Toshiba, allies seek key to system chip success

By Edmund Klamann

TOKYO: Top Japanese chipmaker Toshiba Corp, like its Japanese peers, has staked much of its future on complex, customised "system chips" used increasingly in products from cars to TVs to photocopiers. But tough foreign rivals like Samsung Electronics are now targeting that market and success for the Japanese will depend on forging alliances and shrewd use of its chip designs and other intellectual property, a Toshiba executive said on Thursday.

"This isn't like memory chips, where you can put out a large sum of money and quickly get moving," Katsuji Fujita, head of Toshiba's system chip operations, said in an interview. "It takes a long time to build up a base, to accumulate the necessary assets."

Japan's chipmaking conglomerates were all but driven out of the market for mass-produced computer memory chips by Samsung and other overseas competitors. After axing tens of thousands of jobs and posting billions of dollars in losses last year, the Japanese giants have shifted their focus to system chips, which combine memory, processing and other functions on a single piece of silicon.

Now Samsung is joining the fray, announcing on Tuesday it would invest four trillion won ($3.34 billion) on system chips over the next five years. "There isn't anyone else throwing that kind of money around," Fujita said. He estimated Toshiba spent 200 billion yen ($1.68 billion) developing intellectual property in system chips over the past decade.

But by joining hands with customers and other chipmakers, Fujita said, Toshiba and its Japanese peers could cut duplicative competition and pool resources to stay in the game.

"The Japanese are engaging in a lot of 'wasteful competition' in technology, where they take virtually identical products to virtually all the same customers," he said. Toshiba is currently mapping out a system chip alliance with Fujitsu Ltd., Japan's fifth-largest chipmaker and an initial framework for cooperation is due by mid-September, he said.

That would be about the same time Hitachi Ltd. and Mitsubishi Electric Corp, Japan's third and fourth largest chipmakers, are due to unveil details of a merger of their system chip operations, announced in March. While some analysts hoped for a merger of the Toshiba and Fujitsu operations as well, few saw that as likely anytime soon.

Fujita echoed that view on Thursday, citing difficult issues regarding equity ratios and corporate structures, although the decision ultimately lies with the two companies' presidents. Eventually, however, Fujita expected Japan's chipmakers to consolidate their manufacturing operations, and a joint project by of them is already working on next-generation manufacturing processes and design platforms for system chips.

"If the six simply take that common platform back to their own factories and make things, that wouldn't be very smart. Either there will be jointly owned plants or the six companies will turn to two or three for their manufacturing," he said. He also hoped Toshiba would strengthen ties with its biggest customer, consumer electronics giant Sony Corp.

The two joined hands in 1997 to develop a processor for the PlayStation 2 game console and are working with IBM Corp on a next-generation processor, code named "cell", that would enable Internet connections carrying high-resolution images. Fujita added it was possible Toshiba and Sony would build a joint chip plant in the future, but there were no plans now.

He added Toshiba would aim to bolster another weak link in its system chip operations -- software -- with help from U.S. software providers and Asian engineers. By the end of the year, he said, Toshiba would have 300 software engineers under its employ in China and India, with another 700 available there through tie-ups with other firms.

© Reuters