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Experts caution against chip sector boom
When the economy headed for downturn in 1995, leading to a financial crisis two years later, Koreans were blinded by the dazzling growth of the chip industry, mistaking it for an indication of the strength of the overall economy.
Analysts warn against the same illusion being prevalent in Korea with the current boom in the chip sector, buoyed by surging prices of DRAM chips and Taiwanese production stoppages following an earthquake.
"Korean chip producers' performance could mislead people regarding the nation's entire economic situation, as was the case several years ago," an official of the Bank of Korea warns.
According to the central bank, memory chip exports between January and August this year surpassed $12 billion, accounting for 13.53 percent of the nation's entire overseas shipments during the same period. The figure is close to the 14.15 percent share held by the chip industry in Korean exports in 1995, and it is also expected to grow further.
Cautioning against the chip industry's bulging proportion in overall exports, a recent study argued that its ripple effect is smaller than other industrial sectors.
The report, released by the LG Economic Research Institute, says that when chip demand grows by 1 won, it results in a 1.2 won worth of production increase in the entire industry. The figure is far below the 2 won average production ripple effect made by other manufacturing industries.
The number of jobs created by the growth of the chip sector is also found to be a third of other industries.
Critics warn against the risk stemming from the nation's dependence on the chip sector, which is extremely sensitive to supply-demand conditions.
"In 1995, while other sectors were suffering from slow production and rising bankruptcy, the Korean chip industry's robust performance misled the nation's economic indicators," an analyst said. "The falls in chip price and demand were partly responsible for the 1997 economic crisis of the nation which overly relied on chip exports." The price of DRAM (dynamic random access memory) chips has been rising as a result of last week's earthquake in Taiwan, giving a huge boost to profits of local semiconductor producers.
Analysts expect the price hike to continue until year-end as the quake damage exacerbates the chip supply shortage in the world market.
According to industry sources, 8M x 8 PC-100 chips, the current mainstay, were being traded between $21.25 and $21.46 on the U.S. spot market Monday, slightly up from Friday's $19.65-$21.25. The price of 16M x 4 PC-100 chips, widely used for server computers, shot up some $2 from $18.82-$20.56 to $21.25-$21.46, almost double the price before the quake.
64M DRAM chips were trading at around $15 before a massive quake paralyzed the island's major semiconductor production lines last Tuesday. The damage immediately pushed up the international price of the chips to over $17 and to over $20 Friday.
According to analysts, it will take two to three months for Taiwanese manufacturers to recover their normal output.
In contrast, the global demand for chips is likely to surge until year-end in line with the current PC market boom, which stems from an increase in the number of Internet users, computer makers' price-cut strategy and consumers' willingness to buy new PCs in fear about Y2K.
"PC sales are growing at a rate surpassing global output of chips and this trend will continue to the Christmas season," said an official of Hyundai Electronics Industries, one of Korea's leading semiconductor manufacturers.
He predicted that the price of 64M DRAM will easily rise above $25.
The supply of chips has fallen short of demand as leading producers failed to expand output due to the price remaining low in recent years. In addition, a blackout in Taiwan in July reduced the world DRAM supply by some 2 percent.
Before the earthquake, U.S. research firm Dataquest estimated that the demand for DRAM chips in the fourth quarter will increase to over 764 million while supply will reach omly 762 million units.
The situation will become more serious with the earthquake damage to Taiwan, whose firms account for up to 12 percent of the global DRAM chip supply and one third the world's subcontracted production of non-memory chips.
Korean chipmakers, taking some 40 percent share of world DRAM sales, will rake in huge profits from the price hike, given that the production cost of one chip is estimated at $4-$5.
Samsung Electronics produces 20 million 64M DRAM chips per month while Hyundai Electronics Industries and Hyundai MicroElectronic, which are scheduled to merge next month, each turn out 18 million units.
Samsung expects to earn 4 trillion won in net profits this year due to robust exports of chips along with telecom equipment and TFT-LCD (thin film transistor-liquid crystal display).
The strength in DRAM price is also expected to help Hyundai's electronic unit, which was in the red due to the fall in the chip price in the first quarter of this year, recover the deficit and see a modest surplus this year.
To cash in on rising foreign orders, the three chipmakers kept production lines in operation during the Chusok holidays.
But according to sources, profits from chip sales are not as high as estimated from quotations in the spot market.
"The actual export price is below the quotation," said an industry watcher. "Though the price surpassed $20, a 64 DRAM chip is selling for $9-13."
Korean chipmakers are supplying chips to major PC makers on long-term contracts, which are late to reflect price change in spot markets.
"It usually takes two to four weeks for contractors to readjust their price according to spot market price," he said.
Chip sales in long-term contracts account for some 85 percent of Samsung products, 50 percent for Hyundai Electronics Industries and 80 percent of Hyundai MicroElectronic.
Meanwhile, Samsung and Hyundai are showing differing views on the market trend.
Samsung officials say that the chip market is overheated, and not backed up by actual trade.
"While the quotation stays high, actual trade is not increasing. The current 64M DRAM market will cool down before long," a Samsung official said.
Samsung, which has already recovered its investment in 64M DRAM chip manufacturing, hopes that the chip-market mainstay will switch rapidly to next-generation chips, 128M DRAM and 256M DRAM, for which the company has the market initiative.
In contrast, Hyundai projects that the current domination of 64M DRAM chip will continue for some time.
"Despite the high price of the 64M DRAM, the disruption in Taiwanese production will delay the generation shift in DRAM chips until well after the first quarter of next year. The 128M DRAM price has already jumped 30 percent from earlier this year," a Hyundai official said.
But the firm is also confident about its competitiveness in the 128M DRAM market, as the planned merger between electronic units will dramatically expand its chip production capacity.
Updated: 09/29/1999 by Hwang Jang-jin Staff reporter |
