Elpida Files for Bankruptcy

Notice on Petition for Commencement
of Corporate Reorganization Proceedings

Elpida Memory, Inc. announces that at the meeting of the board of directors held on February 27, 2012, we resolved to file a petition for the commencement of corporate reorganization proceedings and filed the same with the Tokyo District Court.

As such petition was duly received on the same day and then the Court has immediately rendered the temporary restraining order to restrain any repayment, etc., the comprehensive prohibition order to prohibit any execution and the supervision and examination order, we hereby notify thereof as follows. In this connection, our consolidated subsidiary, Akita Elpida Memory, Inc., has simultaneously filed a petition for the commencement of corporate reorganization proceedings.

We sincerely regret any inconvenience caused by this petition for the creditors as well as the people who have been supporting us.

From now on, under the supervision of the Tokyo District Court and Mr. Atsushi Toki, Attorney-at-Law and the Supervisor and Examiner appointed by such court, our company will work together as a whole and will make our best efforts to rebuild the business of our company. Your continued support and contribution will be greatly appreciated.

1. Grounds for the Petition
Our company was established in December 1999 as a sole company in Japan that specializes in DRAM (our initial trade name was NEC Hitachi Memory, Inc.), has started development operations for DRAM products since April 2000, and changed our trade name to the present one in May 2000.

Thereafter, we expanded our business by establishing foreign companies as local distribution offices, by commencement of sales business inside and outside Japan, by succession of businesses of other domestic or foreign companies to our company, by collaboration with other domestic or foreign companies, and by commencement of manufacturing of products at our subsidiary in Hiroshima (currently, our Hiroshima Plant).

Since March 2003, we have been a sole company in Japan being engaged in DRAM business. After the listing of our shares (currently, common shares) on the 1st section of the Tokyo Stock Exchange in November 2004, we explored our business through such as the plant and equipment investments into Hiroshima Plant, etc., the establishment in 2005 of a joint venture company, Tera Probe, Inc., a company specialized in wafer probe testing, the establishment of Akita Elpida Memory, Inc., a wholly owned subsidiary to take on the back-end process for DRAM, the establishment of Rexchip Electronics Corporation, a joint venture company for front-end process, and the subsequent acquisition thereof as a subsidiary.

However, as a result of the reinforcement of production capacity by investments into plants and equipment implemented proactively in the DRAM industry in 2006 through 2007 in expectation of the growth of demand due to an increase of the volume of shipment of personal computers as well as an increase of the capacity of DRAM per unit, the supply significantly exceeded the demand. At the beginning of 2007, the price of DRAM started falling sharply and, combined by a significant decrease of demand for the products due to the global economic downturn begun in the fall 2008, such price further declined. In the fiscal year ended March 2009, we were forced to experience a significant deterioration in business results compared with the previous year.

In such situation, being evaluated in June 2009 as one of the companies having world’s highest technology in development and design of DRAM, we received an approval on the business restructuring plan under the Act on Special Measures Concerning Revitalization of Industry and Innovation of Industrial Activity from the Ministry of Economy, Trade and Industry in order to maintain such superiority in technology and to increase the productivity. Despite such business restructuring plan that targeted on keeping the superiority in technology, improvement of productivity and further expansion of market share by implementing the most advanced research and development of premier DRAM, and by investments into advanced plant and equipment which enable high productivity, the circumstances around our company turned from bad to worse due to the factors such as the record-breaking strong yen against the US dollar, and the steep fall of the price of DRAM products by fiercer competition in the DRAM industry. Within such continuing harsh management environment, an additional negative factor, which is a stagnation of demand for DRAM due to the great flood in Thailand in 2011, has arisen.

Based on the background mentioned above, we have concluded that, if we continue the business by ourselves, we will face cash shortage soon. Moreover, we assumed that, if we left this situation and then cash shortage would become reality, the corporate value of our company must significantly fall, there must be no way to be supported by any sponsorship, and the people concerned such as the creditors must suffer more inconvenience. Therefore, we are obliged to decide that we will aim for the restructuring of our business under the proceedings of the Corporate Reorganization Act and filed the petition as of today.

2. Aggregate Amount of Indebtedness
(on the balance sheet as of March 31, 2011)
448,033 million Yen

3. Future Prospect
In the future, under the instruction and supervision of the Tokyo District Court and Mr. Atsushi Toki, Attorney-at Law and the Supervisor and Examiner, our company will work together aiming for the restructuring of our business with a view to selection of a sponsor and the sponsorship from such sponsor so that we can secure as much repayment funds as possible for the creditors.

