Sony to build new chip plant in Japan

Miki Shimogori

TOKYO: Sony Corp., Japan's flagship high-tech manufacturer, said on Wednesday

it would spend a total of 100 billion yen ($942.3 million) by March 2006 to

build a new semiconductor plant in Japan, accelerating its drive into the

potentially lucrative component business.

The new plant in the southern city of Kumamoto is designed to double Sony's

output of small liquid crystal displays (LCDs) and charge-coupled devices (CCD),

now used mainly for digital camcorders and digital steel cameras, Sony said.

"We have decided to build a new plant, believing that the industry-wide

demand for these key devices will expand further in three to five years from

now," said a spokesman for Sony, which grips about half of the world's CCD

market.

The new semiconductor plant will start operating in October next year with

300 workers. Mass production of LCDs will begin in 2002 at 3,000 wafers per

month, while 2,000 wafers of CCDs will be produced per month in 2003, Sony said.

In 2005, the combined output of the two devices at the new plant will be

increased to 12,000 wafers a month, which will double Sony's overall LCD and CCD

output capacity, it said. Sony currently sells about half of its semiconductor

products - including LCDs and CCDs - to other manufacturers.

News of Sony's new chip plant failed to inspire investors, however, with

shares in the company - the nation's bluest of blue chips - ending the day down

2.7 per cent at 11,530 yen.

Caught by a steep correction in global high-tech issues, Sony has lost 31 per

cent of its value from a record high marked in March, but analysts said its

long-term luster remains intact.

"The new plant will bring short-term pain by pressuring this year's

profit, but it should be viewed as positive in the long term as it will pave the

way for future profit expansion," said ING Baring Securities analyst

Kazushige Hata, who rated Sony shares a "buy", with a 12-month target

price of 14,400 yen ($135.7).

Aggressive semiconductor strategy



Sony has been gearing up to invest heavily in production of semiconductors,
which are eyed as a potential earnings pillar for the firm, the world's

second-biggest home electronics appliance manufacturer next to Matsushita

Electric Industrial Co.

For this business year, Sony said its parent-only investment on

semiconductors would total 95 billion yen, including 10 billion yen earmarked

for the new Kumamoto plant. It was up 58 per cent from an original estimate made

at the start of the year.

Separately, Sony's game making unit also plans to invest 125 billion yen to

boost output of chips for its cutting-edge PlayStation2 game console and other

home electronics devices.

Sony Computer Entertainment Inc (SCE) announced in early June that it would

make the additional investment to its initial 130 billion yen outlay in two chip

plants in southern Japan, one for graphic chips and the other for advanced

central processing units (CPUs) or "core" chips.

SCE said it may sell the chips to rival manufacturers - a move which analysts

said could set the course to create a de facto standard for chips for

next-generation digital electronic appliances, demand for which is expected to

grow further in the coming broadband networking era.

To finance part of the chip investment, Sony plans to issue a total of 150

billion yen worth of domestic bonds next month - its first domestic bond issue

in seven years.

Leading rating agency Moody's Investors Service on Wednesday assigned a

healthy Aa3 rating to the Sony bonds, but added that it will closely monitor

when Sony's investments start to generate free cash flow, which should improve

its balance sheet.

"Sony's most important negative rating issue is its free cash flow,

which (not including its financial businesses) was negative at fiscal year-ends

in March 2000 and 1999 because of huge capital expenditures for its

semiconductor division," it said.

Sony's announcement comes at a time when Japanese chipmakers such as NEC Corp

are making rosy profit estimates and boosting investment plans for this year,

amid booming demand for chips for mobile phones and other electronics goods. NEC

last Friday doubled its estimate for half-year group net profit.

(C) Reuters Limited 2000.