WARNING! VERY LONG POST
Statement of Steven R. Appleton
Chairman, President and CEO of Micron Technology, Inc.
Regarding the Financial Crisis in Asia
Before the Committee on Banking and Financial Services
U.S. House of Representatives
February 3, 1998
Introduction
Good morning Mr. Chairman and Members of the Banking Committee. My name
is Steve Appleton, and I am the President, CEO and Chairman of Micron
Technology. Micron is the largest, and in fact the last remaining,
United States producer of Dynamic Random Access Memory, better known as
DRAMs, and recognized as the key memory semiconductor used in everything
from computers to defense systems to satellites. I would add that we are
the second largest worldwide in this area and among other products we
produce, we are the ninth largest maker of personal computers in the
United States. We employ over 13,000 people, with significant operations
in Idaho, Utah, Minnesota and North Carolina.
I appreciate the opportunity to testify here today regarding an issue
that has been threatening the existence of my company for over a decade.
I think we all realize the financial situation in Asia and its
ramifications for the U.S. economy are complex issues, with a great deal
of speculation being injected, and I applaud your efforts to ensure
that there is input from all sides. I had the opportunity to listen to
most of the testimony in the afternoon hearing last week, and I was
encouraged that almost everyone testifying agreed that the current
crisis is a result of unsound economic practices by many Asian countries
and that assistance without reform will only result in a much greater
crisis at a future date.
But more importantly, I hope this committee will not subscribe to the
oversimplified notion put forth by others, that if we merely divert
enough funding into the Asian market, we will avoid a global economic
meltdown. The Administration put forth an admirable effort to install
and implement conditions on the initial money provided by the
IMF. But as we all know, once the cat is out of the bag, it is difficult
to implement greater control. In other words, since we had already
funded the money, it was very difficult to then back up and require new
conditions.
However, we have an opportunity with any new funding, to require well
defined and enforceable reform measures. In the next few minutes, I hope
to further illustrate that without adequate conditions, it would be
better, by any measurement, to provide no money at all. We would simply
be rewarding and perpetuating unsound economic practices that have
created the current crisis. And let me add that the "inevitable wreck"
next time will be far more costly than this one.
It is well known that Micron has been involved in several dumping cases
regarding the non-commercial, predatory practices of Asia, and during
recent years I have testified on the topic of international trade before
both the House Ways and Means and Senate Finance Committees. In other
words, I have been barking about this problem for quite some time, and
in fact, have watched one U.S. company after another forced out of this
important product area. And now, much of what I said has come to pass,
and it is those very same practices that have brought Asia to the brink
of economic disaster.
The United States and the international community have not been direct
enough in dealing with predatory practices that do not embody
market-based mechanisms. Long-term sales below cost and unsound build-up
of industrial capacity can only lead to bankruptcy in the long run.
United States taxpayers are now being asked to pay the price for those
practices and for that failure.
Expansion of the Korean Semiconductor Industry Played a Large Role in
Precipitating the Current Economic Crisis in Korea
As is now widely recognized, and as we have already heard today, South
Korea's current economic crisis stems from the Korean government's
practice of directing lending on non-commercial terms to promote the
rapid expansion of favored export-oriented sectors. When world markets
could not absorb the resulting excess production capacity, the prices
for Korea's major export products declined sharply, thereby threatening
Korea's ability to repay the massive foreign currency loans used to
underwrite the aggressive capacity expansion.
While characteristic of all three of Korea's largest export sectors -
semiconductors, automobiles, and steel - this pattern of rapid
overexpansion, excess capacity, and declining world market prices has
been particularly marked in the memory semiconductor sector. Backed by
government-directed borrowing, and targeting 90 percent of its
production for the export market, the Korean semiconductor industry rose
in a few years from an insignificant producer to one of the world's
largest, capturing nearly 40 percent of the worldwide market for memory
chips. The three Korean semiconductor producers achieved this by
aggressive, highly-leveraged investment in new production
capacity at a rate far exceeding that of any other country, and at a
rate that could not be economically justified. The result of this
additional production capacity has been a worldwide glut of memory
semiconductors, and an unprecedented two-year downturn in the industry
that has forced most producers to sell memory chips below their
costs of production (dumping). As a result, Micron is now the only
remaining U.S. semiconductor company producing DRAMs in the United
States.
