Hynix May Be Down to Its Last Chip

Should the beleaguered chipmaker be taken off life support?

Like chipmakers around the world, Hynix Semiconductor Inc. (HXSCF ) hoped a rebound in the U.S. economy later this year would give it a vital lift. This was always wishful thinking, of course. Not only was a U.S. recovery uncertain, but the South Korean company is saddled with $9 billion in debt and battling to survive as prices for the memory chips it makes fall through the floor. Now that the terrorist attacks in the U.S. have spread fresh gloom over the global economy, the odds of Hynix' survival are considerably longer.

Even Hynix' creditors seem to see the writing on the wall. Meeting at the Seoul headquarters of one of the company's leading lenders, Korea Exchange Bank, on Sept. 14, they refused to provide fresh loans. The 18 assembled lenders agreed only to reschedule Hynix' debts and lower its interest burden. For KEB President Kim Kyung Lim, who had sought a more resounding expression of support, the rejection was another body blow to the world's No. 3 memory chipmaker. "The future of Hynix is uncertain," he says.

MASSIVE LOSSES. That is an understatement. Hynix--the offspring of a forced merger between Hyundai's and LG's chip businesses--is expected to lose $3 billion this year on revenues of $4.2 billion. Whatever happens to Hynix, someone will suffer. If the Korean government lets it collapse, business confidence in South Korea will be devastated at a delicate moment. Yet if Seoul orchestrates a bailout, Hynix will prolong a worldwide glut in memory chips that is delaying the industry's return to profitability.

Some Hynix backers insist the company is worth salvaging. According to Monitor Company Group, a management consulting firm hired by KEB, if you discount Hynix' crippling interest payments, it is the second most competitive of the world's top four makers of dynamic random-access memory (DRAM) chips. Thanks to low production costs and a weak won, Hynix can make chips 24% cheaper than Germany's Infineon and 9% cheaper than Idaho-based Micron Technology. Only Samsung Electronics Co., the world's No. 1 producer of memory chips, can make DRAMs for less.

So Hynix execs want to hold on until an industry shakeout gives them a chance to profit from their cost edge. Says Hynix Vice-President Park Chan Jong: "We're in a battle of endurance." Some rivals do seem prepared to abandon or scale down their memory-chip businesses to focus on more profitable, less cyclical niches. The managers of Toshiba's memory-chip operation are angling for a joint venture with Samsung or Infineon, or even an outright sale to one of those companies. NEC Corp. and Hitachi Ltd. have spun off their memory-chip units into a joint venture, apparently the first step in giving up those operations altogether. Hynix, of course, cannot afford to bid for any of these businesses--not when survival is the goal. "Hynix is like a mouse driven into a corner," says Choi Suk Po, senior analyst at Meritz Securities Co. in Seoul. "It has no other option but to tough it out, hoping that the cat will give up."

A cold analysis would conclude that Hynix, the world's most indebted chipmaker, ought to be the first to go. Because it is paying an average of $2 million a day in interest charges, Hynix has precious little left over to invest in research and development. Hynix badly needs to upgrade. While it continues to make 0.18-micron chips, Samsung, Micron, and Infineon have moved to 0.15-micron technology, which allows them to jam more circuitry onto their chips and thus boost the efficiency of operations. "In times of hardship," says a Samsung official, "you must keep investing in new technology if you want to benefit from an upturn."

Will Hynix survive? The company itself says it needs DRAM prices, down 90% since July, 2000, to double by next year. But analysts don't expect demand to recover until at least 2003. Many argue it would be cheaper to kick away Hynix' crutch now. Micron, for its part, is lobbying Seoul to let Hynix fail and thereby ease a worldwide production glut at a time when demand is perilously low. That's up to Hynix' creditors. Without a new infusion of funds, the chipmaker could collapse next year.

By Moon Ihlwan in Seoul

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