Hynix: Chipping Away and Making Good

The Korean chipmaker had to be bailed out five years ago. Now it's making a run at Samsung for market share in NAND and DRAM chips

Earlier this decade, Hynix Semiconductor (HXSCF) was a poster child for the kind of invest-and-spend mentality that had landed a number of big Korean conglomerates in a world of trouble. It managed to lose $7.2 billion in 2001 and 2002 and was up to its eyeballs in debt. In the notoriously boom-and-bust memory chip market, few thought Hynix had what it took to survive. And there was a time that would have been true if not for a bailout by state-controlled Korean banks.

Yet sometimes good things happen to companies facing annihilation. Hynix has pulled off one of the more remarkable salvage jobs in global high-tech history. Today, the company clearly outperforms its U.S. memory chip rival Micron Technology (MU), which unsuccessfully tried to take it over four years ago.

Even more impressive, Hynix is now making a serious run at industry leader Samsung Electronics, for years an unquestioned king in the business (see BusinessWeek.com, 3/23/06, "Samsung's Flash of Inspiration"). "Hynix's turnaround is miraculous," says Park Kyung Min, chief executive at fund manager Hangaram Investment Management. "Nobody had expected it to reemerge so strongly."


  In the three months to June, Hynix posted a 46% year-on-year jump in its operating profit to $405 million, earning 23.2 cents for every dollar of sales. That compares with a profit margin of 22.2% for Samsung's semiconductor unit in the same period, 3.6% for Micron, 10.2% for Qimonda—a memory chipmaker recently spun off from Germany's Infineon Technologies—and 9.9% for Japan's Elpida, according to Simon Wu, semiconductor analyst at Merrill Lynch.

Next month, Hynix will launch a leading-edge factory to make mega-size silicon wafers in China, the world's fastest growing semiconductor market. The chip plant, or wafer fab in industry jargon, in Wuxi will churn out wafer disks measuring 12 in. across, from which tiny chips are diced. "The China operation will be a fresh catalyst fueling Hynix' growth and competitiveness," says Wu.

The China fab, a joint venture 67% owned by Hynix and 33% by European chipmaker STMicroelectronics (STM), underscores the cornerstone for the Korean company's recent success. A strategic alliance that combined Hynix' technology to etch ever-thinner circuit lines with STMicro's design and application acumen enabled the Korean company to march into a lucrative flash chip market dominated by Samsung and Japan's Toshiba (TOSBF).


  After its debut in the business in 2004, Hynix in the second quarter of this year grabbed an 18.5% share of the world's NAND flash chips that store data even when power is switched off. This makes Hynix the third largest supplier of the chips used for digital cameras, MP3 music players, cellular phones, and other mobile gadgets, following Samsung's 46.2% share and Toshiba's 24.6%, according to researcher iSuppli. "It would have been impossible for us to achieve this without a tie-up with STMicro," says Kwon Oh Chul, senior vice-president in charge of strategic planning at Hynix.

Alliances have also allowed the Korean company to secure needed capacity with limited cash. On top of the China joint venture, which has an 8-in. fab in addition to the 12-in. one, Hynix worked out a deal last year with ProMOS, based in Taiwan. ProMOS will provide half its output to Hynix in return for licensing the Korean company's technology to print thin circuit lines on its 12-in. wafer disks.

Sure, Hynix would have been history had it not been for a bailout by state-controlled banks. But the lenders would have come out ahead in that case, too. Back in 2001 and 2002, creditors swapped $5 billion in debt for an 81% stake in the company. The heavy state intervention wasn't a popular arrangement abroad. In 2003, the European Union slapped punitive 34.8% duties on Hynix Korean-made chips sold in its markets. The U.S. imposed tariffs of 44.3% that same year which will run until 2008.


  Yet this turnaround owes much to a wrenching restructuring and incessant innovation by Korean engineers. Without that, Hynix might still have survived—but as a seriously diminished player. Hynix made some tough calls by sticking to the memory chip business, while selling off units involved in the logic chip, liquid crystal display, and cell phone businesses to raise some $2.6 billion. This helped pare down its debt to $4.6 billion by the end of 2004 from $16.4 billion in 2000. Last year it reported a net profit of $1.9 billion, up 8% from 2004 when the memory chip market boomed.

Engineers at the cash-strapped company worked 24/7 to find ways to keep using old chip-making gear to etch tomorrow's ultra-slender circuits on traditional 8-in. wafer disks. As a result, Hynix managed to keep its position as the second largest maker of dynamic random access memory chips used in PCs and third largest maker of NAND chips.

It did so by spending less than a third of what Samsung did on capital expenditure in the past five years and about two-thirds of Micron's expenditure, according to iSuppli (see BusinessWeek.com, 4/19/06, "The Downs (and Ups) of the DRAM Market").


  Hynix' joint venture in China and its existing fab in Oregon will also allow the company to skirt the restrictive tariffs stemming from the bailout. That's because overseas plants aren't subject to the punitive duties. Hynix could ship Korean-made chips elsewhere in Asia, where many PCs and electronics are made anyway.

Hynix creditors are seeing some stunning returns on their bet on Hynix. The company's market valuation has jumped about tenfold in the past three years or so. "The company is the best example in Korea's corporate workout history," says senior loan officer Namkoong Jin Kwon at Korea Exchange Bank, which still holds an 8.2% stake in Hynix. If the bank had sought to unload its exposure to Hynix as a distressed asset then, it would have had to accept a 70% haircut. Now its share is traded at 3.5 times the value at which it conducted the debt-equity swap.

Hynix senior vice-president Kwon says the company aims to expand its market share in both DRAM and flash chips. "With all sorts of digital gadgets requiring more memory, the growth potential is tremendous," he says.


  The company is spending some $3.7 billion on capital this year, the third largest in the overall semiconductor industry after Intel's estimated spending of $6.3 billion and Samsung's $5.9 billion, according to researcher Gartner (see BusinessWeek.com, 8/9/06, "Micron Takes the Long View").

So far, so good. Although NAND prices are halving every year, iSuppli is expecting the global flash chip market's revenues to jump 37% this year to $14.76 billion and 33% to $19.58 billion in 2007 because of explosive growth in demand. Yet Hynix isn't alone in ramping up chip output. Samsung, Toshiba, and a joint venture between Intel and Micron are all aggressively adding capacity for NAND production.

Nobody said it was going to be a tea party. Hynix operates in one of the most cutthroat businesses imaginable and that non-stop pressure isn't going away. The real stunner, though, is that Hynix is still in the game at all.

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