030
of a fair price for the property. This
method has been used when an immi-
nent threat to or need for land requires
quicker action than would be possible
if compensation had to be determined
first. The underlying principle applies
to the auto crisis.
To stabilize a vital sector of the
economy, Congress could take the
assets of the automakers in peril and
place them immediately in the hands
of a receiver who would then cut new
deals with workers, dealers, and
suppliers. Eventually, the receiver (who
might be the proposed "car czar")
could, on behalf of the government,
sell the new entity in the marketplace,
as is, or with a continuing government
subsidy.
DIVIDING THE MONEY
The "takings" legislation would
provide for a post -confiscation
judicial hearing, where a court would
determine the value of the assets the
government seized. That amount
would be transferred to the corporate
shells of the former automakers. Or,
if a court ordered, part of the pay-
ment could go to others whose rights
were compromised by the seizure.
The companies could then enter
bankruptcy, where secured and other
claimants would fight over the cash.
The bankruptcy code is well suited to
officiate in a contest for limited assets.
This contest would be separate from
auto production, which would not be
disrupted in the imbroglio.
A legislative taking wouldn't be a
panacea. Renegotiation with needed
workers and dealers, among others,
is an inevitable cost of continuing
to make cars. However, the unions
would no longer cling to the hope of
preserving their current contracts.
Unwanted dealers could not hold up
the redeployment of assets. And there
would be no uncertainty over whether
unsatisfied secured creditors might
force liquidation. Quick action might
preserve a viable portion of the U. S.
auto industry, i BW i
Adler, the Charles Seligson Professor
at New York University School of Law,
teaches and writes about bankruptcy
and corporate finance.
BUSINESSWEEK I DECEMBER 29, 2008 I JANUARY 5, 2009
CHIPMAKERS
ON THE EDGE
Awash in inventory, global companies are in
deep trouble—and some are seeking bailouts
By Bruce Elnhorn
HONGKONG
Overcapacity. Looming
bankruptcies. Government
bailouts. The U.S. automobile indus-
try? No, this is the global semiconduc-
tor industry, producers of the chips that
power everything in today's economy
from cell phones to smart infrastruc-
ture. While so much attention has been
focused on American automakers, the
convulsions in the chips business may
have just as broad implications and
possibly more strategic significance for
countries around the world.
In recent years, Intel, Samsung, and
many lesser-known companies have
pumped huge amounts of money into
new production facilities. They saw
rich opportunities in making chips for
the growing crop of digital devices,
from iPhones and BlackBerrys to elec-
tric utility monitoring systems. But
now as the worldwide economy slows,
demand for those chips has fallen off a
cliff. Companies that sank billions into
new factories are running them at half
capacity or less, and losing a bundle.
BIG SPENDERS
Capital expenditures by world's
memory-chip producers
, „ BILLIONS OF DOLLARS
'03 '04 '05
Data: Merrill Lynch
The situation is "desper-
ate," says Daniel Heyler,
head of global semicon-
ductor research for Merrill
Lynch in Hong Kong.
The semiconductor
industry has always been
cyclical, and if these were
normal times there would
be a brutal shakeout with
the weakest players shut -
ting their doors or selling
out. But this downturn
looks different from those
of the past. Chip produc -
tion is more global than
ever before, with many
of the largest facilities
in Asia. Many govern-
ments see semiconductor
production as strategically
important to their economies. So some
governments are providing financial
support to local companies. This will
mean lower prices for chip custom-
ers, but it could cause serious pain for
chip companies that compete without
government support. "The last thing
you want to see is governments rescu-
ing less-competitive companies," says
Avi Cohen, head of research at Avian
Securities in Boston. "The supply
never goes away."
Overcapacity is a growing problem.
On Dec. 16, the market research firm
iSuppli issued an alert to clients that
semiconductor inventories are likely
to balloon to $10.2 billion at the end of
December, up from $3.8 billion at the
end of September.