Alan Greenspan, Chairman of the Federal Reserve, has recognized the role
played by the Korean semiconductor industry in precipitating this crisis
in his testimony before the Joint Economic Committee on October 29,
1997. He noted that "the glut of semiconductors in 1996 suppressed
export growth, exerting further pressure on highly leveraged
businesses."
The uneconomic nature of the investment decisions of the Korean
semiconductor makers cannot be emphasized strongly enough. I will give
you several examples: LG Semicon, one of the three Korean DRAM
manufacturers, spent $2.4 billion on new capital investments in 1997 - a
figure that exceeded its total revenue in that year. LG had to borrow to
finance even its day-to-day operations. Another manufacturer, Hyundai
Electronics, currently has a debt-to-equity ratio of 850 percent. This
means that Hyundai has outstanding loans that equal 850 percent of
the total value of the company. By contrast, the average debt-to-equity
ratio for U.S. semiconductor makers is about 30 percent. Electronics
Buyers News recently reported that Hyundai Electronics plans to invest
US$4.5 billion in 1998, despite the fact that, even with distortive
accounting treatment of foreign exchange losses, Hyundai will have a
negative $1.8 billion cash flow for 1996 and 1997 combined.
If these were companies operating in the United States, they would have
two choices - bankruptcy or undertake a massive belt-tightening policy,
by cutting capital spending and bringing output back into line with
current demand. Amazingly, the Korean semiconductor companies are doing
neither. In fact, far from going out of business or scaling back
production as might be expected during a period of persistent
oversupply, they are sticking by their original
investment plans and have, at the behest of the Korean government,
launched a massive export campaign to export even more semiconductors in
1998 than they did in 1997. Samsung Electronics, for example, announced
on January 5 that it will target exports of $14 billion in 1998, up a
full 17 percent over Samsung's performance of last year. Korean
producers are now producing in record volumes, and selling that
production at prices that are well below their costs.
Government encouragement and sponsorship of this export surge is
unquestionable. As Kim Chang Ro, director of the export division of the
Ministry of Trade, Industry and Energy, said in December, "To overcome
this crisis, export promotion is the most important policy of the
country." He went on to add, "We are going to try to have the
foreign capital investment to support our industry and support exports."
The vast majority of these exports are targeted for the U.S. market, and
U.S. companies like Micron will bear the consequences of this export
surge.
Why do the Korean semiconductor makers think they can possibly afford to
do this? The answer is simple. They are an industry that was created and
fostered through the clubby, secretive, and non-commercial relationship
of the Korean government, the Korean banks and the family-run chaebol.
Given this history, and the fact that they are the single largest export
industry in Korea, they simply cannot believe that they would be allowed
to fail. They are counting on the infusion of capital from the IMF and
eventual second-line-of-defense bilateral loans to provide sufficient
liquidity to keep them going. In fact, the Korean semiconductor
producers have been telling their equipment suppliers in Japan and the
United States that as soon as they get the IMF funding worked out, they
are going to be able to accept delivery of new capital equipment
purchases. I find this extremely disturbing.
What does this mean? It means, basically, that these companies would not
be expanding, and would, perhaps, be forced out of business, if it were
not for the IMF funding - U.S. taxpayers are being asked to fund foreign
corporations that compete unfairly and destroy U.S. jobs.
The Korean Economic Model Has Been Harmful to U.S. Semiconductor
Producers and Left Unchecked will Cause Further Injury
Government support for the creation and development of the Korean
semiconductor industry has permitted Korean chip producers to move from
an insignificant market share to become the third leading global
producer of semiconductors today. Korean semiconductor sales grew in
value eightfold from 1991 to 1996, with approximately 90% of all Korean
production going to export markets. The rapid expansion program embarked
on by the Korean producers, with the help of the Korean government, has
resulted in semiconductors becoming Korea's single largest export
product, accounting for approximately 14% of total exports.
Moreover, the overwhelming proportion of Korean production has been in
one product area - memory semiconductors, primarily DRAMs - which
accounts for more than 80% of Korean semiconductor production.
Korea's overreliance on a single product as the driver for its
export-led growth policy has proven to be extremely imprudent. As the
Korean industry expanded DRAM capacity to capture even greater market
share, it contributed to global oversupply, which in turn precipitated a
collapse in the DRAM market prices.
