Many Semiconductor Cos Waiting For Brighter Days
By BRIAN MOCKENHAUPT IN SEOUL
October 31, 2001 FEER(11/8)
THERE IS LIGHT at the end of the tunnel for the region's semiconductor companies, but it is still very, very dim. Hopes of a fourth-quarter turnaround are gone and chip prices continue to drop. So it was with an air of frustration -- some say desperation -- that Japan's big chip makers threatened legal action late last month against Korea's Samsung Electronics and Hynix Semiconductor for dumping chips in Japan.
NEC, Toshiba, Hitachi and Mitsubishi say the two Korean companies are selling dynamic random-access memory, or DRAM, chips so cheaply that other companies have been forced to drop their own prices and take huge losses. But James Chung, a Samsung spokesman, says it's not Samsung and Hynix's choice to practically give away chips at prices far less than the cost of production. "We are experiencing something we've never experienced before," he says. "Every company has been highly damaged from this price reduction and the plummeting IT sector."
Indeed, Hynix posted a third-quarter loss of 1.62 trillion won ($1.25 billion), while Samsung's net profits fell 75% from the same quarter last year to 420 billion won, but it's been a terrible year for all chip makers. DRAM prices have dropped 70% since January -- to just more than $1 for a 128-megabyte chip -- and analysts expect them to fall a further 15%-18% in the fourth quarter. "Across the board, no question, they are all in the same boat in terms of profitability," says a semiconductor analyst with Nomura securities in Seoul. "In the down cycle, the best thing is for the weaker ones to be weeded out."
Hynix, now saddled with $6.6 billion in debt, has been hurting for a long time. But several Japanese chip makers have also been hit hard by the technology slump -- Toshiba late last month announced $1 billion in losses for the past six months -- and some are trying to get out of the DRAM business. By threatening legal action against Samsung and Hynix, analysts say, they could be looking for some breathing room.
It would be hard to prove the companies have been dumping chips -- most companies have been selling DRAM at well below the cost of production. But there may be more to the argument that Hynix, which accounts for 20% of the global DRAM supply, has been able to keep production high and prices low because it is being propped up by creditors, including government-run banks. Creditors are negotiating with Hynix over new debt restructuring, but some are hesitant to pump more money into a sinking ship. And others note, if Hynix failed, chip prices might increase.
Hynix has been selling non-semiconductor assets to raise money and focus on chip making, which has made it more susceptible to fluctuations in DRAM prices. A Hynix official says the immediate focus is on raising cash and making Hynix cost competitive. One step: it is requiring all of its 14,000 employees, including executives, to take one month's unpaid leave between November and March to save money.
While Samsung has been hit just as hard by the technology slump, the company is better prepared to deal with a prolonged downturn. Earnings from its telecommunications division kept the company in the black for the third quarter, despite steep semiconductor losses. The company is focusing on higher-end semiconductors -- like double-data-rate RAM, graphics memory and Rambus memory chips that fit United States-based Intel's Pentium 4 processors -- that will decrease its vulnerability to market fluctuations in low-end DRAM chips. Samsung is also trimming back its production of 128-megabyte chips and focusing on 256-megabyte chips, which analysts say will become the industry standard early next year. The company says it plans to mass-produce 512-megabyte chips and will start producing 576-megabyte Rambus chips this month.
But there has been belt-tightening as well. Samsung scaled-back capital expenditure for the year by nearly 40%, to about 4.7 trillion won. "The most important strategy," Chung says, "is to survive, not invest."
For now, there is little the region's chip makers can do but wait for brighter days. The terrorist attacks in the U.S. dimmed hopes for even the expected small boost in PC sales from Christmas-time buying and last month's release of Microsoft's memory-hungry Windows XP. So chip makers are looking for a recovery in the middle of next year, and hoping it isn't further derailed by terrorism jitters |
