From Page One of Electronic News: September 7, 1998 Issue
Far East Fallout
Hyundai, LG To Merge Semi Operations
Seoul, Korea--Last week's long-awaited news that LG Semicon and Hyundai Electronics Industries have caved in to Korean government pressure and agreed in principle to merge their semiconductor operations may or may not improve the desolate financial situation here, but analysts seem fairly certain it will have minimal effect on the dismal conditions in the DRAM market.
According to several industry analysts, the shake-up for the market is negligible as long as the merged company continues running at the same capacity as the two companies did previously.
"Right now, it really doesn't change the DRAM market very much in that you still have an oversupply," said George Iwanyc, an analyst with San Jose, Calif.-based market research firm Dataquest. "It will take time for that oversupply to disappear. Right now, with what we know about the merger, nothing (in the market) has really changed."
Indeed, details are sketchy at best. It is known that LG and Hyundai agreed in principle to merge the semiconductor operations, and that agreement was announced last week by the Federation of Korean Industries.
So far, though, no formal agreements have been signed, and details need to be hammered out regarding which company will hold a higher stake and what executive will run the merged company. In fact, some industry reports out of Asia last week indicated that there is skepticism among Asian financial analysts about when--or if--the deal will be completed.
The Korean government has been under pressure itself. Ever since the International Monetary Fund (IMF) bailed out Korea to the tune of $58.35 billion late last year, the organization has been after Korea to clean up some of the excessive investment and overcapacity of the nation's large conglomerates, or chaebol, which many blame for Korean woes. After months of teeth pulling, the chaebol apparently agreed to several of the mergers that had been rumored for months.
"It is going to take some time until both parties agree on exact terms and conditions," said C.S. Chong, senior VP at Hyundai Electronics America (HEA). Mr. Chong would not speculate as to how long.
While analysts agreed this merger would not alleviate the soft conditions in the DRAM market that have existed for more than two years, they agreed that the consolidation of the two companies' DRAM market share would most likely create a new No. 2 player in the market.
According to Dataquest, Hyundai was No. 3 in the world in DRAM revenues in 1997, with a 9 percent market share. LG, meanwhile, was seventh in the world, with a 7 percent market share. Once merged, the companies would have a 16 percent market share (based on 1997 figures), just three percentage points behind market-leading Samsung Semiconductor. The market had already been consolidated significantly a couple of months ago when Micron Technology bought the DRAM business of Texas Instruments (EN, June 22). By Dataquest's numbers, that marriage would be good enough for a 14 percent market share and now, apparently, the world's No. 3 position.
"One of the things we can clearly say is that this merger is increasing the concentration in the DRAM market," said Steve Cullen, senior analyst with In-Stat, a Scottsdale, Ariz.-based market research firm. Mr. Cullen, whose numbers vary slightly from Dataquest's, said the LG/Hyundai merger translates into about 16.5 percent market share, while TI/Micron would hold about 15.1 percent. "Between those three companies (the two mergers and Samsung), you have 50 percent of the market. All of the other guys are going to have to try to carve their share out of the remaining 50 percent."
Mr. Chong said this merger may prove stronger than Micron's TI acquisition. "Micron will take some time to upgrade the facilities it purchased from TI," Mr. Chong said. "The facilities of LG and Hyundai are already state of the art."
"There seems to be a general thinking in the DRAM business that a larger market share is a better thing to have," said James Handy, an analyst at Dataquest. "I think that goes back to some study done by Westinghouse in 1930s. So far, it really doesn't seem to be the case."
All the analysts Electronic News spoke with expect Samsung to retain its No. 1 position in the market, regardless of any LG/Hyundai merger. "They are in a position to defend that," Mr. Iwaync said.
Officials from Samsung Semiconductor did not respond to requests for information about how the LG/Hyundai merger would affect Samsung.
Mario Morales, manager of semiconductor research at International Data Corp. (IDC), said rumors in recent months have involved a merger between Samsung Semiconductor and LG Semicon. In the end, though, he said Korea felt LG and Samsung together would control too much of the memory market. "I think it is better for Korea to have two very strong companies," he said.
"One thing that is always a challenge is, 'How do you deal with your customer base?' Large vendors don't want to be too dependent on one customer," Mr. Iwanyc said. "If you are running into a situation where LG and Hyundai both supply a large percentage of DRAM to one customer, it could be a problem. But that probably would have been a bigger issue if Samsung had been in a merger with one of the two."
Mr. Chong of Hyundai said he did not believe Samsung would be affected by the merger. "To a large extent, Samsung's position will be kind of neutral," he said. "I think there is no benefit from Samsung's perspective. They already have the largest market share." Mr. Chong added, " I don't think Samsung would be participating in this type of arrangement. The combination of Samsung and LG would pose more of a negative connotation to the customers."
Mr. Chong said he expects customers to benefit from the arrangement. "From the customers' perspective, it (the relationship with the merged company) may be better, because most of LG Semicon's sales activities so far have been through Hitachi," he said. "The combined capacity (of the merged company) will provide a stable source of supply. In that sense, it may be more complementary."
Generally, observers agreed that the merger is a necessary move. Many said the Korean government had to do something to show that it was making progress.
"I think it has to happen," Mr. Morales said. "There is no way these companies can continue to garner all the losses that they have been scoring."
"I don't think it's going to help a whole lot in the short run," Mr. Cullen said.
An official from LG Semicon also confirmed there is an agreement to merge in principle, but would not comment beyond that. |
