday to optimism that they may be at the bottom of a heavy slump.

Their stocks were getting a boost after Merrill Lynch, the world's biggest brokerage, said in a research note that the worst may be over for the sector.

Longer term, optimism is building that demand for products that use chips may return next year. That is driving a resurgence in the battered chip sector now.

Toshiba up in Japan

For instance, Toshiba Corp., Japan's top chip company, raced ahead Thursday, its stock closing up 7.9 percent at 645 yen.

Chips are a vital product for Asia, driving stock markets such as Taiwan and South Korea. Those exchanges have gotten a lift from their stocks this week.

In Seoul, world memory chip No. 1 Samsung Electronics rose during the day but ended Thursday down 1.3 percent at 195,500 won.

Samsung has been a pillar of strength for Seoul's exchange, where it is the largest stock. Traders said it was due a dip after rising 20 percent over the last three weeks, making headway despite Korea's persistent economic woes.

Chipmakers are suffering through a long, hard summer. Japan's big producers -- Toshiba, Fujitsu Ltd. and Hitachi Ltd. -- have all said they're scaling back production.

NEC Corp. said this week it will cut 4,000 jobs and get out of making one product, memory chips, altogether.

Hynix calls it 'worst year ever'

Things have gotten so bad that South Korea's Hynix Semiconductor, the world memory chip No. 3, calls this the worst year ever for chips.

It shuttered its Oregon plant in the United States for six months, "temporarily" laying off 600 workers. Prices for Dynamic Random Access Memory chips, or DRAMs, have collapsed, dropping 90 percent this year to $1 per chip.

Chip companies are trimming production because it's costing them more to produce chips than they can sell them for.

But analysts are watching for signs that the industry may be turning the corner. They like the way NEC and Hynix are now responding, forced to shed their worst product lines and revamp factories.

"This is a natural attrition that takes place at the bottom of the cycle," said Keon Han, Asian technology analyst for Bear Stearns. "These are the most inefficient fabs [plants] being shut down."

A backlog that needs to clear

That does not mean things are good for chips. Chips are a commodity, albeit a high-tech one.

Demand has sagged for all the products they go in -- computers, stereos, cell phones, you name it. That means there's a chip glut on the market.

The companies need that to clear before their profits improve. But optimism is building that demand may come back for electronics goods at the start of 2002.

Because the stock market anticipates that sort of move, the chip stocks are starting to move now.

"Tech companies around the world are stating the third quarter may be the bottom, so beginning in the fourth quarter we might see a general recovery, that's what the market is looking for," Han said.

"Share prices will have moved already by the time you see the real demand coming through," he noted.

In Taiwan, the world's two largest contract chipmakers led the gains on Thursday.

World No. 1 Taiwan Semiconductor Manufacturing finished up 2.9 percent at T$70.50. World No. 2 United Microelectronics Corp. closed up 2.8 percent at T$40.20.

In Seoul, even Hynix rose on Thursday. It ended up 2.2 percent at 1,615 won, the heaviest-traded stock. It set all-time lows last month.

On Wednesday, Merrill raised its forecast on 12 chip companies worldwide, crediting them in part for being more realistic about their prospects.

The research house also said it foresees a recovery in chip sales, making chip stocks a good buy. It was particularly encouraging about contract chipmakers as well as makers of analog chips and chips for cell phones.

But it warned that price competition could hurt computer chipmakers and that the stockpile of communications chips could take time to fall.