Qimonda, the German DRAM maker that was fast running out of cash, will be kept afloat by a €150 million (US$203 million) loan from the state of Saxony, tied to a matching investment from majority-owner Infineon Technologies, the German state said Tuesday.

Qimonda, one of the world's largest DRAM makers, said last month that it would run out of cash in the first quarter of next year without additional funds or an unexpected upturn in its business.

The DRAM industry has been hit hard by the double-punch of a lengthy supply glut and the global financial crisis. Governments in Germany, Taiwan and Korea have all been considering state aid as a way to keep their manufacturers afloat.

But some analysts see giving aid as a misguided, short-term fix. The DRAM industry would benefit from some bankruptcies or mergers to pare back its suppliers and make the industry efficient again, said Andrew Norwood, a research vice president with Gartner.

Loans like the one made to Qimonda "stop the industry seeing the rationalization in suppliers that it needs to be profitable over the long term," he said.

The chip industry as a whole is facing its biggest challenge in years. Gartner expects worldwide semiconductor sales to decline in 2008 and 2009. It would be the first time that global chip sales have fallen for two consecutive years.

Despite its problems today, the DRAM industry could help mitigate the industry downturn, according to Gartner, but only if it overcomes the oversupply problems, which could help to firm up prices by the end of next year.

"Only widespread government support for the ailing DRAM vendors could avert this supply rationalization, and that would be a disaster for the industry as it would just prolong the current downturn," Gartner said Tuesday.

Qimonda has a chip factory and a research and development center in Dresden, the capital of Saxony. It employs about 3,200 people there, but has already announced plans for layoffs and the closure of a chip packaging and testing facility.

The additional funding, which must now be approved by the European Commission, will be used to upgrade its manufacturing plant to a newer technology. Europe needs cutting-edge technologies to assure its competitiveness and future jobs, Saxony said in a statement (in German).

"We must not allow that manufacturing knowledge to disappear from Saxony and Europe," the German state said.

(With reporting by Dan Nystedt.)

The IDG News Service is a Network World affiliate.