A New Force in Chip Wars : Korean Chip Exports Are Growing 35% a Year, and the U.S. and Japan Are Worried
As a young engineer working in International Business Machines Corp.’s semiconductor research laboratory, Chin Dae-Je had access to the company’s advanced technology. Thus, he believed that IBM would be less than pleased when he decided to leave after seven years to help launch South Korea’s semiconductor industry.
Instead, IBM sent Chin on his way with words of encouragement and a two-month bonus. “They told me they wanted a strong competitor to break the Japanese monopoly in memory chips,” explained Chin.
Chin hasn’t disappointed. As director of Samsung Electronic’s semiconductor research center in Kiheung, he led the team that developed the state-of-the-art, 16-megabit DRAM (dynamic random-access memory) chip ahead of the Japanese competition.
Samsung’s progress in advanced memory chips, critical components of computers and consumer electronics equipment, is the crowning achievement of South Korea’s spectacular rise as a semiconductor power.
In 1987, when Chin left IBM, Japan seemed to be on its way to monopolizing the business, with nearly an 80% share of all DRAM sales. Korea had a minuscule 3% share.
Last year, Japan’s share of the $7-billion world market for DRAMs dropped to 57%, while Korea’s share jumped to nearly 19%, according to Dataquest, a market research firm.
But now that it has become a force in the world market, Korea is facing some of the same trade problems that have bedeviled Japanese chip makers.
Acting on a complaint from Micron Technology, a Boise, Idaho, chip supplier, the International Trade Commission ruled that some of Korea’s major chip producers may have injured the U.S. semiconductor industry by selling chips at below market value, a practice known as “dumping.”
Next month the U.S. Department of Commerce will decide whether to impose punitive duties on the products of Korea’s Goldstar Electron Co. and Hyundai Electronics Industries Co. because of the charges. The two are the major Korean chip producers in addition to Samsung.
Also, the European Community is expected to rule this month on charges that Korean companies dumped chips in Europe, hurting EC companies.
Unquestionably, Korea’s industry has served to check Japan’s powerful semiconductor industry. Growing Korean exports have helped drive down chip costs for such users as personal computer manufacturers.
Lower product prices have undercut the competitive strength of Japanese electronics makers by preventing them from getting a full return on the billions of dollars in investments they have made in semiconductor production the past three years.
“If Koreans didn’t make memory chips, Japanese would control the market by themselves now,” says Son Jong-Hyun, general manager of Dataquest’s Korea office.
Korean companies have been boosting chip exports at a rate of 35% a year over the past three years. Now, in a push to boost exports to $15 billion by 1996 from $5.7 billion last year, the South Korean government is expecting chip makers to invest a massive $11 billion in production facilities the next four years.
But Korea will face serious obstacles as it tries to maintain such frenetic growth.
Korean companies suffer from a relatively shallow technology base and lack of foreign partners to help with technology development. In contrast, major chip makers in the United States, Europe and Japan have been forming alliances with one another to share technology and help spread the huge cost of chip development.
Meanwhile, both American and Japanese companies are threatening to increase the royalties they collect from Korean firms for the use of their semiconductor technology, a move Koreans see as an effort to slow them down.
“Sometimes it does seem like Korea against the world,” says Kee Young Nam, analyst at Jardine Fleming’s Korea branch.
Even the government seems to be having second thoughts about the high cost of chip investment. “Each new generation costs twice as much to produce, with a 16-megabit DRAM production line costing about $1 billion,” says Paik Man-Gi, director of the semiconductor division at the Ministry of Trade and Industry. “There is a question of whether it is really feasible to have three (Korean) DRAM makers.”
Although Korean chip makers would like to ally themselves with major Western chip makers, most of the largest companies have already made alliances.
Hitachi provided Goldstar with technology for two earlier generations of memory chips. But Hitachi has refused to share its technology for 16-megabit chips with Goldstar because it has a technology exchange deal with Texas Instruments.
IBM, which once seemed to be encouraging the Korean chip industry as a counter to Japan, now has a joint venture to produce advanced memory chips with Toshiba, Japan’s largest chip maker, and Siemens, Europe’s largest chip maker.
