Two weeks ago, Hynix Semiconductor Inc. was touting its 512Mbit DDR400 as the first such memory chip to win validation from Intel Corp. However, last week in a turnaround, Hynix was telling the U.S. International Trade Commission that it was "further behind in technology" than any of its three major DRAM rivals.
Two weeks ago, Micron Technology Inc. told financial analysts that it didn't anticipate any need to go to the capital market to raise funds. Last week, however, Micron chairman and chief executive Steve Appleton told the ITC that the company's planned transition in 2004 from DDR1 to DDR2 "requires a substantial investment." Appleton told the commission that a spate of Hynix subsidies allegedly directed by the Korean government has allowed Micron's rival to undercut competitors, making it "difficult for Micron to find the cash to move forward."
Such was the awkward position two chipmakers found themselves in as they tried at one and the same time to paint a positive picture for customers and investors while seeking a favorable ruling from the ITC, which next month will decide whether the U.S. DRAM industry has been injured by the Hynix payments.
The Commerce Department last month imposed duties of 44.71% against Hynix DRAM imports as a penalty for what it found to be illegal government subsidies. But before the tariff is made official, the ITC must decide whether the U.S. industry was harmed by the action.
Last week, Micron tried to show how a subsidized Hynix was able to cut its DRAM prices to such an extent that Micron lost $2.5 billion in the last two years, has seen its cash flow plummet, and is now faced with difficulties raising critically needed investment funds.
For its part, Hynix, which is said to have received nearly $16 billion in bank loans during the past two years, claimed it poses no threat to the interests of U.S. DRAM makers Micron and Infineon Technologies North America Corp.
"Hynix global capacity and production is falling behind. Falling exports from a weakened Hynix cannot be a threat," Hynix attorney James Durling told the ITC. "All the evidence is that Hynix is further behind on the technology roadmap, and has less cash than its peers. Hynix is now behind others in die shrink."
So far in 2003, only 20% of Hynix's DRAM production is at the 0.13-micron level, which Durling claimed is much less than its three major competitors--Micron, Infineon, and Samsung Electronics Co. Ltd. Wafer starts at Hynix declined by the equivalent of 9,688 8in. wafers a month from July 2000 to April 2003, while the industry's top three vendors increased wafer starts, according to data Hynix provided the ITC.
Durling added that Hynix's share of the North American market fell to 10.4% in 2002, while Micron and Infineon increased their position to a combined 40.5% share.
Micron and Infineon countered that Hynix has consistently used subsidies gained through government-owned or -controlled banks to reduce its DRAM prices to unprofitable levels in an effort to starve out its competitors.
Hynix's actions have "created difficult times for us to raise funds," Appleton testified. "We couldn't find any financial institution to lend us money and we were forced to raise money through stock at the worst prices ever. Our actual capital expenditures far exceed our cash flow," he said, adding that Micron's cash flow dropped from $2 billion in fiscal 2000 to $172 million this fiscal quarter.
Appleton charged that Hynix received three government-direct bailouts from 2001 through 2002 amounting to $11.7 billion and a more recent $4 billion bailout after Micron filed its countervailing duty complaint. "No other DRAM company could remotely get $16 billion in the last two years," he said.
Robert LeFort, president of Infineon Technologies North America, said "artificially low prices that can be offered by someone who doesn't have to pay his own bills are capable of having a harmful impact well beyond actual sales volume or market share.
"Infineon has been forced to postpone indefinitely the completion of a new 300mm-wafer facility in Richmond, Va. Instead, and despite the growing demand for DRAMs, we had to mothball the whole project. We will be unable to ever complete this project if our prices and profits remain depressed due to subsidized imports in our market," LeFort said.
Hynix wants examination
Hynix denied it has the lowest DRAM prices in the industry and asked the ITC to examine confidential pricing data for all foreign and domestic suppliers.
"There are occasions when any supplier becomes aggressive in price. We have seen this from Micron and Infineon," said Gary Swanson, senior vice president of sales for Hynix Semiconductor America, San Jose.
Durling said the bank loans Hynix received were used to restructure debt, not to boost capital spending, adding that the company's capex in 2002 was $500 million, which he claimed was less than the $900 million spent by Micron. Durling also said imports from Samsung, the industry's leading DRAM manufacturer, and other foreign suppliers have a bigger impact on the market than Hynix.
However, Infineon's LeFort said a pervasive "Most Favored Customer" clause in place at many major OEMs forces prices to the lowest common denominator regardless of actual sales volume. "A single irrational price offering between Hynix and one customer can spread through the entire DRAM market," he said.
Gilbert Kaplan, an attorney for Micron, charged that even after the 2001-02 period of inquiry, the Korean government directed another $4 billion bailout of Hynix.
"The Korean government clearly indicated it will cover the losses of Hynix no matter how long it takes," Kaplan said. "Micron has to compete against the subsidy for years into the future."
Farhad Tabrizi, vice president for worldwide marketing at Hynix, dismissed the argument, stating that a global market downturn driven by a sharp drop in customer demand is responsible for the DRAM industry's troubles.
"Boom-bust cycles have always been a feature of the DRAM market and are quite normal," Tabrizi said.