European semiconductor makers are engaged in a fight for survival in which billions of dollars of cash are needed to stay ahead in a technological rat race.

The continent's three chip leaders Philips Semiconductors, Siemens and STMicroelectronics NV (ST) have to fight against major US groups such as Motorola and Texas Instruments and Asian companies which have been investing heavily.

According to Dataquest figures, Philips ranks ninth in the world semiconductor manufacturers' league table, ST is 10th and Siemens 12th.

On July 31st, Siemens announced the closure of a Dynamic Random Access Memory (DRAM) chip factory in Britain as a price war with mainly South Korean makers plunged the semiconductor division of the German electronics group into the red.

Siemens chief executive officer, Mr Heinrich von Pierer, said he expected a loss of more than one billion marks (£400 million) for the year 1997/98 for the chips unit.

Philips and ST do not make DRAM chips.

Philips has recently enjoyed a boom in chip sales which replenished the group's coffers at a crucial moment in its overall recovery programme. But there, too, alarm bells are ringing.

Philips' finance director, Mr Jan Hommen, said in July that the semiconductor division's operating margin was becoming weaker.

ST has issued a profit warning, saying it would be difficult to exceed second quarter profits in the third quarter.

For European chip makers, the fourth quarter of this year is going to be crucial for the outcome of 1998 the third quarter is traditionally very slow while an overall upturn in the industry could begin in the last months of the year.

The European chip makers are part of the global industry which is suffering from its worst crisis in decades, characterised by overcapacity and price-cutting.

ST chairman and chief executive officer, Mr Pasquale Pistorio, said the industry's crisis was almost entirely the consequence of over-ambitious investment plans by Asian companies wanting to "buy" market share in a key sector which has strategic value for the industrial future of a country.

He said these companies embarked on massive memory chip investments at a time when there was a shortage for computers and other applications. In the 1990-95 period, global chip sales soared to $144.4 billion from $50.5 billion.

When the new plants came on stream, there was over-capacity.

Dram, once a piece of technological prowess, has become a standard product with producers churning out 16, 32 and 64 megabyte chips.

According to data by Semiconductor International Capacity Statistics, the capacity utilisation of MOS (metal-oxide semiconductor) plants including DRAM factories, stood at 90.3 per cent in the first quarter of 1998.

This was down from the 93.5 per cent of the fourth quarter of 1997, but higher than the 89.1 per cent of the first quarter of last year.

The WSTS research body said in June that DRAM sales were expected to drop 26.6 per cent in 1998 to $14.5 billion after a 21.2 per cent fall in 1997.

"The inventory over-supply problem, now in its third year, is expected to dissipate late in 1998. As supply comes in line with demand, DRAM revenues will climb 26.7 per cent in 1999, 35.4 percent in 2000 and 35 per cent in 2001," WSTS said.

Total world semiconductor sales are expected to fall 1.8 percent in 1998 to $134.6 billion, but accelerate by 17.2 per cent in 1999 and 18.5 per cent in 2000.

While the Asia-Pacific region was the hottest emerging market for years, sales are expected to grow by only 2.8 per cent in 1998 to $31 billion while in Europe sales will rise by 5 per cent to $30.5 billion.

Asian over-supply caused the current down cycle in the semiconductor industry and Asia's financial crisis prolonged the duration. But at the same time Asia could bring the solution and put the industry back on its longterm trend of 15 per cent growth per year.

ST's Pistorio said he hoped the crisis in Asia would lead those companies to "financial rectitude".

After the closure of the Siemens DRAM plant, European chip makers will have abandoned that sector and be specialising in so-called "discrete" non-commodity chips.

The European three have also given up any hope of running after Intel in making high performance computer microprocessors.

Instead, they are making the chips for the appliances of tomorrow. Mobile personal assistants, net computers, car navigation systems and high-definition television (HDTV).

Philips and Siemens make a lot of chips that go into their own products but Philips sells 80 percent of its production to others.

ST supplies many manufacturers such as Alcatel for use in mobile phones and Thomson Multimedia for set-top boxes and HDTV. These consumer markets are poised for take-off.