The Hynix plant in Cheongju, North Chungcheong Province, mainly produces 300mm wafers for NAND flash memory chips.

CEO Kim Cautious but Confident About Semiconductor Outlook

By Kim Yoo-chul
Staff Reporter

It was already shaping up to be a dismal year for chip companies when the financial crisis hit and further solidified the industry downturn.

However, Hynix Semiconductor chief executive Kim Jong-kap seems more optimistic than most, predicting a rebound in chip prices from the second-half of next year driven by a stronger market for devices.

Meanwhile, dramatic falls in the prices of NAND flash memories are having a devastating impact on the global industry, and Hynix recently posted its sharpest
quarterly loss in almost eight years, the fourth-straight quarter the company was in the red.

Increased demands from electronics makers, doubled with industry consolidation trends, will allow profits to rebound in the later part of 2009, Kim said.

"The prices for dynamic random access memory (DRAM) and NAND flash memory chips will hit rock bottom during the first quarter of next year before rebounding later," said Kim, who expects slower growth in chip shipments for next year.

"There are some good signs on the supply side, but the demand side has been the problem. I don't think the demand and supply imbalance will continue throughout 2009," he said.

Declining chip prices, a result of lagging demand and oversupply, are forcing chipmakers to cut their investment. Hynix is planning to cut its spending by around 1 to 2 trillion won next year, company officials said.

The industry had hoped for a turnaround ahead of the winter holiday season, but with the recent financial crisis killing off much of the demand in consumer electronics products, chipmakers are now facing a murkier future.

The chip industry will see "very limited" supply growth next year, Kim said.

"We will make sure we maintain our (sufficient) liquidity levels, and our internal reserves at end of the third quarter were around 1 trillion won, which is a large enough amount to tackle the difficult market," he said.

On speculation of Hynix once again becoming a DRAM-focused company, due to the skidding NAND prices, Kim stressed that the company will be committed to maintaining flexibility in product portfolios.

"The decline in NAND prices was much steeper than in DRAM prices, and as we are seeing good production yields in 54-nanometer DDR2 DRAM chips, the costs of DRAMs will rise," said Kim, who added that the portion of 50-nanometer DRAM chips in total production will rise by 15 percent this year.

"The process for churning out highly advanced 41-nanometer computer chips is progressing in pace with our production target for the first quarter of next year. By massively producing chips, we get a chance to offset our losses."

The average selling price (ASP) of the company's DRAM chips posted a quarterly decline of 11 percent in the third quarter, while its NAND chip prices fell 23 percent during the same period.

Despite the erosion in profit, Kim said Hynix will be committed to maintain its technical edge, spending around 10 percent of its budget on research and development.

"The proportion of our spending on R&D has to be among the highest for memory chipmakers, and we will continue to keep the spending on R&D around the 10 percent level, although our spending on facilities is likely to decline," Kim said.

Company in Search of New Owner

The process of finding a new owner for Hynix is about to accelerate, with creditors, looking to sell their combined 36 percent stake in the company, planning to pitch up efforts to select a preferred bidder, Kim said.

"It's somewhat nonsense for banks to stay with us. I think creditors will bring the issue to the table no later than this year, depending on Hynix' stock moves," Kim said, who doesn't expect a serious approach from rival chipmakers.

Hynix nearly collapsed in 2001 (the last major downturn for the semiconductor industry) but was saved by creditors through debt-to-equity swaps.

Hynix creditors, who own a total of 165.48 million Hynix shares, include Korea Development Bank, Woori Bank and Shinhan Bank.

The sale price is valued at around 3 trillion won, but analysts don't expect the Hynix sale to take place this year given the lack of interest amid a weak financial market and recent industry woes.

According to sources, LG Group, Hyundai Heavy Industries and SK Group had been tipped as potential bidders.

"I know our employees want the stake sale process to be finalized as quickly as possible in order to draw a long-term roadmap of the company," Kim said.

"And I am optimistic about what will happen."

Relationship With ProMOS

A series of merger and acquisition deals is expected in the chip industry, as many companies look to bulk up in size to weather the global financial crisis.

One of the chipmakers discussed in potential deals is Taiwan's ProMOS Technologies, which is a key strategic partner of Hynix. ProMOS has recently been linked in merger deals with rival companies like Powership Semiconductor, Nanya Tech and Japan's Elpida.

ProMOS is a crucial ally of Hynix, which produces chips on a foundry or contract basis with the No. 3 Taiwanese maker.

"I hope ProMOS survives in the chip market," Kim said.

"The memory chip sector is a capital-intensive industry, where even the leading players frequently accessed capital markets. Just like our other partner, Numonyx, ProMOS will find its own momentum for survival."

"We will continue to explore other partnerships with more companies and seek collaboration in developing technologies, especially in the non-memory segment," he said.

Rambus Headache

Kim stressed that his company won't step back in its patent dispute with Callifornia-based chipmaker, Rambus, although not ruling out a "positive outcome" to the issue.

"Let's see what happens. If the judgment from a U.S. federal court doesn't make sense, yes, we will continue to fight," Kim said.

Rambus has been embroiled in legal battles with memory chipmakers such as Hynix and Samsung Electronics over alleged patent infringement and fraud related to failures to disclose patents to standard-setting organizations.

Rambus is insisting Hynix may have to pay $51 million annually to avoid being barred from the U.S. computer chip market by a federal judge. Rambus has asked the judge to block Hynix from selling DRAM chips in the U.S.

Kim said a measure by the Japanese government to impose tariffs on chips made by Hynix is "totally nonsense."

"We will take legal action against the Japanese company. Why it doesn't accept an order from the World Trade Organization (WTO). We are still watching the situation with greater patience. But again, I don't know why," he said.

In September, Japan scrapped duties imposed to counter state-mandated bank loans that Hynix received in 2001, after the WTO ordered Japan to cut them. But Japan left in place a 9.2 percent countervailing levy on Hynix's computer chips to account for bank loans the chipmaker received in 2002.

yckim@koreatimes.co.kr

Who is Kim Jong-kap? Kim Jong-Kap was appointed Chairman of the Board of Directors and President & CEO of Hynix Semiconductor on March 30, 2007. Assigned to his first official post in 1976, Kim has since held numerous key leadership positions at the Ministry of Commerce, Industry and Energy (MOCIE), now known as the Knowledge and Economy Ministry, and the Korean Intellectual Property Office (KIPO) throughout his 31 years of public service. Kim is widely regarded as a trade negotiator and an expert in industrial policies. As commissioner of KIPO, he introduced many corporate management concepts and techniques to the agency. Under his leadership and initiative, KIPO's patent files dropped dramatically, while the quality of services rendered to applicants saw significant improvement.