The launch of Korea’s ‘new’ $1 billion chip company

Youm Huh, MagnaChip Semiconductor Ltd., Cheongju, Korea

October marked the official launch of MagnaChip Semiconductor Ltd., South Korea’s $1 billion semiconductor company and a milestone for the Korean chip industry. MagnaChip is the first major Korean integrated device manufacturer (IDM) to focus solely on value-added, nonmemory semiconductor products. Competing in such sectors is critical for continued advancement and profitability of Korea’s semiconductor industry.

The launch of MagnaChip was the result of a complex business transfer agreement that took more than two years to finalize. Under terms of the transaction, Hynix Semiconductor Inc. sold its nonmemory semiconductor operations to MagnaChip for approximately 954 billion won (US$828.4 million) in total consideration. The carve-out was orchestrated by the Hynix and MagnaChip management teams, as well as financial investors Citigroup Venture Capital (CVC) Equity Partners L.P., CVC Asia Pacific Ltd., and Francisco Partners. The transaction was an asset purchase with assumption of limited liabilities and the transfer of employees.

MagnaChip Semiconductor boasts five wafer fabs in Korea, with current manufacturing capacity of approximately 110,000 8-in. (200mm) equivalent wafers/month. Three fabs are located in Cheongju and two are located in Gumi. These fabs specialize in high-voltage power, analog, mixed-signal, and embedded-memory processes. The company’s goal is to continue to improve these process technologies for a range of high-end products and foundry services, offered at competitive prices. MagnaChip believes it has enough capacity headroom for growth at present, but would consider expansion to other locations, including China, in the future.

New era for Asia’s IDMs
The spinoff of MagnaChip and the company’s business strategy offer insights into how we expect the semiconductor industry to evolve in Asia. Companies in the region no longer will be able to leverage their balance sheets and drive up debt to fund significant expansion projects. Successful industry leaders will maintain credit-friendly structures in order to grow their businesses and fully support global customers.

Geographic-centric players will see limited returns on investments as leading Asian semiconductor manufacturers expand their roles as global IC suppliers to end markets on a worldwide basis. Therefore, Asian manufacturers that cannot function in a global fashion will lose market share. This is a critical point.

Korean companies have a long history of manufacturing excellence, with well educated and committed work forces. To succeed on the increasingly competitive global stage – even more so now due to China’s rapid growth and technical advances in semiconductors – Korea must continue to support the conditions for an open, market-driven economy by continuing restructuring efforts begun in the 1997 financial crisis. These efforts are focused on providing an environment in which companies can survive and prosper only with financially sound balance sheets and economically viable returns. Korea is on a path to do this, but it must continue to make those strides.

Before the creation of MagnaChip, the country’s chip industry was mostly concentrated in two large IDMs – Hynix Semiconductor and Samsung Electronics Co. Ltd. – both of which had been historically strong in memory products. These IDM models, focused on memory chips, were similar to the large semiconductor businesses in Japan during the 1980s and 1990s. Memory-driven IDM strategies also were prevalent in the US semiconductor industry until the 1990s. However, many semiconductor businesses in North America and, more recently, in Japan have shifted their focus to more value-added products in nonmemory market segments. The move to establish MagnaChip as a nonmemory semiconductor leader is similar to what transpired in Japan and the United States during the past few decades.

MagnaChip finds itself in a fortunate position: It began life with more than 15,000 patents in its extensive intellectual property portfolio and was launched with 4200 employees, including 650 in research and development. The company’s own product portfolio is divided up into three main offerings: CMOS image sensors, display driver ICs, and application processors. World-class customers include the likes of LG Electronics, Samsung, LG Philips, Sharp, NEC, Panasonic, and LCD maker BOE Hydis Technology. Furthermore, MagnaChip is aggressively pursuing nonmemory foundry business and ASIC designs with its Semiconductor Manufacturing Services unit.

Total company revenues in 2004 were projected to reach $1 billion, compared to just $200 million in sales five years ago from the businesses now making up MagnaChip. The company plans to grow its revenues faster than the overall semiconductor market by focusing on technology leadership in diversified segments that are less volatile than the total chip industry. R&D is concentrated on value-added processes for high-voltage power management and mixed-signal circuits. The company expects R&D spending to be approximately 10% of sales.

