Japan’s High-Tech Industry Braces for Heavy Losses in Chip-Making Operations

TOKYO —  Summer--so hot and muggy in this city that steam seems to pour from subway and train stations along with the nearly 15 million daily commuters--is coming early this year for many of Japan’s large electronics companies.

Corporations here have begun to report their year-end financial results, setting in motion a monthlong ritual that closes with shareholder meetings in late June. Already the management and directors of some companies, particularly those whose products include semiconductors, are beginning to sweat.

The firms are revealing sagging profits; their chip-making divisions, for the most part, had such huge losses in the fiscal year ended March 31 that the red ink no longer can be absorbed quietly.

At last, the worldwide semiconductor industry recession, exacerbated by the rising yen and trade frictions, is catching up with Japan’s high-technology industries.

By the time the annual financial reporting season has ended, some of the world’s largest chip makers, including NEC, Hitachi and Fujitsu, will be well into restructuring programs that likely will permanently change those corporations.

The news will be so bad, some analysts here have predicted, that corporate directors will resign from their board seats. Following Japanese custom, they will accept responsibility for the chip losses and the pain those losses will bring to the companies’ employees and stockholders.

Although the companies do not break out results by division, most admit that their semiconductor operations have been troubled.

Figures Show Profit Off

“All Japanese semiconductor operations were in the red” last year, said Kazua Kimbara, head of Hitachi’s electronic devices group.

Hitachi’s unconsolidated results showed a 39% profit drop from a year earlier. Toshiba’s net income from its businesses in Japan plunged 56%.

The world’s largest chip maker, NEC, will report its unconsolidated results this week; those, too, are expected to show a profit decline. And on Monday, Fujitsu posted a double-digit profit drop for the second consecutive year.

The reduction in chip-making employment may be as severe as it has been in the United States, where an estimated 30,000 to 40,000 chip workers lost their jobs during the past 20 months. With one major difference: Japan’s companies are still retaining their “lifetime employment” guarantees, at least technically.

That means other parts of these companies must absorb workers displaced from semiconductor divisions that have sustained losses, cut back production and eased away from high-volume, commodity products that generate lots of manufacturing employment.

From now until late June, executives and directors of Japan’s electronics giants will be engaged in wrenching, closed-door meetings with labor leaders, trying to find the least painful method of shedding employees.

At Hitachi, 2,000 to 3,000 chip workers are being shifted to computer operations, where sales have been increasing. NEC also has moved 3,000 employees from its semiconductor operations.

These announcements likely will spark further disclosures of cutbacks, said Osamu Ohtake, semiconductor analyst in Tokyo with market researcher Dataquest.

“It’ll be like a domino effect,” he said.

Fujitsu has moved an undisclosed number of workers out of chip making; the number of displaced semiconductor workers at companies like Matsushita, Toshiba and Oki Semiconductor is likely to increase, analysts believe.

In this respect, the electronics companies--the major drivers of Japan’s boom economy in recent decades--are beginning to resemble some of the nation’s “sunset” industries, such as steel, shipbuilding and chemicals.

Those businesses are struggling to maintain lifetime employment guarantees even as they slide into decline. Often they make room by encouraging longtime workers to take early retirement or by pushing workers into spinoff ventures that don’t carry guarantees of employment with the parent company.

At electronics companies, meanwhile, part-time workers have been cut from the payrolls, retiring workers are not replaced and fewer college graduates are being hired.

Although most electronics companies insist they are maintaining their lifetime employment policies--the transfers are euphemistically called “employment adjustments”--they admit it may not be possible to do so forever.

“Japan must take it for granted that a certain amount of unemployment will continue, and that the lifetime employment (policy) must undergo significant change,” said an official of one of the government agencies designed to help transfer workers from declining industries.

Philosophy May Change

Such an admission comes hard in Japanese culture, where layoffs by companies and mid-career changes by employees until recently have been nearly unthinkable.

Although re-evaluation of lifetime employment policies has become a national, though low-key, debate, it still is dangerous for a company to admit openly that it is reducing its employment in any way.

Said Hitachi’s Kimbara: “We rarely announce (these moves) in our domestic market. To close a (production) line or decrease workers is taken very negatively and results in a decline of our stock price.”

The transfer of workers from semiconductor operations began last year, primarily in response to the recession in the semiconductor industry that began in late 1985.

The reduction was accelerated earlier this year when Japan’s Ministry of International Trade and Industry ordered memory-chip production cuts of as much as 20% from levels of late last year. MITI’s order stemmed from a chip trade agreement with the United States. That agreement had already cost Japanese semiconductor makers some sales in the United States, they say, because of prices it set for memory chips sold there.

Many companies, along with Dataquest’s Ohtake, say the production cutbacks are causing shortages of some types of chips. On the bright side, said Ohtake, demand probably will drive up prices and help restore profits.

U.S. Demand Increasing

The increased demand is coming mostly from computer makers, especially in the United States, which are seeing a rebound in sales of the chip-laden machines. But demand from Japan’s chip consumers--often sister divisions of the semiconductor operations--remains flat.

In part, that is because of the stronger yen. The yen’s rise also is costing the electronics companies profitability in their other divisions. Without major cost reductions throughout the companies, the high yen could cut holes in the deep pockets that once protected chip operations from cyclical downturns.

Being forced to stand on their own has accelerated the move of Japanese chip makers--like their American competitors before them--away from concentration in commodity memory chips toward more profitable products.

As the month unfolds, it is likely to reveal many changes in Japan’s high-technology industries. The shareholder meetings--which in the past have been known to run for hours as irate shareholders berate company officials--may prove especially raucous this year.

Some companies, such as Toshiba, are choosing to pay the same dividend as last year to avoid taking too much heat from investors.

For chip workers, who face being transferred or who already have lost incentives and bonuses normally considered standard pay, the consequences are not as easy to sidestep.

“Because business was not so good last year,” said Yoshio Egawa, a Fujitsu official, “we didn’t get much of our bonuses. Maybe we’ll get paid in semiconductors.”