Toshiba Falls Behind in Chip-Development Race

By Mayumi Negishi and Takashi Mochizuki Features Dow Jones Newswires

Toshiba Corp. is lagging behind rival chip makers in securing next year's supply of silicon wafers, people in the industry said, showing how the company's troubles are hamstringing operations at its principal profit center.

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Toshiba is trying to sell its memory-chip unit for some $20 billion in a bid to survive after its U.S. nuclear unit, Westinghouse Electric, filed for bankruptcy protection in March and left Toshiba with multibillion-dollar losses. But the sale process has gotten bogged down. At a meeting Thursday, Toshiba's board failed to select a preferred bidder, people familiar with the meeting said. The company has said it wants the sale wrapped up by June 28.

The semiconductor unit is riding a once-in-a-decade boom in demand thanks to the surge in internet-connected devices and services that rely on huge banks of computers storing data. One spillover effect of the boom is a shortage of silicon wafers, the material from which chips are created. Inventory levels have fallen to all-time lows and companies are hurrying to lock up supplies.

People in the industry involved in contract negotiations said some of Toshiba's rivals have already agreed to price increases for next year's contracts so they can ramp up production, while they said Toshiba has held back in some cases.

That could put Toshiba, the world's No. 2 maker of NAND flash memory, at a disadvantage in a fast-paced market. A Toshiba spokeswoman declined to comment on negotiations but said the company is working to deal with price rises for wafers.

Toshiba remains two months behind market leader Samsung Electronics Co. in developing 3-D NAND chips, which are used in Apple Inc.'s iPhones, analysts said.

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Companies involved in bidding for the Toshiba chip unit include Foxconn Technology Group of Taiwan, SK Hynix Inc. of South Korea, U.S.-based Broadcom Ltd. and Toshiba's joint-venture partner Western Digital Corp., according to people familiar with the matter. Private-equity firms and entities backed by the Japanese government are also involved.

The sale has been hampered by a legal brawl with Western Digital and Japanese government opposition to a Chinese buyer.

Western Digital says its contracts with Toshiba give it the right to block any other bidder and sued this week in California state court to prevent Toshiba from selecting a buyer. Toshiba says Western Digital has no such right of refusal.

Meanwhile, Japanese government officials say they won't let Toshiba's technology get transferred to Chinese hands, and they have made clear privately that Foxconn, because of its extensive operations in China, would be blocked for that reason.

Even if Western Digital resolved its dispute with Toshiba and made a deal to buy the Toshiba unit, antitrust regulators in China or elsewhere might object because Western Digital already has a big share of the NAND flash memory market.

The delays are badly timed because the chip unit needs a deep-pocketed owner to fund expansion. The chip industry is in the midst of its largest growth year since 2010. NAND chips especially are hot, as consumers demand more storage in their smartphones.

One person familiar with the matter said Toshiba views Broadcom's offer as the most attractive because the U.S. company has shown its commitment to beef up the chip unit's production.

Chip companies anticipate 12% growth overall and 30% growth in memory in 2017, according to the World Semiconductor Trade Statistics.

Japanese silicon wafer makers Shin-Etsu Chemical Co. and Sumco Corp. won their first price rises in more than a decade in the January-March quarter, according to executives from both companies at their most recent earnings announcements. Both companies supply to Toshiba, along with GlobalWafers Co.

"Customers are prioritizing volume" in negotiations, said SMBC Nikko Securities analyst Shinobu Takeuchi in a note to investors. He said the price of 300-millimeter wafers was likely to rise by about 40% by the end of 2018 compared with the end of 2016.

Samsung said this week it would ramp up its 64-layer 3-D NAND production. Analysts expect Samsung to command a little less than half of 3-D NAND capacity by the end of the year.

Write to Mayumi Negishi at mayumi.negishi@wsj.com and Takashi Mochizuki at takashi.mochizuki@wsj.com

(END) Dow Jones Newswires

June 16, 2017 08:15 ET (12:15 GMT)