Koreas DRAM Inc. meets reality
02/01/1998
Korea`s DRAM Inc. meets reality
George Burns, Strategic Marketing Associates, Santa Cruz, Cailfornia
At the beginning of July 1997, the South Korean won stood at the then low of 888 to the US dollar. By mid-December the won stood at 1710 won to the dollar: a spectacular fall of 52 percent in less than six months. The repercussions of this collapse are enormous. Not only has the world`s 11th largest economy been brought to its knees, but the world`s lender of last resort, the IMF, is undertaking its biggest rescue ever with a $57 billion effort. Korea`s high-flying semiconductor companies - Hyundai, LG Semicon, and Samsung - will be suddenly grounded. In 1998, their semiconductor capital spending budgets will be slashed and billions of dollars of planned new plant and equipment put on hold, perhaps permanently.
The South Korean economy was a modified command economy. From the 1960s through the 1980s, the government decided what sectors of the economy could grow and directed
the bank to provide low interest loans to the chaebol for expansion in those areas. Semiconductors was one of these areas, and Hyundai, LG Semicon, and Samsung were the beneficiaries. But now they are the casualties. As a condition of the $57 billion IMF bailout package, Korea must slash the growth rate of its GDP, reform its financial sector, and its chaebol must begin to repay their huge debt. The days of debt-financed fabs are now gone. Korean semiconductor companies are cutting their new fab investments drastically, and have announced delays and push-backs of several of their major new fab projects. Not counting the value of Samsung`s and Hyundai`s follow-on fabs at Austin, Eugene, and Dunfermline, the total value of the delayed projects is $6.8 billion (Table 1).
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Dongbu is a giant construction and steel chaebol that wanted to make DRAMs. The company had an agreement with IBM for the wafer technology and had already broken ground on a $2 billion DRAM plant. However, the project has now been delayed indefinitely due to lack of available financing.
Hyundai planned to be one of the world`s top two or three DRAM manufacturers, and by building one billion-dollar fab/year, was well on its way to achieving this goal. In 1997, it opened a new $1.3 billion fab in Eugene, OR, and planned to open a $1.7 billion fab in Dunfermline, Scotland. However, its building plan was highly leveraged and in early December, the company`s US unit, Hyundai Semiconductor America, had its credit rating downgraded by Standard & Poor`s to triple-B minus. At first, Hyundai resisted any notion that it would derail its Dunfermline fab. But it makes no sense to spend a billion dollars on credit that Hyundai doesn`t have to produce DRAMs with no profit.Hyundai now plans to delay equipping its Dunfermline fab until at least 1999, and it is possible that the shell will remain a shell, an outpost of unfinished ambition on a distant Scottish moor.
LG Semicon, too, had strivings to be one of the world`s leading semiconductor companies. But its plans have also been dashed by the plummeting won. LG has delayed its Chongju Fab 3, valued at $1.6 to $2.4 billion, for up to two years, and there are rumors that it might also pull the plug on its $1.6 billion fab under construction in Newport, Wales, leaving an empty shell behind on the shores of the British Isles.
Samsung, the largest of the Korean semiconductor companies and the world`s seventh largest semiconductor company in 1996, also has run out of easy money. It now plans to delay equipping its $1.5 billion DRAM Fab 9 for at least a year. There are rumors about a possible delay for its new Austin, TX, fab, also.
Effects on equipment spending
The chip equipment industry has benefited greatly from the growth of the Korean chip industry in recent years. The obvious danger is that the fall of Korean spending will translate into a downturn in chip equipment company revenues. From 1990 to 1996, the top three Korean chip companies spent over $21 billion on fabs and fab equipment. During this same period, the Korean portion of total capital spending rose from 9 percent to 22 percent. However, in 1997, responding to falling DRAM prices and vanishing profits, Korean company spending levels fell by 14 percent. The news for 1998 is even more bleak: financial reform and credit tightening will force Korean spending even lower. We expect at least an additional 24 percent decline from 1997`s level to $4.9 billion, the lowest level since 1994.
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Caption: Capital spending by Asia Pacific companies
This downturn in Korean spending may be partially offset by increases elsewhere, particularly in Taiwan and Southeast Asia. In 1997, spending in the rest of Asia was much more resilient than in Korea. While Korean spending was falling by 14 percent in 1997, spending in Southeast Asia and Taiwan declined by only 5 percent, and this was due chiefly to the collapse of two billion dollar fab ventures in Thailand (Alpha-TI and SubMicron Technology). In 1998, spending in China, Singapore, Malaysia and Taiwan will increase by as much as $2.2 billion over 1997`s level. Such an increase will more than offset the decline in Korean spending.
In sum, the implications for chip equipment companies are serious, but they could very well be offset by increases in spending elsewhere in Asia (see figure).
DRAM capacity implications
In terms of DRAM capacity, the cutbacks in investment will have the effect of decreasing 64-Mbit capacity, and hence raising DRAM prices. The cancellation of Hyundai`s Dunfermline fab represents a decrease of 20 percent of the company`s planned 64-Mbit DRAM capacity. Likewise, Samsung`s delay of its Keheung fab represents a decrease of 28 percent, and LG`s delay of its Chongju fab a decrease of 25 percent. For the three companies combined, the decrease in capacity between now and 1999 will be 25 percent less than they had originally planned (Table 2).
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Since the top three Korean companies account for over 40 percent of the world`s DRAM supplies, such a decrease in planned investment capacity will have a major impact on DRAM supply and hence, prices.
Conclusion
Until the current meltdown of Asian currencies, the Asian model for the semiconductor industry was generally well regarded. Witness the size and success of the Japanese, Korean, Taiwanese, and Singaporean semiconductor industries. Witness also the growth of the emerging Chinese semiconductor industry. The Asia model, if broadly understood to mean government support, is not limited to Asia, however. Governments in the US and in Europe have successfully provided tax incentives and sometimes outright grants of cash for semiconductor companies to build within their jurisdictions. In the case of DRAMs, this has obviously led to oversupply. Prices for 16-Mbit and 64-Mbit DRAMs are at historic lows in terms of price/bit. The cutbacks in planned investment by the leading Korean companies and by Dongbu are a corrective to a fundamental imbalance of governments and companies building capacity and market share without market constraint.
In the early 1990s, Japanese DRAM manufacturers cut back on their spending for new capacity because of oversupply. Korean companies, then outsiders, saw the Japanese cutbacks as a strategic opportunity and added capacity. This allowed the Korean companies to become world leaders in the manufacture of DRAMs within a very short time. This time the cutback by the Koreans is another strategic opportunity. On the one hand, it could be an opportunity for the Japanese and other DRAM manufacturers to step up their investments and gain additional market share at the expense of their Korean rivals. But if this were to happen, the present oversupply of DRAMs would likely continue. On the other hand, if the industry can just maintain its current investment plans and not add back the capacity that the Koreans are currently cutting, then the growth of DRAM demand may very well catch up with supply before the new millennium.
GEORGE BURNS is principal of Strategic Marketing Associates, a high-technology market research company serving semiconductor manufacturers, process equipment and materials suppliers, and facilities suppliers. Strategic Marketing Associates publishes a monthly newsletter, International Wafer Fab News, The Quarterly Spot Report on Semiconductor Fab Projects and the Sourcebook of New Fab Projects. Strategic Marketing Associates, P.O. Box 1217, Santa Cruz, CA 95061; ph 408/464-2669, fax 408/464-2025, e-mail [email protected], www.scfab.com.