04-15-98 Korea's Position on the Specific Issues Raised by Micron and SIA
Following are excerpts of a position paper of the Korea Semiconductor Industry Association (KSIA) concerning the issues raised by the U.S. semiconductor industry in connection with the International Monetary Fund (IMF) financial assistance to Korea. In the paper, KSIA summarizes the issues raised by the American chip industry and its response to them.
In December 1997, the IMF put together for Korea a loan package totaling $58.35 billion, of which $21.1 billion has been distributed. The package is designed to help Korea stabilize its economy.
The U.S. Semiconductor Inudstry Association (SIA) publicly has supported the IMF assistance, but has expressed concern regarding the relationship between the Korean government and the Korean semiconductor producers.
Specifically, in its February 1998 paper, 'sIA Position On IMF Financial Package For Korea,'' SIA urged Korea: (i) to reform its economy according to free market principles ( e.g., to refrain from providing government subsidies); (ii) not to seek economic recovery through government-directed exports or export targeting; and (iii) to improve its accounting standards.
Micron Technology has severely criticized the Korean semiconductor industry in connection with the IMF support on repeated occasions, including during the Feb. 3, 1998 testimony of Micron President and Chief Executive Officer Steve Appleton before the House Banking and Financial Services Committee.
In essence, Micron has asserted that the Korean government likely will use the IMF funds to ''bail out'' the Korean semiconductor producers and that this would be unfair to other producers. Micron also alleges, without support, that the Korean semiconductor producers are responsible for the recent worldwide DRAM oversupply and price drop and for the production delay at Micron's Lehi, Utah, production facility.
The concerns and criticisms of SIA and Micron are groundless and inaccurate. Although one U.S. company _ Micron _ has decried the robust competitiveness of the Korean semiconductor producers, the Korean firms' presence has disciplined the U.S. memory chip market, resulting in competitive prices and better quality and service, which, in turn, benefited the U.S., computer industry.
In addition, Korean semiconductor producers have contributed to the development of the U.S. semiconductor, semiconductor equipment and material industries by paying substantial royalties and by purchasing more than $1.2 billion worth of equipment and materials from the United States each year since 1992.
A. The Korean government is using the IMF funds to reform Korea's economy, ensuring more efficiency and transparency.
The Korean government has made an unequivocal and specific promise to both the IMF and the U.S. government: The IMF funds will be used to repay foreign debts and increase the foreign currency reserve of the Bank of Korea and not to bail out or subsidize private industries or specific firms.
The Korean government will not direct the funds to any specific industry, including the semiconductor industry. Rather, private firms will continue to borrow money primarily in international financial markets based on their own credit ratings. These private loans are completely unrelated to the IMF loans.
The IMF Mission to the Bank of Korea is closely monitoring all transactions involving the IMF funds to ensure that the IMF financial package is implemented in compliance with IMF regulations and requirements and to ensure that all transactions further the purpose of the funds _ to increase the foreign currency reserve of the Bank of Korea and to provide commercial banks in Korea with foreign currency liquidity.
In addition, because the current economic crisis resulted from the shortage in Korea's foreign currency reserves and the underdevelopment of Korea's finance industry, Korea will continue to try to extend the repayment term of foreign debt and will restructure its finance industry.
B. The Korean government will not subsidize the Korean semiconductor industry; private sector R&D is the driving force behind the development of the Korean semiconductor industry.
Korean semiconductor producers plan and conduct their own R&D without government aid. These private research efforts, combined with cutting-edge technology, innovation and good management, have driven the development of the Korean semiconductor industry.
Currently, Korean government involvement in high-technology R&D project is limited to basic science, which is allowed under the WTO regime. The Korean government's role in these projects is similar to that of the U.S. government in SEMATECH and the flat panel display consortium. Korea's programs have violated neither the GATT Subsidies Code nor the WTO Subsidies Agreement and they currently are subject to a biannual WTO monitoring check.
C. Korea will not seek export-induced economic recovery and will not target the United States as an export market.
Korea will not rely on exports as the sole method of its economic recovery, but is making effort to stimulate domestic demand. Korean producers export their products according to market demand, not government directives.
Korean semiconductor producers do not target the United States _ which is, in any case, the world's largest market _ as their sole export market. Exports to the U.S. market represent only approximately one-third of Korea's total semiconductor exports. These exports to the United States are based on U.S. demand.
D. The Korean semiconductor market is open.
Statistics regarding Korea's semiconductor trade demonstrate that Korea does not maintain trade barriers to foreign semiconductors. In 1997, Korea imported $17.2 billion worth of semiconductor-related products, including $4.2 billion in equipment and materials; Korea's exports were $17.91 billion.
Foreign semiconductors' import penetration of the Korean market is immense _ accounting for over 70 percent of Korea's domestic demand in 1996. In 1996, imports from the United States represented over 30 percent of Korea's total semiconductor imports.
E. Korea's accounting standards are consistent with internationally accepted accounting standards.
Korea has adopted and is practicing internationally accepted accounting standards. Difference between the U.S. and Korean financial markets result in differences in accounting practices, but Korean accounting standards in these areas of difference are reasonable and are consistent with internationally accepted standards.
For example, regarding foreign exchange translation losses, the U.S. semiconductor industry asserts that Korean accounting standards distort the Korean semiconductor firms' true financial positions by pemitting amortization of certain foreign exchange losses.
Under U.S. accounting standards, foreign exchange losses are recognized in the year that the exchange rate changes; under Korean standards, foreign exchange losses relating to long-term loans are amortized over the life of the loan.
The rationale for the Korean standard is that, unlike U.S. firms, Korean firms commonly obtain long-term loans in a foreign currency. Thus, a small fluctuation in the foreign exchange rate may significantly alter the value of a firm's debt.
