More Korea shenanigans, earnings impact?
techweb.com
In a move that would have been unthinkable just a few months ago, South Korea's president-elect has recommended that Hyundai turn over its chip operations to rival Samsung Electronics, in exchange for Samsung's fledgling automotive business, industry sources said.
A Samsung spokeswoman in Seoul confirmed on Friday president-elect Dae-Jung Kim's proposal, which the two companies are calling "The Big Deal." The two conglomerates "are studying the proposal, but have many questions on it," she said.
The spokeswoman indicated that a major problem is antitrust implications for Samsung, already the world's largest DRAM producer with 20 percent of the market. Hyundai was the fourth-largest DRAM
maker in 1996.
A spokesman for Hyundai in San Jose this week stressed that the company had no intention of giving up its core DRAM business.
Industry executives and observers are skeptical that Hyundai will agree to part with one of its core businesses, and would more likely sell only individual electronic product lines, either to Samsung or foreign interests.
W. Keith McDonald, senior vice president of sales and marketing at Samsung's U.S. subsidiary, Samsung Semiconductor, San Jose, said he had heard talk of an exchange, but couldn't confirm that a deal is in the works. "Anything is possible," he said.
McDonald said he believes the companies would be better off reorganizing their own operations, without the government's participation.
Whatever the fate of the astonishing government proposal, the South Korean electronics companies already have begun selling off marginal chip operations, and the divestitures are expected to pick up as the companies seek quick cash in order to remain competitive.
A source at Hyundai Electronics America, San Jose, said the company is "trying to educate government bureaucrats" on the difficulties of swapping operations with another company. For one thing, Hyundai's chip operations are much larger than Samsung's new-born car business, the source noted.
Based in Ichon, Hyundai Electronics Industries (HEI) was founded in 1983 with a $12.5 million capital infusion from its parent, the Hyundai Group. In 1996, HEI had 20,000 employees and reported
$7.4 billion in total assets. The sale of semiconductors and display devices accounted for about 67 percent of the company's 1997 revenue, and more than 70 percent of all HEI's revenue was generated through exports.
In addition to DRAM, the company's semiconductor division manufactures fast and slow SRAM, MPEG-2 decoder chips, ASICs, and thin-film-transistor LCDs. HEI also has divisions dedicated to other display technologies, as well as to consumer electronics, workstations, mid-range and enterprise server development, telecommunications, and automotive electronics.
Another of HEI's U.S. companies, Hyundai Semiconductor America, is running test production at an 8-inch-wafer fab in Eugene, Ore., designed to manufacture 64-Mbit and 256-Mbit DRAM. Despite Hyundai's latest fiscal woes, that facility is slated to come on line in the first quarter of 1999 with a capacity of 30,000 wafers per month, according to Mark Ellsberry, vice president of marketing for Hyundai Electronics America.
As for Samsung's automotive efforts, the company established Samsung Motors in 1995, and has been building a huge factory in the Shunho Industrial Complex near Pusan. The company plans to begin
production of passenger cars next month, with 80,000 units this year and 500,000 units by 2002. Plans also call for investing $12.5 billion in production and facilities.
The recent turn of events is part of the South Korean president-elect's effort to restore the health of his country's debt-laden conglomerates, or chaebol, which have been hit by the concurrent collapse of the won and the price of DRAM chips -- the country's chief high-tech export.
Whether or not Hyundai's chip business is on the table, the sale of other subsidiaries is already in progress. Hyundai officials in Seoul said the company is seeking a buyer for a small San Jose-based start-up affiliate, Odeum Microsystems. Reports from Seoul also indicate that Hyundai is talking with South Korean firms concerning the sale of its laser and photo-diode product lines. And Samsung Electro-Mechanical Division, which is a profitable operation, last month acquired the chip resistor and multilayer chip capacitor business from LG Electro Components.
U.S. analysts, such as A.A. (Tad) La Fountain III of New York financial house Dominick & Dominick, characterized the inter-chaebol sales so far as "small stuff."
"I expect to see the sell-off of much larger operations, as the Korean industry consolidates to cope with its huge financial problem," La Fountain said.
The dimensions of the South Korean electronic meltdown are staggering, analysts agreed, as more data emerged last week on the depth of the companies' cash shortage.
A report by ING Baring Securities Korea, for example, revealed that at the end of 1997, Samsung Electronics had a negative cash flow of $2 billion. Hyundai ended the year with a negative cash flow of $660 million, and LG Semicon reported a negative cash flow of $870 million.
The ING Barings report said Samsung has $9.2 billion in outstanding debt, with a debt-to-equity ratio of more than 350 percent. Hyundai has $4.3 billion in debt and a debt-to-equity ratio of 684 percent, while LG Semicon has $4.1 billion in debt and a debt-to-equity ratio of 1,127 percent. By contrast, U.S. chip-makers have a debt-to-equity ratio of no more than about 40 percent.
The chaebol are expected to move quickly to restructure their massive debt load based on last week's global settlement which will convert $25 billion in short-term foreign debt to longer-term
loans guaranteed by the South Korean government.
The collapse of DRAM prices has decimated the 1997 earnings of South Korean chip companies. ING Barings estimates that Hyundai Electronics will report a 1997 loss of about $28 million, compared with a small $45 million net profit in 1996. Samsung Electronics is expected to report only a $4 million net profit for the year, down 96 percent from last year. Profits for LG Semicon, meanwhile, are estimated at $20 million, down 66 percent.
Because of the depth of the cash crisis, South Korean electronics companies are said to be courting foreign suitors as well as domestic buyers, and are searching aggressively for possible joint ventures.
The conglomerates are also asking materials and equipment suppliers to finance purchases until the crisis eases, and have offered discounts on product sales for early payment.
The chaebol also are cutting back semiconductor capital investment in 1998 more drastically than originally projected. LG Semicon, whose $2 billion in 1997 capital expenditures equaled all of the firm's chip revenue from that year, is expected to slash investment to about $1 billion this year. Samsung Electronics' originally projected capital spending of $1.6 billion is down 33 percent from $2.4 billion in 1997. |