The impact has been particularly destructive in the U.S. market, where
Korean overcapacity has directly contributed to a crash in semiconductor
prices that started in 1995 and continues today. The U.S. market has
been and remains the single largest destination for Korean semiconductor
exports. The resulting supply glut caused the spot price of memory chips
to fall from $50 for a 16-megabit chip in December 1995 to under $2 at
the end of 1997, a drop of 96 percent. For the U.S. industry, this price
decline led to drastically reduced profit levels and a prolonged delay
in the industry's own plans to replace aging production facilities.
Price declines of this magnitude have been devastating for Micron. In
1995 we announced that we would be constructing a multi-billion dollar,
state-of-the-art fabrication facility in Lehi, Utah. In 1996, we were
forced to put completion of the project on hold because of suppressed
prices and resulting low profitability. This facility is slated
to employ 5,000 people. We will not start that plant until we can do so
profitably. The Korean producers need to stop flooding the market with
dumped product. Rational companies cut back production when supply
exceeds demand.
The economic fallout from the overexpansion of the Korean semiconductor
industry - and its resultant flood of low-priced exports to the United
States - can only be understood in the context of the industry's
dynamics. First, semiconductor production is extremely
capital-intensive, with a single fabrication facility costing $2 billion
or more.
At its inception and throughout its history, the Korean semiconductor
industry has obtained an enormous competitive advantage through access
to resources underwritten by the Korean government. The pace and scale
of the capacity and market share expansion of Korea's semiconductor
industry is simply unprecedented in the history of the electronics
industry. No other country has moved so quickly from the position of
insignificant outsider to market leader in such a capital-intensive
industry.
Second, semiconductors such as DRAMs are a commodity product, and
therefore are highly price-sensitive. When an industry such as
semiconductors is effectively championed by the state, as occurred here,
it allows the industry to produce and sell its product in an economic
vacuum - without true regard to market forces.
This basic strategy was successfully employed by Japanese producers in
the 1980s, and the result was the near extinction of the U.S.
semiconductor industry. During that period 9 U.S. producers went out the
DRAM business, including National Semiconductor, Motorola, Fairchild,
AMD, Intel, and Mostek. Today, accelerating foreign government targeting
of the semiconductor industry in Korea and other Asian economies
foreshadows the prospect of a much larger and even more devastating
period of excess capacity, predatory pricing, closed markets, and unfair
competition.
As noted, Korea exports 90% of its semiconductor production, and the
excess capacity in memory semiconductors has led Korean producers to
sell well below their costs of production in 1996, 1997, and into 1998.
Under international standards this amounts to dumping, which is
condemned by the World Trade Organization. The U.S. Commerce Department
has already made two findings of dumping by Korean semiconductor
producers, including an existing antidumping order on Dynamic Random
Access Memory semiconductors (DRAMs), and a preliminary finding of
dumping of Static Random Access Memory semiconductors (SRAMs) made last
year. In addition, the European Union has had an antidumping undertaking
in place to counteract the pricing practices of Korean DRAM
manufacturers, and has recently concluded an agreement with those same
producers under which the companies are required to monitor prices and
costs to avoid dumping.
U.S. memory semiconductor companies continue to suffer financial injury
as a result of Korean dumping. The growth of jobs in this sector has
been stagnant over the past two years. U.S. producers have drastically
reduced the investment in the new plant and equipment that is necessary
to stay on the technological cutting edge in this industry. Micron and
Texas Instruments (who produces DRAMs overseas) cut capital spending by
42.7 and 33.5 percent, respectively, in 1997 over 1996 figures. In July
of this year, Motorola, who had gotten back into the DRAM business in
the late 1980's, announced that it was exiting the DRAM business
altogether, an industry it had helped to pioneer. There is now only one
U.S. manufacturer of DRAM semiconductors still producing DRAMs in the
United States -- Micron. All the others have been driven out of the
business. The damage from Korean targeting is not limited to DRAMs,
however. Producers like Cypress Semiconductor and IDT who make another
type of memory semiconductor, SRAMs, have also had to cut production and
investment plans because of competition from Korean producers.
Thus, for companies like Micron that have been directly injured by
Korea's overexpansion of its semiconductor industry, the stakes in the
IMF proposal are enormous.
IMF Funding Must Not Be Used to Bail Out the Korean Semiconductor
Industry
I believe that it would be devastating to permit U.S. taxpayer dollars
to be spent on bailing out the Korean semiconductor industry,
particularly since their irresponsible and non-commercial actions led to
this crisis. I simply cannot believe that the U.S. Congress or the
American people would allow this to happen. What we need to do is
to simply let market mechanisms work. This may mean that some of the
Korean producers will go bankrupt, but we do not tolerate corporate pork
within our own borders, so why would we provide funding to save
insolvent industries abroad?
