Infineon claims cost-cutting success

Semiconductor maker Infineon Technologies is claiming progress in its plan to cut costs by £630m over the next year, but...

Semiconductor maker Infineon Technologies is claiming progress in its plan to cut costs by £630m over the next year, but observers say the company remains on shaky financial ground.

Two months into its belt-tightening programme, the company claims to have has achieved cost savings of several hundred million euros. By the end of the calendar year, Infineon will have cut some 2,400 jobs, bringing it almost halfway to its target of 5,000 layoffs.

However, financial analysts are not impressed. On 24 September Deutsche Bank revised its forecasts for Infineon downwards.

"We now believe that the lack of any meaningful second-half recovery in DRAM 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 128Mbit DRAM chips are currently retailing for less than 90p each, but cost £2.50 to make, said Andrew Norwood, a senior analyst at Gartner. Infineon has one of the higher production costs in the industry, given its focus on advanced 300mm wafer technology, he added.

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

"If a semiconductor facility goes bellyup, 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."

Nevertheless, the effect on consumers is likely to be limited.

"Prices are so ridiculously low. The fact is that you can pick up a 256Mbyte DRAM module for $20 (£14) or something. Even if they were to double overnight, that's only $40 (£27), and in terms of the full building materials of the PC, that's pretty small," he said.

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