Struggling chip maker claims cost-cutting success

Semiconductor maker Infineon Technologies AG is claiming progress in its plan to cut costs by 1 billion euros (US$923 million) over the next year, but observers say the company remains on shaky financial ground.

Two months into its belt-tightening program, Infineon has achieved cost savings of several hundred million euros, the company said in a statement Wednesday, adding that by the end of the calendar year, Infineon will have cut some 2,400 jobs, almost half of a planned 5,000. But financial analysts continued to give the company poor marks. Deutsche Bank AG revised its forecasts for Infineon downward Monday.

"We now believe that the lack of any meaningful second-half recovery in DRAM (dynamic random access memory) pricing will exert significant pressure on Infineon's balance sheet. As a consequence, we now believe that the company may need re-financing in the next one to two quarters, most probably at terms detrimental to existing shareholders," the bank's analysts wrote.

Benchmark 128M-bit DRAM chips are currently retailing for only about $1.20 each, but cost over $3.50 to make, said Andrew Norwood, a senior analyst at Gartner Inc., adding that Infineon has one of the higher production costs in the industry, given its focus on newer 300-millimeter wafer technology.

"It's ahead of the game in terms of bringing in new technology, but part of the drawback of being ahead of the game is you've got to pay for it," he said.

Memory chips prices could rise if Infineon or a competitor should go out of business, Norwood continued.

"If a semiconductor facility goes belly up, the question is: what happens to that capacity? If another company takes it over, you're in the same situation; if that capacity goes out of use, then you go from oversupply to undersupply, and prices could double."

But nonetheless, the end effect on consumers is likely to be limited.

"Prices are so ridiculously low. The fact is that you can pick up a 256M-byte DRAM module for $20 or something. Even if they were to double overnight, that's only $40, and in terms of the full building materials of the PC, that's pretty small, so the consumer will probably be insulated from any price increase," he said.

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