4. Application for Examination of Restructuring Plan, Etc.,
Provided in the Securities Listing Rule
of the Tokyo Stock Exchange
We have no intent to file the application for the examination of restructuring plan, etc., provided in Article 605, Paragraph 1 of the Securities Listing Regulation of the Tokyo Stock Exchange.

Comments

Here is an article on the subject written by Jim Handy and Lane Mason, analysts at Objective Analysis.

Japan's Only DRAM Firm Seeks to Reorganize Debt

Japan's Elpida, the nation's only DRAM maker and the world's third largest, has filed for bankruptcy. According to Bloomberg this is the largest bankruptcy in Japan since the filing of Japan Airlines (JAL) two years ago.

The filing says that the company has debts of ¥448 billion (about $5.6 billion) after having lost money for the past five quarters.

Background
Elpida was formed by the merger of the DRAM businesses of the major Japanese DRAM makers: NEC, Hitachi, and later Mitsubishi. In the 1980s Japan ruled the DRAM market - NEC rose to become the world's largest semiconductor manufacturer based on its DRAM strength before Intel took that distinction from the company in 1992.

Elpida, while strong technically, has suffered because of the 2011 DRAM price collapse and Japan's strong yen. An export driven economy has to keep its currency undervalued to remain competitive in the world economy. The success of the Japanese economy raised the value of the yen. Elpida has good technology, but is simply unable to compete in an oversupplied world market using prices that are yen-based.

Since Elpida is Japan's only DRAM manufacturer many industry watchers and participants expected Japan's government to keep the company afloat out of national pride. This seems not to be the case.

What Happens Next?
Over the life of the DRAM industry companies that have exited the business have remained in production under a different organization. In some cases, like Elpida's predecessors, smaller firms have banded together to create a larger firm. In other cases one company acquires the DRAM business of other firms. This has largely been the case with Micron Technology, who took over the DRAM businesses of Texas Instruments and Toshiba, and Qimonda's interest in Inotera.

Certain companies exit the business by converting DRAM capacity to manufacture other products. Intel, National Semiconductor, Fujitsu, STMicroelectronics, Motorola, and many others have taken this route. These were all companies that had a large enough semiconductor business outside of DRAM that they could effectively execute such a plan. Even companies that are strong in both NAND and DRAM can convert DRAM capacity to NAND flash relatively inexpensively. Elpida does not have this luxury.

There has only been one case in which a DRAM manufacturer has been liquidated - that was Qimonda in 2009.

Of the remaining DRAM manufacturers, Micron is the only one that is likely to take over other companies' DRAM businesses. Hynix and Samsung build all their own capacity themselves. The Taiwanese players are in a position similar to Elpida's, so they are unable to acquire the firm. In fact, it would not be surprising to hear of other consolidation or similar drastic actions occurring shortly in Taiwan's biggest three DRAM makers: Nanya, Powerchip, and ProMOS. In fact, Elpida is today the sole outlet for Powerchip's DRAM wafers, which account for about half of Powerchip's production, so there is significant cause for concern here.

DRAM makers are all anxious for the market to shift from an oversupply to an undersupply, but the high level of capital spending in 2010 indicates that a supply/demand balance is unlikely to arrive until 2013. Should DRAM growth slow due to the use of NAND caches in PCs (as explained in detail in a recent Objective Analysis report) a DRAM recovery could be postponed even further.

Will Prices Stabilize?
Some industry watchers theorize that prices will stabilize either by Elpida being immediately taken offline or through the market becoming an oligopoly. We find neither of these to be likely.

Elpida will stay in business as various options are decided. The purpose of the bankruptcy is to shield the company from actions its creditors could legally take to seize assets. The intent is to continue to operate. This means that there will be no change to the current oversupply until a decision has been made.

It is also unlikely that an Elpida exit from the market would create an oligopoly leading to stable prices stemming from a lack of competition. DRAM is still an undifferentiated product in which capital costs dominate the cost structure, so oversupplies will result in a price collapse as long as there are two or more vendors.

In short, this move is unlikely to impact DRAM prices over the near term, as Elpida sorts out its future and the market remains oversupplied.