If the changes, i.e, foreign exchange losses on long-term debt, are recognized currently, Korean firms' financial statements are distorted without any underlying changes in sales prices or volumes.
Reflecting this rationale, the Department of Commerce stated that this Korean accounting standard is ''an improved way of accounting for unrealized gains and losses.'' In the Notice of Final Determination of Sales at Less Than Fair Value: Static Random Access Memory Semiconductors From the Republic of Korea, 63 Fed. Reg. 8934, 8940 (Feb. 23, 1998), the Department of Commerce allowed the Korean producers to amortize foreign exchange losses on long-term debt over the remaining life of the loan.
(Separately, and equally significant, the IMF has concluded that Korea's accounting practices do not interfere with the transparency of Korean firms' financial status.)
As noted above, Korea's accounting practices take into consideration certain aspects of the Korean financial market and do not distort generally accepted principles of accounting. The mere existence of differences in accounting standards between the two countries should not matter, as long as the Korean accounting standards are consistent with internationally acceptable standards.
Moreover, although Korean accounting standards are internationally acceptable, Korea is making further efforts to revise Korean accounting standards in order to avoid any possible misreadings of financial statements.
F. The Korean semiconductor firms are not engaging in unfair trade practices.
In 1992, Micron accused the Korean DRAM producers of dumping. However, the U.S. government held that Samsung Electronics, which represents over 70 percent of all Korean DRAMs sold in the United States, was selling DRAMs in the United States at fair prices. (In other words the U.S. government found that the vast majority of Korea's DRAM exports to the United States were sold at fair prices.)
As for Hyundai Electronics Industries and LG Semicon, on remand from the Court of International Trade, they each received very low margins _ 5.15 percent and 4.28 percent. These margins indicate that the Korean manufacturers were not engaged in extreme price-cutting or gravely unfair trade practices.
In the subsequent three annual administrative reviews, neither of the Korean companies still under the antidumping order were found to have been dumping. However, the Department of Commerce nevertheless refused to revoke the order. The Korean government has taken the issue to the World Trade Organization (WTO) for resolution.
In regard to SRAMs, in the Feb. 13, 1998 Department of Commerce final determination, Samsung and Hyundai received dumping margins of one percent (de minimis) and 5.08 percent, respectively. Effectively, the department found that Samsung, which accounts for over 90 percent of Korea's total SRAM exports to the United States, is not dumping in the U.S. market. The Korean producers' low margins are in sharp contrast to those of Taiwanese chip makers, all of which received substantially higher margins _ up to 113.85 percent _ than the Korean firms.
This account of the Korean producers' roles in the U.S. market is confirmed by the authorities of the European Union regarding European markets. With regard to alleged dumping in the EU, the European Commission determined in its interim review that the Korean semiconductor firms have neither engaged in dumping nor injured the European semiconductor industry.
Furthermore, at the initiative of KSIA, the European Electronic Component Manufacturers Association and KSIA recently established a data collection and maintenance system (DCMS). The DCMS demonstrates the mutual trust between the two industries and the bona fide intention of the Korean producers to honor their commitment to prevent injurious dumping.
In contrast, the U. S. industry has rejected the Korean industry's proposal to establish a similar DCMS. Micron prefers to advance its groundless allegations than to resolve the dispute in a reasonable manner.
Additionally, Korean semiconductor producers will not be able to tab advantage of the devaluation of the Korean won to increase their sales in the U.S. market. However, Korean firms have no incentive to undercut the already very low global market prices, and the devaluation of the Korean won does not improve Korean firms' price competitiveness. Because the Korean firms rely heavily on imports for equipment and materials, rising import costs and the high interest rates Korea is required to maintain by the IMF will offset any effects of the devaluation of the won.
G. The Korean companies were not alone in expanding production facilities; Micron did the same and its decision to delay the Lehi plant's operation is unrelated to the Korean producers.
Many of Micron's assertions presume that the Korean semiconductor producers were the only companies expanding production facilities in the past few years and, therefore, are solely responsible for the worldwide DRAM oversupply.
However, Korean manufacturers were not alone in expanding production capacity. U.S., Japanese, European, Taiwanese and Korean manufacturers all have increased production capacity over the last five years based on increased market demand. In recent years a number of U.S. producers, including Micron, IBM, Motorola and Cypress, have increased production capacity and/or entered into major joint ventures with European, Japanese and Taiwanese producers to manufacture memory products.
Micron, in particular, has drastically increased its production and its production capacity, recently having completed its huge Lehi, Utah facility. (In an attempt to capitalize on the boom of 1995 and the predicted boom in 1996, Micron started construction of the Lehi facility in late 1995, which was a disaster from a timing perspective.)
Contrary to Micron's assertion, the Korean semiconductor producers have decided to scale back both their domestic and overseas investment plans, given the dramatic price drop in worldwide semiconductor markets in 1997. LG Semicon this year will reduce its planned capacity expansion by 50 percent.
Hyundai and Samsung each will reduce their capital expenditures by 40 percent. In contrast, Micron, being a price leader, increased production from 10 million chips per month in 1996 to 30 million chips per month in 1997 and supplied them at low prices, aggravating the oversupply in the DRAM market and precipitating the worldwide price drop.
As a result of the oversupply in the DRAM market, Micron apparently has had difficulties in operating its Lehi facility. Micron's problems with the Lehi facility are due to Micron's poor financial planning and timing, not Korean competition.Operation of the Lehi facility has been delayed because of a downturn in the semiconductor industry and because of Micron's erroneous business forecast of market demand. These factors are completely unrelated to Korean manufacturers. |
