Korea's IC industry seen on shaky ground

TechOnline India - October 20, 2009

After listening to top business leaders in South Korea these days, one comes to a simple conclusion: The domestic semiconductor industry is in deep trouble.

SEOUL -- After listening to top business leaders in South Korea these days, one comes to a simple conclusion: The domestic semiconductor industry is in deep trouble.

Perhaps that's an exaggeration. A more accurate way of describing Korea's IC industry is that domestic chip makers are reeling, as vendors have been battered by the current and unforgiving IC downturn.

Now, chip makers are finally seeing an upturn, which should help heal their wounds from the recession. But going forward, Korea's four major chip makers--and the nation's semiconductor industry as a whole--face its share of challenges.

At a recent event here, a Samsung executive warned that his own company is still too dependent on the memory business, saying it must seek new markets to fuel future growth. Samsung itself has taken steps into many non-memory markets, including a move to re-enter the power IC sector, but the chip giant continues to struggle in many of those markets.

Another memory maker, Hynix Semiconductor Inc., has recently seen its creditors put the company up for sale--the lone bidder also appears to be shaky ground. In addition, MagnaChip Semiconductor Ltd. has just emerged from bankruptcy. And analog foundry vendor Dongbu HiTek has been given a new capital injection to reduce its debt load.

If that's not enough, business leaders warn that Korea's ongoing push to jump-start its fabless IC industry has fallen short of its original targets. Korea's move to develop its fabless chip industry is critical, as the nation needs to propel new and innovative startups. The nation also remains too dependent on the lumbering, family-run conglomerates or chaebols, such as Hyundai, LG and Samsung.

Clearly, South Korea is a powerhouse in memories, handsets, LCDs, TVs and related markets. The problem is that Korea is still too dependent on foreign sources for many of its non-memory chip products, warned Hak-Sun Kim, vice president of Samsung Electro-Mechanics Co. Ltd. (Seoul), the passives components and module unit of Samsung.

In the mobile market, for example, ''most of the chips come from overseas,'' Kim said. ''We are also importing 100 percent of our networking ICs.''

''We are well-positioned in the memory business,'' said Youm Huh, vice chairman of the Korea Semiconductor Industry Association (KSIA). ''In system LSI, Korea is weak.''

Huh--who is also president and CEO of Silicon Mitus Inc. (Seoul), one of the emerging startups in the analog space in Korea--also urged the domestic fabless community to look beyond its own borders. Instead of seeking the international markets, local companies tend to look inward and sell their ICs to the two local giants in electronics--LG and Samsung.

''We are too dependent on the local market,'' he warned. ''We have to expand our markets. We only have local players--not global players.''

It's not all doom-and-gloom in Korea. The nation has carved out its place worldwide in automobiles, consumer electronics, semiconductors, steel and ship building.

But more importantly, business is looking up for the IC industry as a whole. ''We're all seeing strong demand,'' said John Yong-In Park, president and chief executive of Dongbu HiTek (Seoul), an analog foundry vendor.

Still, there are major questions surrounding Korea's IC industry. The most obvious ones are clear: Can Hynix and MagnaChip survive over the long term? And what will Samsung do next? {pagebreak}On Tuesday, Samsung invested in Fusion-io, a Salt Lake City, Utah-based developer of flash I/O technology. Some believe Samsung may make another bid to acquire SanDisk Corp. Others were surprised that Samsung did not acquire Singapore's Chartered Semiconductor Manufacturing Pte. Ltd., in an effort to expand its fledging foundry business.

In any case, Korea is a powerhouse in electronics today after a humble start. Korea's efforts in electronics can be traced back to the 1970s or earlier, when the nation took a bold step into the arena.

Backed by government funding, Korea started a DRAM project in 1980s. Others believe the nation gained its memory know-how through reverse engineering in the 1980s. It reportedly stole designs from its rivals.

Still, by the mid-1990s, Korea's "chaebols" emerged and captured one-quarter of the world's IC market. Over time, Samsung and others basically took the memory business away from Japan.

More recently, Korea's electronics industry has been on a roller-coaster ride. Korea's information technology (IT) sector posted a $57.8 billion trade surplus in 2008, according to the Ministry of Knowledge Economy, a government agency in Korea.

Exports of IT products grew 0.9 percent in 2008 over 2007, totaling $131.3 billion, while imports increased 5.5 percent to $73.5 billion, according to the data. Mobile phones became Korea's No.1 IT export item, going up 19.1 percent to $33.45 billion. In contrast, oversupply and declining prices led exports of semiconductors to decline for the first time in seven years last year, according to the data.

Today, it's a mixed bag. Korea recorded a trade surplus of $6.43 billion in the IT sector for the month of September 2009, the third-highest figure since the government began keeping records in 1996, according to the data.

