KAWASAKI, Japan -- NEC Electronics Corp. will likely outsource more production of semiconductors used in consumer electronics to outside chip-making foundries as a way to ensure against a sudden plunge in demand like the one that caused the company's heavy losses in the past fiscal year.
In an interview, NEC Electronics President Junshi Yamaguchi said that any new outsourcing would start after the company's proposed merger with Renesas Technology Corp. While the two chip makers have reached a basic agreement to merge by April, they are still working out the details of a plan that could lead to the creation of Japan's largest chip maker.As a way to avoid the huge capital investment required for new chip plants, semiconductor companies are increasingly designing products and then turning to foundries like Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. for production. NEC Electronics said it hasn't decided with whom it plans to work.
NEC Electronics, which is 70% owned by electronics conglomerate NEC Corp., is using Japanese chip maker Elpida Memory Inc. as a foundry for semiconductors used in LCD televisions, but it now plans to outsource production of chips for other consumer electronics affected by volatile demand.
However, the firm still intends to produce some of those chips in-house and use the foundries to buffer against spikes or plunges in orders from customers. Mr. Yamaguchi said his company will continue to make automotive chips at its own production facilities, because cars change as quickly as consumer-electronics products.
As sales of cars and electronics plummeted near the end of 2008, NEC Electronics and other chip makers struggled with a sharp decline in orders when manufacturers halted production. In turn, it was forced to shut down its own production lines, which contributed to another year of losses.
NEC Electronics is coming off its fourth-straight year in the red, posting a net loss of 82.6 billion yen ($888 million) in the fiscal year ended March 31. Things got especially bad in the January-March quarter when the company's factories were running at about 40%.
"The worst is over," said Mr. Yamaguchi, a fluent English speaker who took over as NEC Electronics' president and chief executive in June. He is implementing a 90 billion yen cost-cutting program devised by his predecessor, Toshio Nakajima.Factory utilization grew to more than 50% in the April-June quarter before reaching about 65% in July. Mr. Yamaguchi said he expects that figure to approach 70% in September.
Part of the company's recovery is being fueled by strong demand for chips used in increasingly sophisticated automobiles and electronics such as flat-screen televisions and DVD players in Japan and China.
Mr. Yamaguchi expects microcontrollers, which serve as the "brains" of electronics products by controlling engine units and other auto components, to cash in on the growing market for hybrid vehicles. Hybrids use 30% to 50% more chips than regular gasoline-powered autos. "It'll be a big tailwind for the chip industry," he said.
