Scrappy Taiwanese DRAM Maker ProMOS Steadies Itself

ProMOS Technologies put the final touches on a new viability plan last week that will keep the company in business with a trimmed down workforce, ensuring at least one Taiwanese DRAM maker will survive the current downturn unless DRAM prices collapse again.

The Taiwan government moved last year to support its DRAM makers by working with banks to postpone loan repayments and then by creating a new company, Taiwan Memory Company (TMC) with an eye to acquire failing DRAM producers and combine them into a larger entity.

Plans around TMC have been delayed by bickering over whether TMC will acquire DRAM producers or instead become a research and development firm, forcing DRAM makers on the island to seek their own ways out of the current cash crunch.

ProMOS, one of the most heavily indebted companies, has finally emerged from what was perhaps its darkest hour in this recession. The company was able to win approval in April from most bondholders to repay bondholders US$250 in cash for every US$1000 bond held, for a 75 percent "haircut" to creditors.

Now the company is working on a new plan to stay afloat.

Last week, ProMOS laid off another 500 workers and mothballed another chip factory to slim operations to what it can afford to operate with the roughly NT$700 million (US$21.39 million) it's able to bring in every month selling DRAM and other kinds of memory chips.

"Right now, we're just trying to survive," said Ben Tseng, a vice president at ProMOS, in an interview. "At today's DRAM price, we cannot afford to run at full capacity."

The chip maker has also entered talks with foreign and domestic companies on potential memory chip partnerships, he said.

Raising new funds through a loan, bond or stock offering is impossible right now. "You have to be profitable to raise money," he said.

The company's cash flow allows it to operate just two of its four factories currently, while still enabling it to pay off gas, electric and other suppliers.

ProMOS won't restart the other factories until DRAM prices rise or it can sign partnerships to produce other kinds of memory chips.

"Today's DRAM price is still too bloody to jump back in," said Tseng.

The company's plight is common for DRAM makers hit by an industry downturn that started long before the global recession took hold. ProMOS is also an example of the problems such companies will face when DRAM prices start to rise again. There are still too many production lines ready to make chips when prices rise, so any increase will be capped as companies restart factories.

The good news for computer buyers is that DRAM will remain cheap and plentiful, so people can load up now on the chips, which are important for overall system speed and performance. DRAM makers have also said they're pushing ahead with new technology, DDR3 (double data rate, third generation), because the chips run faster and consume less electricity than DDR2, making them a better fit for mobile devices and server farms where power savings are important.

ProMOS has proven scrappy amid the ongoing recession. Many industry watchers predicted the heavily indebted company would be one of the first to fail, mainly due to fears it would not be able to resolve the bond issue it wrapped up in April. Other loans the company would have had to pay this year have been postponed through a government program to work with banks to arrange new repayment schedules, said Tseng.

This isn't the first time the company has faced adversity. Several years ago its stock was sold down well below value after then-technology partner Infineon Technologies pulled out of their agreement due to differences with ProMOS's parent company. Some analysts at the time predicted ProMOS may be forced by courts to stop using Infineon's production technology and cease operations, but that never happened. Nearly a year of bickering ended in a broken relationship but a new technology agreement.

Infineon later decided to spin off its DRAM business into a separate company, Qimonda AG, which became the first major DRAM maker to declare bankruptcy amid the current chip glut.

The global recession and DRAM industry downturn have been worse for ProMOS than its fight with Infineon. ProMOS posted its second consecutive yearly loss in 2008, NT$30.92 billion, on revenue of NT$36.09 billion, according to statements to the Taiwan Stock Exchange.

The chip maker's revenue hit a new low in the first quarter, NT$1.85 billion compared to NT$7.76 billion a year ago. The net loss for the quarter was NT$8.60 billion, bigger than the NT$8.05 billion loss in the first quarter of 2008.

The company's outstanding debt stood at NT$89.5 billion as of the middle of 2008, according to figures supplied by the Taiwan government, but that figure does not include the April bond repayment.

Analysts say the company faces continued hardship because of the global recession and weak DRAM prices.

The price of mainstream 1GB DDR2 DRAM chips that run at 800MHz fell nearly 9 percent last week, according to market researcher Gartner, the first big fall in several weeks. Analysts say a summer lull in purchases of laptop and desktop computers will hurt chip prices, but that there could be a rebound when PCs armed with Microsoft's new operating system, Windows 7, hit the market. Microsoft has said the software will launch globally in late October, but there will be a coupon system in place earlier than that date so that people buying a new laptop or desktop can upgrade to Windows 7 at no additional charge. Details of the program have not yet been formally announced.

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