Politic-Economic-Society-Tech

The I.T. crash knocked even well-run Samsung Electronics for a loop. Can it still profit from the woes of its competitors?

By ROGER DEAN DU MARS in Seoul

Samsung Electronics always seemed like a rare instance of professionalism in Korea's chaotic economic landscape. Before the economic crisis hit a few years ago, the country's conglomerates, or chaebol, recklessly expanded. Banks offered ill-conceived loans. Shaky ventures lost their shirts in the volatile KOSDAQ stock market. But the flagship firm of Samsung Group, Korea's largest conglomerate, followed the book on carving a lean, profit-oriented machine. When the downturn hit, Samsung Electronics tightened its belt further. Unencumbered by militant unions, it eliminated 20,000 jobs between 1998 and 2000. The world's leading chipmaker, which produces 20% of all DRAM (Dynamic Random Access Memory) chips, also diversified into everything from the latest in mobile phones to microwave ovens. Its reward: $4.6 billion in profits last year. 

But the global memory chip debacle has humbled even the mighty — and the well-prepared. The price of 64-megabit DRAM chips has dropped to 90 cents — below the cost of production and a hair-raising fall from $9 just a year ago. Other chips have fallen less precipitously, but none has eluded the tempest. The I.T. sector, from Seoul to Singapore, from L.A. to Bombay, is getting blasted. Taiwan's exports fell 17% in June; Singapore went into a recession; even China's industrial production began to slow. The Samsung Group is now expected to cut its workforce by 10%. Over the past three weeks Samsung Electronics' share price has fallen 15%. And as Samsung goes, so goes Korea's economy. Seoul's export-oriented economy relies heavily on semiconductor sales. The I.T. business accounts for 20% of all exports; chips make up 10%. If chips are going down, the economy will too. 

Overproduction, dearth of demand and rock-bottom prices portend more bad news. "Not long ago the consensus was that the semiconductor cycle would pick up in the third quarter," says Shim Yong Jae, an analyst at Good Morning Securities. "That forecast is getting extended to next year." Unfortunately for Samsung Electronics, a year ago it gambled that the demand for ever-faster chips would continue to roar ahead. The company invested $2.8 billion in upgraded and new production lines for high powered chips, like the DRAM 256, the DDR (double data rate) and the Rambus, the fastest memory chip on the market. 

Samsung's investment looked like a good thing: Chip makers have to stay ahead of that innovation curve or miss the big upswings in demand. The company is known for exploring the downside of major investments. But no one foresaw how steep this falloff would be. Even Intel is said to be preparing to slash production of Pentium 4 chips by 60%. So what is Samsung Electronics' plan? "We're in the process of trying to evaluate the situation," says spokesman James Chung. "It will take a couple of weeks before we can figure out how to adopt a new strategy." 

Good luck. The obvious response to an oversupply of up to 30% is to cut output. But no one wants to go first. In the 1996-1998 downturn, Samsung Electronics and its biggest competitor, Hyundai Electronics (now called Hynix Semiconductor), cut production along with Japanese chipmakers. Rivals Micron Technology and Infineon Technologies later gobbled up market share when demand rebounded. So Samsung Electronics CEO Yun Jong Yong has said that the company is not yet contemplating a cut in production. A "production switch" of making different types of chips would also be risky. Hitachi announced last week that it was stopping production at a new plant that makes chips for cellular phones. But most firms are hunkering down to weather the storm — and to hope, perhaps, that one of their number goes under first. "Semiconductor companies are currently stymied," says Daewoo Securities analyst Chung Chang Won. "As the market deteriorates, companies will take stiff action." 

Asia's stock markets are taking action of their own. In Japan last week, the share price of Advantest, which makes the equipment that makes semiconductors, dropped 8.4%; Taiwan Semiconductor Manufacturing fell 3.8%. In Korea, Hynix dived 6.7%, sending the world's second-biggest chipmaker to its lowest share value since it was founded 18 years ago. Having collected $4.4 billion in lifeline loans — on the assumption that its focus on chips would spell recovery — Hynix's weak financial state puts it under great pressure to cut production. If it does so, some of its smaller rivals in Japan and Taiwan could follow suit. 

Regardless of what happens to its competitors, Samsung Electronics is likely to emerge stronger than ever. Says the vice president of a leading Western consulting firm in Korea: "It is in the best position. When the recovery starts, it will have more market share and better chips it can sell at better value." That would be a good lesson for other Asian firms: Corporate virtue really can be its own reward.

source: asiaweek.com, 20 July 2001