The government bailouts began this
month. China's biggest chipmaker,
Semiconductor Manufacturing Inter-
national, cut a deal to receive $170 mil-
lion from a state-owned company. In

Germany, the state of Saxony offered
Qimonda $206 million in support,
although it's not clear the pact will be
finalized. And in Korea, a consortium
of state - owned and private banks are
expected to provide Hynix Semicon-
ductor with about $600 million in new
loans. "One country starts considering
a bailout, and then it kind of spreads,"
says Christian Heidarson, senior
research analyst with Gartner in Hong
Kong. "Nobody wants to see their in-
dustry being lost to another country."
CONSOLIDATION INEVITABLE?
Taiwan may have the most at stake.
The country has fostered a large and
lucrative chip industry, with gi-
ants such as Taiwan Semiconductor
Manufacturing doing cutting-edge
work on par with Intel and IBM. Now,
1 however, several of the country's larg-
I est chipmakers are in serious trouble.
[ A handful of companies that make
' memory chips, which manage data on
PCs and store information on digital
cameras and mobile phones, may go
1 out of business without a govern-
ment bailout next year. "It's unbear-
able," says Frank Huang, chairman of
Powerchip Semiconductor, Taiwan's
largest memory manufacturer. "Right
now no [chip] company can make a
profit. The government must support
this industry." On Dec. 16, Economic
Affairs Vice-Minister Shih Yen-Shiang
said the government is considering aid
I for chip companies.
The stocks of memory chip makers
have already been pounded by the twin
concerns of the economic downturn
and government bailouts. Singapore's
Chartered Semiconductor Manufac-
turing, Germany's Infineon Technolo-
gies, and Boise (Idaho)-based Micron
Technology have all seen their shares
tumble at least 75% this year.
Competition is most brutal in
memory chips because production is
standardized and chips are considered
commodities. Companies splurged
on new production in recent years,
investing a total of $33 billion in 2007.
Because 70% of their costs are fixed,
there's little reason to cut back produc-
tion. So even as demand has fallen, the
big Asian memory companies continue
to flood the market. "That's why you
are seeing rock-bottom prices," says
Merrill Lynch's Heyler.
For customers, plummeting memory
prices may lead to more innovative
DECEMBER 29, 2008 I JANUARY 5, 2009 I BUSINESSWEEK
NEWS
products. Cheap chips, for example,
could also make it easy for anyone to
store an entire photo collection on a
mobile phone.
Semiconductor companies in the
U.S. are a bit more insulated than
those in Asia. Intel, the world's largest
chip company by revenue, has been
hit by the economic downturn, but
it benefits from its focus on making
microprocessors, the brains of PCs. Its
only real competition in that business
is Advanced Micro Devices, and AMD
has struggled to keep up because it
can't match Intel's heavy investments
in the latest production technology.
Texas Instruments and Qualcomm
don't compete in the commodity
memory business, either. They pro -
duce chips that let cell phones make
wireless calls, among other products.
The turmoil in the global chips
industry is likely to last a while. Still,
consolidation looks inevitable, espe-
cially among the memory chip makers.
In the meantime, if Taiwan, Germany,
and others keep givingfinancialsup-
port to local companies, chipmakers
elsewhere will be faced with a tough
decision: They can either compete on
an uneven playingfieldor cede the ter-
rain. "There are no choices that do not
involve significant pain at this point,"
says Dale Ford, senior vice-president
atiSuppli. IBWI
-With Arik Hesseldahl in New York,
Cliff Edwards in San Francisco, and Jack
Ewing in Frankfurt
—
Business Exchange
Read, save, and add content on BW's
new Web 2.0 topic network
Chips: The New Economics
Steep fixed costs are a big
problem for chipmakers. So when
demand falls, many keep cranking
out chips to cover their overhead.
In "The New Economics of
Semiconductor Manufacturing,"
Harvard's Clayton Christensen
looks at managing the pressures.
To read Christensen's article, go to
http://bx.businessweek.com/
semiconductors/reference/