Semiconductors and the
05/01/1997
Semiconductors and the "Miracle of the Han"
Subrata Chatterji, Bob Richardson, Silicon Valley Group, San Jose, California
Korea`s modern economic development is often called the "Miracle of the Han," referring to the river that flows through the capital of Seoul. Progress has indeed seemed miraculous, because rarely has a country so quickly recovered from the devastation of a war, and so rapidly developed into an economic power. The Korea of today is embracing radical market reforms and seeking to integrate its economy into the global marketplace.
Korea`s economy is currently the 11th largest in the world, according to World Bank data, and many opine that it will soon join the ranks of the top 10. The Korean semiconductor industry has experienced phenomenal growth during the last 10 years and has played an important role in the overall enhancement of the country`s economy. Korea is the largest manufacturer of DRAM chips in the world and one of the leading innovators in the semiconductor industry.
While previous issues of Solid State Technology have featured articles on the business culture, environment, and communications in Korea, this article focuses on the semiconductor industry as an integral part of the economic fabric, and foreign investment as a manifestation of the "Miracle of the Han."
Outline of the Korean economy
Some important points to consider about the Korean economy are listed below.
The GNP for the Korean economy is US$451.7 billion and per capita GNP is $10,076.
The GDP growth rate in 1995 was 8.7%, and the annual average GDP growth rate during 1963-95 has been 8.5%.
In 1995, exports amounted to $25.1 billion and imports amounted to $135.1 billion.
The importance of semiconductors to the success of the Korean economy is obvious (Table 1). No other industry in Korea, other than shipbuilding, has done better than the semiconductor industry. The same conglomerates are the leaders in both industries.
From the early 1960s to the early 1990s, Korea underwent its own dramatic version of the classic Asian economic boom, the "Miracle of the Han." The Gross National Product rocketed from $1.9 billion in 1960 to about $30 billion in 1990 (Fig. 1). The electronics industry correspondingly expanded tenfold, becoming a major contributor to the economy.
Giant conglomerates, called "chaebols," rode this economic boom to emerge as leaders in electronics manufacturing. Their low cost strategy catapulted them to extremely competitive global positions. After a decade of aggressive investment in comprehensive technology development, the chaebols staked their claim in the semiconductor industry and have risen to become major worldwide players.
The semiconductor history of Korea is very short (Table 2). Until 1988, today`s Korean giants (Samsung, Hyundai, and LG Semicon) were generally foundries for US chip manufacturers. But in the 1990s, having acquired valuable expertise, they changed their strategy and entered the merchant market with their own brand names. The investment paid off in the memory business as well as in other sectors. Samsung is today the world`s largest DRAM and SRAM supplier. Hyundai and LG Semicon rank among the top seven in the world.
Figure 1. Korean gross national product.
KSIA stimulates change
The Korean government is contemplating an end to its 8% import tariff on semiconductor components. A request to this effect has been filed by the Korean Semiconductor Industry Association (KSIA) with Korea`s Ministry of Trade, Industry, and Energy (KMTIE), since this will enable Korea to join the World Semiconductor Council. Ending the tariff may be a difficult step for the government to take, translating into a loss of US$600 million in annual import revenues (as earned in 1995). Under the World Trade Organization pact, Korea`s semiconductor tariff`s are set to drop to 4% in 1998 and to zero in 1999. But if KSIA`s proposal is approved by KMTIE and the Ministry of Finance, then the duties will be eliminated much faster.
Tariff elimination may result in more competition for Korean fabs from foreign chip suppliers. However, lower chip prices on critical components such as microprocessors will benefit local computer and electronics manufacturing. Since the three semiconductor giants are also major players in the global electronics industry, tariff reduction would be a mixed blessing for the economy as a whole.
The KSIA has also recommended to the government that it change priorities to include the establishment of a local semiconductor equipment sector. Industry would like to see this sector grow through tax incentives and land for an industrial park. Korean semiconductor manufacturers are said to have approached some of the US semiconductor equipment manufacturers for collaborative business ventures. The extent of current government support remains uncertain.
DRAM price effects
The semiconductor industry is an important chunk of the Korean economy, and Korea is the largest manufacturer of DRAM chips. Thus the decline in DRAM prices should have a considerable impact on the economy.