How do we keep this from happening? First, I believe that the IMF, the
U.S. Treasury Department, and the U.S. Congress must make it absolutely
clear to the Korean government and Korean industry that no IMF, World
Bank, Asian Development Bank or bilateral funding will be used to help
the Korean semiconductor industry, in any form. This principle is
already embodied in the Korean IMF bailout package which requires an
immediate termination of directed-credit to Korean companies. The IMF
and the United States must, however, provide greater specificity
regarding this requirement. It should be made clear that this means no
new loans to Korean producers whether through Korean government-owned or
government-directed banks. It should also be clarified that Korean
semiconductor producers should not be allowed to renegotiate the terms
of existing loans on a more favorable basis (no interest moratoriums, no
roll-overs, and no conversions of debt to equity.) Neither the Korean
government nor the IMF should be permitted to guarantee or underwrite
the private loans of Korean manufacturers, as has been discussed as a
possibility in the Korean press. The analogy would be the U.S.
government guaranteeing Micron's debt. I think we can rest assured that
this is not likely.
I also believe that it is wrong for private banks in the United States
and Japan to roll over and repackage loans to Korean banks based on
Korean government guarantees and/or government assumption of debt,
especially when they are pressured by the U.S. government to do so. When
this occurs, the U.S. government essentially underwrites that debt by
virtue of its role in brokering the renegotiation. Moreover, when the
government of Korea gets involved in this way, it may give rise to
subsidies under the WTO Subsidies Agreement.
Second, steps must be taken to hasten adoption of reforms by the Korean
conglomerates. The IMF Economic Program for Korea that accompanied the
stand-by credits, contains a variety of required structural reforms,
that, if implemented properly and on a timely basis, could result in
positive market-based restructuring in Korea. The IMF program requires
not only a massive overhaul of the Korean banking sector, but also
requires complete restructuring of the Korean family corporate groupings
known as chaebol. The "corporate governance" provisions contained in the
IMF reform program are designed to do this. These provisions include:
an immediate end to government-directed lending to Korean
companies;
no government subsidized support or tax privileges to bail out
individual companies;
reduction of high debt-to-equity ratios of corporations;
the use of internationally-accepted accounting standards;
reduction of mutual guarantees among conglomerates; and
permitting Korean bankruptcy laws to operate without
interference from the government.
These are very broad brush objectives. I believe that it is the
responsibility of the IMF, the Treasury Department and this Committee to
ensure that these broad objectives are translated into concrete criteria
with well-delineated timetables for implementation, and that these
performance criteria be embodied in the reviews scheduled for March
and June 1998. Moreover, IMF and Treasury personnel should be assigned
to monitor compliance and implementation of these provisions on a real
time basis. If we can afford to give the IMF another $18 billion, we can
afford to pay several hundred thousand to pay for a monitoring team that
can ensure we are not simply throwing money down the drain. If this
Committee does appropriate additional funding for IMF credits, it should
include money for a monitoring team.
In addition, it is essential that the IMF and the U.S. government
intervene immediately when they see policies being adopted in Korea that
contradict the letter and intent of the Korean reform package. To begin
with, the IMF and the United States must ensure that Korea does not
implement a program of "special loans" to encourage Korean exports, as
was reported January 14, in the Wall Street Journal. Such loans are "red
lighted" under the GATT Subsidies Code, and violate Korea's commitment
to the World Trade Organization. They contradict both the trade and
corporate governance provisions of the IMF loan package to Korea, and
should be strictly prohibited. The IMF package also requires greater
accountability and transparency in Korean accounting practices,
including the adoption of internationally-recognized accounting
standards. In 1996, the Koreans adopted an accounting standard
that lets companies hide foreign exchange losses by taking them off
their income statement, thus distorting a firm's true financial picture.
The Korean accounting standards board recently issued another accounting
change that appears to permit other foreign exchange losses to be spread
over some future period, creating further distortion. Both provisions
clearly contradict the treatment of foreign exchange losses outlined in
international accounting standards, and distort the true financial
condition of Korean companies. The Koreans are going in exactly the
wrong direction on these accounting standards. The Korean government
must adopt and implement immediately, internationally-recognized
accounting standards. First quarter financial results should be required
and monitored by U.S. and international financial officials.
