Taiwan legislators yesterday rejected applications for subsidies from D-Ram chipmaker Powerchip and Taiwan Innovation Memory Company, the state-founded vehicle for upgrading Taiwan's memory chip industry.

The decision by the economics committee effectively halts government efforts to reform the fractious and troubled dynamic random access memory sector. Taiwan is the world's second-biggest manufacturer of D-Ram chips, which are found in every computer, but many Taiwanese D-Ram companies were on the brink of collapse over the past year after industry overcapacity led to a protracted slump.

Pan Meng-an, a legislator on the committee, said "consolidation should have been led by the private sector and assisted by the government, but it has now become a plan to use taxpayers' money to try to fill a black hole".

TIMC had asked for T$4.9bn (US$152m) from the government while Powerchip said earlier it wanted T$4.5bn to set up a subsidiary to manufacture flash memory chips, which are used in consumer electronics such as mobile phones and cameras.

TIMC was established in July to help raise industry competitiveness. Taiwan's government believed its D-Ram makers lagged behind South Korean, Japanese and American rivals because the Taiwanese did not have homegrown D-Ram technology.

TIMC chose Japan's Elpida , the world's thirdbiggest D-Ram producer, as its technology partner and had said it planned to take a 10 per cent stake in the Japanese company. Many also believed TIMC would lead a wave of consolidation in the industry, although John Hsuan, chief executive, previously said he instead wanted to create new business opportunities for Taiwanese manufacturers by acquiring technology in speciality D-Ram from abroad.

Those plans now appear moot as it is unclear whether or not TIMC will ever begin operations. Mr Pan, the legislator, said TIMC should "return to the market mechanism and raise money privately, as it will not get a government injection".

Mr Hsuan could not be reached for comment.

One analyst said TIMC "has become a political sideshow rather than something that would have a big impact on the industry". This is partly because the global D-Ram industry has recovered sharply in recent months, and there are now growing concerns of capacity shortages . Joyce Yang, vice-president at DrameXchange, said spot prices for DDR2 D-Ram are on track to increase by half between the third and the fourth quarters of this year.

Yesterday's decision comes as Elpida, which had long partnered with Powerchip, this week signed separate deals with ProMOS and Winbond , two of Taiwan's smaller D-Ram makers. ProMOS and Winbond would provide manufacturing capacity to Elpida, and in return Elpida would provide the technology needed to produce future generations of the memory chips to the two companies.

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