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Crisis offers tough lessons to S.Korea chipmakers
Reuters Story - December 11, 1997 04:41
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By Yoo Choon-sik
SEOUL, Dec 11 (Reuters) - South Korea's economic turmoil
should teach a lesson about inefficient management practices to
the country's semiconductor industry, owned by big conglomerates
called chaebols, analysts said on Thursday.
The past few years of expansion by Samsung Electronics Co
, Hyundai Electronics Industries Co and LG
Semicon Co have been blamed for the global oversupply
that led to an 80 percent drop in memory chip prices in 1996.
The three, which are affiliated with the giant Samsung
[SAGR.CN], Hyundai [HYGR.CN] and LG [LUGG.CN] groups, took 34.3
percent of the global dynamic random access memory (DRAM) sales
in 1996, the Korea Semiconductor Industry Association said.
South Korean companies are estimated to have accounted for
40 percent of global DRAM-related capital spending in 1996,
according to a Goldman Sachs report.
"Their capital spending had been decided by the owner of
each conglomerate as was the case in other industries such as
shipbuilding and automobiles," said Yi Seung-gook, head of
research at ABN AMRO Hoare Govett Asia Seoul branch.
Analysts said such "one-man decision" regimes often ignored
concerns about negative impacts on the industry of investments
in terms of the supply-demand structure.
Alarmed by the current economic turmoil, which resulted in
last week's record $57-billion rescue by the International
Monetary Fund (IMF), the chaebols already have been moving to
cut capital spending and streamline their organisations.
Second-tier Dongbu Group, whose core businesses are
insurance and steel-making, recently delayed a two-billion won
($1.3-billion) joint venture with International Business
Machines Corp to enter the DRAM business due to funding
problems.
Hyundai Electronics has been reported to be delaying a
3.0-billion pound investment in two semiconductor plants in
Scotland, although the company officially has denied the
reports.
But the president of the Korea Semiconductor Industry
Association said he did not expect the economic turmoil to have
a major impact on next year's business at chipmakers.
"Our semiconductor industry had completed major domestic
facility investment projects before the turmoil erupted," said
Kim Chi-luck, president of the association. "So I don't see the
turmoil giving a major impact on their business next year."
However, Kim and Moon Jong-geon, a semiconductor industry
analyst at LG Securities, said the plunging won against the
dollar and soaring domestic interest rates could affect next
year's earnings at the three chipmakers.
The won has lost 50 percent so far this year against the
U.S. dollar, falling to 1,719.8 per dollar on Thursday from
844.2 at end-1996.
South Korea's IMF-led bail-out, which imposes tough economic
restructuring conditions, has seen local interest rates
skyrocket and liquidity dry up.
In exchange for the IMF rescue, Seoul agreed to halve
economic growth to about three percent next year and tighten
monetary controls, as well as tolerate higher interest rates.
The country's benchmark three-year corporate bond yields
closed on Thursday at 22.90 percent, compared to 25.48 percent
on Wednesday. As a comparison, yields closed 1996 at 12.60
percent.
Another negative factor for South Korean chipmakers will
come from a slowdown in computer demand from Southeast Asia and
Japan due to an economic slump, analysts said.
"We have seen the launch of the Intel Pentium II
processor and the Microsoft Windows 98 operating system
which has boosted DRAM demand, but slumping computer demand
mainly in Asia will offset that plus factor," said Moon.
The two breakthrough technologies would create enormous new
demand for DRAMs because they require a higher memory capacity
in personal computers.
Business activities at chaebols and chaebol-affiliated
companies could also be affected by South Korea's agreement with
the IMF to cut government subsidies to companies, analysts said.
In the past, many chaebol were granted favourable tax and
debt payment terms when they "braved" low profitability and huge
debt to take over failed companies.
The IMF-led package has already been criticised by Micron
Technology Inc CEO Steve Appleton, who said last month
that the bail-out plans could harm competition in the
semiconductor industry and lead to dumping.
--Email seoul.newsroomreuters.com
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