What other Korean government initiatives are we seeing that contradict
the commitments they made to the IMF? The Korean Maeil Business
Newspaper reported on January 14 that the Korean government will provide
about $US69 million to companies in the telecommunications industry to
"help ease their financial difficulties". The Korea Herald reported on
January 15, that the Korean government will invest a total of 763.6
billion won in 1998 to promote the Korean information technology sector.
This represents an increase of 20 percent over government investment in
1997. The goal of the IMF restructuring program is to sever the
relationship between the public and the private sector. Infusing public
capital into privately held telecommunications and information
technology companies is not a step towards this goal.
Third, the IMF, Treasury and Congress must promote and reinforce a
credible enforcement mechanism to ensure that funding is not provided to
the semiconductor industry and that reforms are implemented on schedule
- that enforcement mechanism must be the withholding of any future
funding if all pre-conditions are not met. While the first installment
of funding amounting to about $10 billion was provided to Korea at the
end of December, provision of future installments must be conditioned on
clear performance criteria. The Administration and the Korean government
need to certify that all conditions are being met.
Fourth, a strong message must be sent to the Koreans that they will not
be permitted to export, and in the case of the semiconductor industry,
dump, their way out of this situation. We should not send tax dollars to
Korea to brace up insolvent companies, on the one hand, while turning a
blind eye to their export surge strategies which are harming U.S.
companies, on the other.
Finally, the U.S. Congress is being asked to appropriate an additional
$18 billion to replenish nearly-depleted IMF credits. You have the
ability, and in my view, the responsibility, to ensure that if such
additional funds are appropriated, strict conditions are put into place
so that funding results in real market-based reforms, and that
funding does not go to brace up foreign companies that would otherwise
go bankrupt. If you fail in this, you send the unmistakable message to
foreign corporations that it is O.K. to invest recklessly and ignore
market signals - the U.S. will be there as the lender of last resort to
help them pick up the pieces.
I would like to also make an observation about the current crisis in
Asia and the appropriate policy response in this country. It is fairly
clear that lending to Korea was accelerated back in December out of fear
that absent a rapid infusion of capital, Japan would be rendered
vulnerable to a similar economic collapse. I think the adage that "as
Korea goes so goes Japan" is an exaggeration of the market reality, and
that if we play into it, we run the risk of pouring public funds into
Asia for no legitimate reason. Japan recently announced that it has
about US$580 billion in bad or questionable loans, the vast majority of
which are domestic, not foreign, loans. Korean companies now owe
about US$24 billion to Japanese banks, not all of which are
non-performing loans. With bad Korean loans accounting for only a small
portion of total lending from Japan, the direct connection between the
financial situation in Korea and that in Japan is not compelling. I urge
that you assess the purported domino effect of the Korean financial
crisis very carefully. If Japan is on shaky ground because of domestic
bad loans, pouring money into Korea isn't going to save Japan.
In terms of the appropriate policy response in the case of Korea, I
would also urge you to look closely at the precedent of the savings and
loan crisis in this country. The S&L crisis ended up costing the
American taxpayer about $120 billion, about what the Asian bailout has
cost so far. But the policy response in the S&L crisis was very
different. The only people that received government assistance in the
S&L crisis were the depositors in failed savings and loans. The failed
institutions themselves had all their assets liquidated and other
suppliers of debt to the S&Ls lost money, as well. Moreover, a host of
new and stricter controls were put into place. By contrast, the IMF
package permits many failed businesses to stay afloat. The S&L owners
had to learn the hard way, through failure. Our Asian competitors will
never take away a similar lesson, if market mechanisms are not allowed
to work, and they are not permitted to fail.
In closing, let me say that we can compete on a fair basis with Korean
producers and remain a strong and growing U.S. company. We have had a
profit every quarter for the last five years, albeit a smaller profit
more recently. But we cannot compete with a Korean industry that is
braced up by IMF funding, Korean government funding, and by U.S.
taxpayer dollars funneled through international institutions. The
prospect of $57 billion going to the Korean economy, and a portion of
that going to bolster an uneconomic semiconductor sector, is
unacceptable. If behavior that is not based on sound market principles
is left unchecked, we will lose the last remaining U.S. DRAM producer
making chips in this country.
Thank you for your attention. I would be happy to answer any questions. |