Korea’s narrow focus on DRAM production, its dependence on Japan for semiconductor manufacturing equipment and its small domestic semiconductor market are also chinks in the national industries’ armor.
“Korean personal computers are no longer competitive; that takes away a big market for memory (chips),” says Dataquest’s Son. A smaller domestic market means that Korea is even more dependent than Japan on exports and more vulnerable to trade retaliation.
Nevertheless, South Korea has overcome huge obstacles in its rapid success in semiconductors and few doubt that it has the resources to persevere.
Unlike the many American chip makers that pulled out of the DRAM business in the mid-1980s, Korean chip makers are part of giant conglomerates that command huge resources that can be poured into their semiconductor business.
Samsung is part of a group with $50 billion in sales. It makes consumer electronics, telecommunications and aircraft products. Hyundai is about the same size but makes automobiles and ships, while $30-billion Lucky-Goldstar makes everything from pharmaceuticals and chemicals to consumer electronics.
Samsung alone will invest an estimated $1.3 billion in new semiconductor production this year, only slightly less than its $1.4 billion in chip sales last year.
The Korean chip industry also benefits from a Japanese-style government industrial policy. The top three Korean chip makers have joined in research consortia to share the basic costs of developing new generations of memory chips. But the government has put up more than half of the estimated $360-million budget for the projects from 1986 to 1993.
Industry also receives tax and loan benefits. And the Korean government has set aside $72 million from 1990 to 1994 to fund research and development of semiconductor manufacturing equipment in hopes of reducing dependence on Japanese chip equipment makers.
Korean chip makers also hope to continue to benefit from tension between the United States and Japan. South Korea was a key beneficiary of the U.S.-Japan Semiconductor Agreement, which closely monitored prices of Japanese memory chips overseas to prevent dumping.
The agreement helped boost memory prices, making it easier for Korean companies to make money in the chip business. Now, as America pushes to crack Japan’s domestic market, Korean companies also hope for a foot in the door.
Samsung and other chip makers are trying to reduce their dependence on DRAM sales by moving into new fields such as microprocessors, where development is more difficult but profit higher. The company is working with Hewlett-Packard to develop a microprocessor chip using RISC (reduced instruction set) technology. “This is a good opportunity for us to learn,” says Chin of Samsung.
Like Japanese firms, Samsung boosted production and raised profits on memory chips by tightly controlling the manufacturing process. That reduces the number of defective chips that come out of each silicon wafer.
Samsung has also beefed up its research spending so it can reduce royalty payments it must pay to use other companies’ technology. Such payments accounted for 6.7% of semiconductor sales last year, down from 12.5% in 1989.
To further expand Korea’s share of the world memory market and to acquire more technology, Korean companies are likely to step up acquisitions of American chip makers. P. June Min, who helped launch Goldstar’s semiconductor business and now owns a business importing technology from the United States, speculates that Samsung may ultimately try to buy Micron Technologies--to acquire its technology and its U.S. market share and to eliminate a major source of trade friction.
Korean companies insist that they want to ally themselves with America in global competition with the Japanese.
“We are not a threat,” says Han Chang-Seock, marketing director at Hyundai Electronics. “We are not trying to get 50% to 60% of the market share like the Japanese; we just want to maintain the minimum level for efficient production.”
Others point out that Korea’s strength in DRAMs complements America’s strength in custom chips and microprocessors.
But some American observers worry that Korea could ultimately present the same threat as Japan does today.
“We are concerned that they have the same mental attitude of what to do (as the Japanese),” says Roger Mathus of the U.S. Semiconductor Industry Assn.’s Tokyo office. Americans are concerned, he said, that Korea will continue to export chips but resist using U.S. chips in their products.
CHIPS FROM KOREA
South Korea’s exports of semiconductors to the United States have more than doubled since 1987, but the country is now facing the possibility of major dumping penalties here and in Europe. Micron Technology Inc. of Boise, Ida., has accused major Korean companies of selling dynamic random access memory chips (DRAMs) at less than fair market value.
