TAIWAN, TAIPEI: A strong recovery in computer memory chip prices has sapped momentum for a state bailout of Taiwan's smaller struggling chipmakers and threatens their existence in the next downturn as global rivals power ahead.

Nearly all Taiwanese PC memory chip makers have bounced back to profits in recent quarters, though their share prices have been flat this year and many smaller firms are still licking their wounds from the sector's last downturn.

Analysts say shaky Taiwanese players including Powerchip Semiconductor and ProMOS Technologies face cash crunches and are under heavy pressure to buy increasingly expensive equipment to upgrade technology.

"Despite relatively firm chip prices, Taiwan firms appear to have problems in boosting output, and could lead to further market share losses," said Jin Sunghye, an analyst at Shinhan Investment Corp.

"They are already some one year behind top tier companies on the technology front and the problem would get only worse in downturn as they would be squeezed financially."

Samsung Electronics and Hynix Semiconductor, together control more than half the $23 billion global DRAM market, with U.S. Micron and Japan's Elpida vying for the third spot with about 33 percent market share together. Taiwanese firms account for the rest.

Samsung and Hynix, the world's No. 1 and No. 2 players respectively, are racing to upgrade technology to make more efficient and cheaper chips as demand grows for an array of technology products.

Spending by such firms could further widen their already sizeable edge over smaller, debt-ridden Taiwanese rivals. A supply glut is looming and could hit prices before Taiwan's smaller players regain their footing.

"The death knell for Taiwan Memory has been sounded many a time since the government dropped its bailout plan," said Ricky Juil Seo, an analyst at KB Investment & Securities.

"With no subsidy and only a small amount of money they just started making, they can't even afford to buy new chip processing system."

A year ago, Taiwan unveiled plans to set up Taiwan Memory Company to rescue the high-tech industry's most commoditised area. But the new firm, renamed Taiwan Innovation Memory Company (TIMC) later, has since not taken off as the government decided not to inject any funds in the company.

In February 2009, Taiwan said it had up to T$70 billion ($2.2 billion) to bail out the struggling DRAM sector, and then it announced the formation of Taiwan Memory in March.

Technology partner Elpida of Japan has put its cooperation on hold, thus giving the strongest players a chance to grab a bigger market share.

Unlike bigger rivals which own technology, Taiwan's DRAM makers rely on overseas partners for technology.

Chipmakers were the darling of investors last year, as Samsung shares rose 77 percent, while Hynix shares more than tripled. Both Powerchip and Promos were little changed last year.

Few survivors

Analysts say Nanya Technology and Inotera, Nanya's chip joint venture with Micron, could be the only two survivors in Taiwan eventually, helped by strong financial support from parent Formosa Plastics.

Other chipmakers in Taiwan are struggling with low profitability: ProMOS sold chips at some 30 percent loss and Powerchip reported less than 10 percent of operating profit last quarter, while Samsung and Hynix reported around 30 percent of operating profit from DRAM, according to BNP Paribas.

Analysts said relatively healthy firms such as Elpida and Micron could stay in the race if they pump out more powerful chips for new mobile devices to widen the profitability gap over marginal chipmakers.

"We've agreed to outsource production to Winbond and ProMOS, so we are taking necessary steps like those so that our Taiwan strategy would not be affected much even if things did not work out on the TIMC front," Elpida spokesman Hiroshi Tsuboi said.

Big spending plans by the giants spell more trouble for laggards, as they have to wait some nine months to get their order for chip processing systems to be delivered due to heavy order backlog.

UBS cut its rating on the global DRAM chip sector to "neutral" this month due to supply worries, and Citigroup expects prices to drop 30 percent later this year from the first half as total capital spending is set to more than double to $10.4 billion this year, marking the first annual rise in three years.

"Korean companies have been dominating the market and it is really difficult for Taiwanese companies to compete in the longer term," said John Chiu, who manages T$12 billion ($375 million) of equity assets for Taiwan's Fuh Hwa Securities Investment Trust.

"Risks are very high for small players," said Chiu, who owns only a very small amount of DRAM shares in his portfolio now.