Time of trial

Time of trialThe Korean chip industry has been on a high for some years with Samsung leading the way. Now that has changed and they are up against it, but the Koreans have plenty of spirit, says David Manners Korea is having a horrible time. Although all of the Big Three chip companies insist they remain committed to staying in the semiconductor business, they have shed employees and staff have had pay cuts of up to 20 per cent. The physical effects of crisis show in the streets. In 1996, so crowded were the roads that EW’s taxi took an hour and a half get from Hyundai’s head office in the centre of Seoul across the Han River to LG’s marketing division in the south-east of the city. A month ago, the same trip took half an hour. Unemployment is rising, strikers are out in protest at lay-offs, social tensions are rising, interest rates are in the teens, the stock market is sliding, people can’t afford to buy consumer goods, the only way out for the chip companies is to export. But exports are devalued by the weakest memory chip market ever seen in the industry – declining in value three years running – and bedevilled by anti-dumping actions. In this market, everyone has to sell 16Mbit DRAMs at a loss, so those companies selling into markets where they have no local production are vulnerable to anti-dumping actions. Samsung, as the world’s largest memory producer, is sufficiently important to customers to command a price premium and therefore avoid transgressing the dumping barrier. The others have to sell for what the market will pay. That means they sell at a loss, but they have to keep on selling because the value of memory exports has constituted as much as 20 per cent of Korea’s exports. Meanwhile rival chip producers try to ensure that none of the IMF bail-out money goes to Korea’s chip rivals. At April’s World Semiconductor Council meeting the Americans tried to spring the Koreans into signing a declaration they would not take any IMF money. Although the Koreans did not sign the declaration, one of the delegates to the WSC, S.S. Lee of LG Semicon, says: “I explained to the WSC that it is not an issue for private companies, but for government people. My understanding is that the money from the IMF is not for particular industries or single companies, but as a move to restore national short-term credibility. We can manage without outside funds”. The hostility of rivals, particularly of American rivals, derives from the fact that the Korean Big Three are widely regarded as having precipitated the crisis by building too many factories. The blame for this lies with the autocratic owner/chairmen of Korea’s conglomerates who saw semiconductors as a glamour industry in which to try and out-spend and out-produce eachother. Holding both ownership and managerial control, these men wield astonishing power. For some years, the Korean semiconductor industry has been a chase in which Samsung set the pace and the others tried to catch Samsung. Everyone in the international semiconductor industry predicted that the race would end in tragedy, and it has. Now it is left to the professional managers to devise and implement a survival strategy. What they have put in place is a typical semiconductor industry response to bad times – to maximise the R&D effort in order to run faster with the technology, to push the process technology down the micron trail as fast as possible, and so to shrink the chip-sizes as much as possible, and as often as possible. Shrinks have two benefits: you produce more chips and you get higher performing chips which command higher prices. This is a better way to increase the value of the factories’ output than by the simple building of more and more factories for run-of-the-mill product. So the factory building programme is held back, while existing factories are pushed to more advanced processes like 0.22, 0.20 and 0.18 micron. LG expects to have a factory at Chong-Ju running at 0.18 micron by the end of this year, while Hyundai plans to have two factories at Ichon, Fabs 6 and 7, running 0.20 micron processes this year. By having the latest processes installed, the companies are assured of having a large proportion of their output meeting the spec for the new 100MHz system frequency PCs. Samsung plans to have 90 per cent of its production meeting the specification by the end of this year. LG plans for 80 per cent of its production to meet PC-100 by the year-end, and Hyundai expects that “over 50 per cent” of its DRAM output will be PC-100-compliant in the fourth quarter. If, and it’s a big if, not too many other companies come out with PC100 DRAMs the price will stay firm – for a while. Having the latest processes also allows for the introduction of new density generations such as 128 and 256Mbit DRAMs. Hyundai starts producing a 128Mbit DRAM in Q4 this year on a 0.22 micron process moving to 0.18 in 1999, and a first generation 256Mbit in Q2 1999 on 0.18 micron with a second generation in Q3/4. LG is pursuing a similar strategy. Samsung put a 128Mbit into production last month and is sampling a second generation 256Mbit, but does not anticipate a market for the 256Mbit until 2000. As well as new processes, faster chips, and new product generations, the Korean companies are moving quickly to using the new microprocessor interfaces – DDR, SyncLink and Direct Rambus. In all these ways, the Korean companies seek to maintain the value of their silicon, keep their factories turning over, their people employed and their country earning foreign currency through exports.
They’re up against it, but the extraordinary spirit which brought them from nowhere to having three companies in the semiconductor top 20 in 15 years, will probably see them through.

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