IT exports were up 0.8 percent year on year to $12.24 billion in September, resuming an upward trend for the first time in a year. In September, with shipments of mobile phones and televisions dropping 22.5 percent to $2.52 billion and 2.5 percent to $540 million, respectively, exports of semiconductors and display panels increased 22.3 percent to $3.6 billion and 4.2 percent to $2.63 billion, respectively, according to the data.

Meanwhile, IT imports slipped 13.6 percent year on year to $5.81 billion last month. This was attributable to a decline in imports of major items--electronic components ($3.59 billion) and computers and related devices ($610 million).

Business is indeed looking up. Citing the DRAM and other businesses, Samsung recently said it expects to report strong third quarter sales. Right now, Samsung is seeing strong demand for DRAMs, especially newer DDR3 parts, in the server and high-end notebook markets. ''The PC market is better than we thought, but we're cautious,'' said Keich Lee, manager of memory marketing for Samsung.

Lee confirmed reports that there are shortages of DDR3 SDRAMs in the market. In NAND flash, there is a supply/demand balance right now. DRAM and NAND flash demand are projected to wane in the first quarter of 2010, as that period is normally the slow season, she said.

In logic, Samsung has been making a strong push in application processors, CMOS image sensors, LCD drivers and foundry services. Samsung's passives unit, Samsung Electro-Mechanical, has quiety re-entered the power IC business. {pagebreak}During a presentation, Kim of Samsung Electro-Mechanics warned that the nation as a whole must expand beyond its bread-and-butter memory business, of which he said is maturing.

Korean companies must push into new IC markets, such as networking, RF and wireless LAN, he said. The nation imports most of these products from foreign sources. ''There are so many things that Korean companies can do'' beyond memory, he said.

Samsung, of course, is on solid ground. Others aren't so lucky, namely Hynix. As reported, former bail out creditors in memory maker Hynix were seeking bids for the remaining 28.1 percent stake they still hold in the chip maker. In effect, the creditors are selling a majority stake in Hynix.

The search for a new majority shareholder for Hynix is nearing as a Korean conglomerate called Hyosung Corp. has submitted a bid. The value of the stake in question is estimated at 3.65 trillion won ($3.04 billion).

Suddenly, however, Hynix' creditors have delayed a plan to sell a majority share in the chip maker to Hyosung, according to reports. Hynix originally said the process would take place in two months or so.

Some observers are skeptical about the bid. Hyosung is roughly the same size as Hynix in terms of total sales and has no experience in semiconductors.

Hyosung's shares have reportedly taken a beating on Korea's stock market, based on fears that the deal makes little or no sense. There are also rumors that Hyosung has created slush funds through its subsidiaries and is also suspected of tax evasion, according to reports.

On the bright side, after a string of losses, Hynix could become profitable in the third quarter of 2009, said James Kim, vice president of investor relations for Hynix (Seoul). The company has raised its forecast for average selling prices (ASPs) for both DRAM and NAND.

Despite the confusion, Hynix will likely survive. The Korean government has rescued the company in one form or another over the years. It still views Hynix as a critical part of Korea's semiconductor industry, but others wonder just for how long?

Another vendor, MagnaChip, isn't likely to survive in the future, some observers believe. In June, MagnaChip--the logic spin-off of Hynix--filed for Chapter 11 bankruptcy protection in the United States. At the same time, a fund led by South Korea's KTB Securities Co. Ltd. acquired MagnaChip and its affiliates. The deal is valued at about $80 million.

In September, U.S. Bankruptcy Judge Peter Walsh approved a reorganization plan submitted by MagnaChip. Officials from MagnaChip claimed the bankruptcy filing did not impact its business, but many wonder just how long before the company is acquired. {pagebreak}There is more hope in Korea's fabless sector. Several years ago, the nation started the ''System IC 2010'' project, an effort to develop more fabless companies, including analog startups.

This program has produced many promising startups, but the effort ''is still not up to our expectations, if you compare it to Taiwan,'' said Silicon Mitus' Huh.

The problems are clear. Korea's fabless companies are generally selling to the local market, namely LG and Samsung, thereby limiting their opportunities. And like startups in the U.S. and elsewhere, Korea's startups are having trouble in terms of obtaining venture capital funding.

The venture capital community is tiny in Korea. So, domestic companies must look at funding opportunities in the United States. In general, though, U.S. venture capitalists have given up on semiconductors, because the market is maturing and the return takes much longer than before.

In total, there are 200 fabless outfits in Korea. Of those, there are 40-to-50 ''active'' fabless companies in Korea, according to the KSIA. The average sales for a fabless company in Korea is $2.8 million a year.

Only a handful of local fabless design houses have sales over $100 million per year. One of those vendors, Silicon Works, is actually a captive supplier of LCD driver ICs to LG Display Co. Ltd.

To jumpstart a new wave of fabless companies, the government has dropped hints about the ''System IC 2015'' program. There are few details about the program, but others have another formula for success for both fabless and IDMs in Korea. ''We should look for emerging markets and (enter) them,'' said Huh.

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