The decline was a consequence of the shortfall in demand for DRAMs in the global market. Korea`s chip exports, an important contributor to the national economy, have been reduced as a result. According to a recent report by the Korean Institute for Industrial Economics and Trade (KIET), the nation`s semiconductor exports will amount to $16.5 billion in 1996, though the government`s July 1996 projection for the year was $21 billion.
Though DRAM prices seem to have stopped their decline, few people expect to see any significant rebound in the near future. The price of 16-Mbit DRAM chips, which had plunged to $10 from $40/unit, has risen slightly to $13. Many in the Korean semiconductor industry believe that the price will hover around $13 for the next few months. This recovery could possibly be attributed to big orders from leading PC manufacturers, including IBM and Compaq, to meet the estimated demand boom during the year-end sales season.
The global glut in DRAM chips is not expected to recover completely until the end of 1997 when the conversion from 16- to 64-Mbit DRAM production is complete. Korean manufacturers will push ahead with output control, and attempt to make an early transition to 64-Mbit DRAMs. A strategic shift of some percentage of capacity to higher value-added memory and nonmemory chips is likely.
The logic for logic
As recently as mid-1996, the major Korean semiconductor manufacturers seemed to be winners in the industry and had no need or reason to follow the business plans of the losers. But reeling from the DRAM downturn, Korean chip companies are trying to diversify their product lines and emphasize the nonmemory sector. One good example is Samsung Electronics.
Samsung has done more to build its nonmemory portfolio than other manufacturers. It has included digital signal processors, embedded microcontrollers, and analog integrated circuits. It has also signed a business deal with Toshiba Corporation to co-develop flash memory chips. Both Hyundai and LG Semicon have already included multimedia processors in their product portfolios.
Several global semiconductor manufacturers have announced plans to migrate into the nonmemory sector in Korea. National Semiconductor recently incorporated Paychild for nonmemory production of the parent company. Motorola Korea is investing $250 million to build a nonmemory chip plant in Paju.
Technical agreements to foster diversification are common. SGS Thompson is working with Hyundai Electronics to make small card ICs. The Anam Group of Korea is entering the nonmemory semiconductor business through a technical agreement with Texas Instruments. Future product directions include an investment in higher margin memory chips such as Rambus and synchronous DRAMs.
International investment
Korea`s trade relations span the globe, with a trade volume of approximately US$260 billion a year. The country`s association with several world trade bodies has created a very congenial business environment for foreign investment. Korea is a member of the 18-nation Asia-Pacific Economic Cooperation, which accounts for about half of the world`s GNP. It is also trying to be a part of the Organization for Economic Cooperation and Development. Korea is a signatory to an increasing number of international trade agreements, including the World Trade Organization and the Trade Related Aspects of Intellectual Property.
In 1995, foreign investment in Korea increased 47.4% over the previous year, reflecting the success of liberalization policies (Fig. 2). Korea`s three leading investors are Japan, the US, and the Netherlands. Current investment incentives include favorable financing, office space availability, expeditious local partnerships, and tax benefits (including a 100% tax exemption for high technology fields).
Figure 2. Foreign direct investment in Korea by the US, Japan, and Europe.
Conclusion
Though the Korean semiconductor "miracle" has experienced a major setback with the recent problems in the memory market, Korean companies are in the industry for the long haul. They are continuing to invest in the most advanced areas of semiconductors, communications, and personal computers, and are partnering with technology companies from around the world.
Though the economy has slowed somewhat, it is still growing at a rate that would be the envy of many countries. Korea is becoming a major consumer of semiconductors and a major producer of some of the most advanced chips. International companies that continue to invest in Korea will reap significant benefits far into the future.
Reference
1. KSIA (March 1996); KDI, Economic Bulletin, Vol. 18 No. 8 (August 1996); Bank of Korea (August 1996).
SUBRATA CHATTERJI received his MBA degree from the University of San Francisco in Calif., and his master`s degree in English from the University of Bombay, India. He is corporate marketing analyst at Silicon Valley Group, and has worked in the field of marketing and new business development in high technology industries. Silicon Valley Group, 2240 Ringwood Ave., San Jose, CA 95131-1224; ph 408/434-0500, fax 408/467-5867.
BOB RICHARDSON received his bachelor`s degree in electrical engineering from St. Louis University, and his master`s degree in business from Southern Illinois University. He is vice president of new business development and corporate marketing at Silicon Valley Group. He has also been the president of SVG`s Lithography Division and Track Systems Division. Prior to joining SVG, he spent four years with Plantronics Inc. as its president and general manager, and three years as director at Motorola.