In the CMOS image sensor segment, 1.0 and 1.3 megapixel products are being supplied. Engineering samples of 2.1 megapixel image sensors are being delivered to customers, and a new 3.2 megapixel device is in development. In the display driver segment, MagnaChip is focused on less power-consumptive technologies and smaller packages. Targeted applications range from small displays in portable systems to high-resolution large LCDs.

MagnaChip’s IDM business model also calls for an expanded global presence. Plans are underway to build design centers globally. The company already has one design center in Taiwan, and the next location will most likely be in Japan or the US. The global network of design centers and closer partnerships with customers worldwide are needed to address shorter product lifecycles and growing pressures to integrate the latest technology advances quickly.

When the time comes for expansion in wafer fab capacity, MagnaChip plans to look at a range of options, including a joint venture, 300mm manufacturing, and outsourcing of wafers, depending upon what makes sense financially and operationally for the business. MagnaChip’s new independent structure will enable it to leverage the combination of significant investments in technology, manufacturing, and products while also taking advantage of much greater flexibility in global expansion of the company’s role. It is this type of IDM model that will play a large part in maintaining Korea’s position in the semiconductor industry.

YOUM HUH received his BS in electronics engineering from Seoul National U. in Korea, MS in electrical and electronics engineering from Korea Advanced Institute of Science & Technology, and PhD in electrical engineering from Stanford U. He is president and CEO of MagnaChip Semiconductor Ltd., 891Daechi-dong Kangnam-gu, Seoul 135-738, Korea; ph 82/2-3459-3007, fax 82/2-3459-3666, e-mail [email protected].

Sidebar: Restructured Korean IC industry is still heavy in memories

During the past nine years, South Korea’s $20 billion-plus chip industry has been hammered and reshaped by a variety of financial and semiconductor market forces. What has emerged is a more diversified semiconductor supplier base in Korea consisting of four major chipmakers pursuing very different business models, but memory products still dominate the country’s output.

“Memory – in particular DRAMs and flash products – could represent nearly 90% of Korea’s semiconductor sales, excluding the foundry business,” estimates analyst Nam Hyung Kim, who tracks memory markets and manufacturers at iSuppli Corp. in El Segundo, CA. Kim, who used to work in the Korean chip industry during the 1990s, believes Samsung Electronics Co. Ltd. and Hynix Semiconductor Inc. now supply nearly 40% of the world’s memory products.

A strong rebound in memory markets during the past several years has helped Korea’s chip industry to get back on its feet and increase capital spending on fabs after a great deal of change since the 1990s. Sharp declines in worldwide DRAM sales from an all-time peak in 1995 and the 1997 Asian financial crisis played havoc with Korean chip industry, which, until six years ago, was primarily made up of semiconductor subsidiaries operated by the South Korea’s three largest chaebols – Hyundai, Samsung, and LG. A series of mergers and spinoffs, along with a foundry startup, has restructured Korea’s semiconductor industry into four major players: Samsung Electronics, Hynix, newly formed MagnaChip, and pure-play foundry supplier DongbuAnam Semiconductor.

Only Samsung – the industry’s largest memory supplier and no. 2 chipmaker in the world – remains intact as a vertically integrated electronics manufacturer, notes analyst Bill McClean, president of IC Insights Inc. “That model [systems and chip making] can work very well and it is at Samsung as well as companies like Sony and Sharp in Japan,” McClean says. “It is a matter of corporate dedication and the agenda. Samsung is proving that vertically integrated models can work,” adds McClean, pointing to the company’s use of its own ICs in cell phones, consumer products, and other systems.

But one thing that has been elusive in Korea has been diversification from DRAMs and other memory products. The spinoff of nonmemory operations from Hynix to form MagnaChip Semiconductor in October is the latest effort to build a large semiconductor company outside of DRAMs and flash devices. “I think they will do well, but I certainly do not expect them to skyrocket or be a major force soon,” McClean says, noting the shift of competition worldwide. “Even Samsung has tried to shift more of its business outside of memories, but today memory is still 85% of its sales. Five years ago Samsung said it was planning to make nonmemory products about 30% of its semiconductor sales. It just hasn’t worked out that way.”

Overall, South Korea’s own domestic IC market accounts for about 16% of chip consumption in Asia (excluding Japan). IC Insights estimates that the value of ICs used in Korea was about $12.4 billion in 2004 and expected to reach $18.4 billion by 2008, but the country’s market for chips is rapidly losing ground to China, which is forecasted to account for more than 50% of Asia’s integrated circuit purchases, or $70.3 billion, in about three years. – J. Robert Lineback, Senior Technical Editor, SST

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