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How Hynix Got Out Of Its Fix


Two years ago, Korea's Hynix Semiconductor Inc. appeared headed for a slow death after its board spurned a $3 billion takeover offer from U.S. chipmaker Micron Technology Inc. As rivals forged alliances and boosted spending on multibillion-dollar plants, debt-laden Hynix didn't seem to have enough cash to keep its head above water.

Today, Hynix is alive -- and swimming in profits. In the second quarter the South Korean chipmaker posted record earnings of $539 million on sales of $1.48 billion, compared with a loss of $458 million on sales of $735 million a year earlier. Hynix' operating margin for the quarter topped 40%, says Merrill Lynch & Co. (MER) analyst Simon Woo. That's close to the 47% enjoyed by the semiconductor division of Samsung Electronics Co., the global leader in memory chips. And it's well above the 10% of Micron, based in Boise, Idaho. "In terms of earnings and capital structure, Hynix belongs in the big leagues," says Woo. For the year, he is predicting earnings of $1.89 billion, compared with a $2.01 billion loss in 2003.

How did Hynix save itself? Through a combination of government-backed bank bailouts, engineering smarts, and good luck. Even as makers of processors and other logic chips suffer from ballooning inventories, Hynix has seen prices for its dynamic random access memory (DRAM) chips -- used in computers and electronic gizmos -- hold firm. Global supplies remain tight as some Hynix rivals have struggled with a shift to new manufacturing technologies, while others have cut back on DRAM for more expensive flash memory chips used in digital cameras and other newfangled gadgets. Since 2001, Hynix has sold most of its nonmemory operations to focus on DRAM, which today represents more than three-quarters of its sales. This has helped Hynix jump into the No. 2 position in DRAM. In the second quarter, Samsung led with 29.7% of the market, followed by Hynix at 17.1% and Micron with 15.3%, according to researcher Gartner Inc. (ITM)

UNFAIR SUBSIDY?

Competitors aren't exactly thrilled with the turnaround. If state-controlled banks hadn't agreed under government pressure to swap $4.2 billion in debt for an 81% stake in the company, they say, Hynix would be history. That, rivals contend, amounts to a government subsidy -- and trade officials in the U.S. and Europe agree. Last year the European Union slapped punitive duties of 34.8% on Hynix' Korean-made chips, and the U.S. imposed tariffs of 44.3% for five years. Japan is undertaking its own probe. The bailout "has proved a win-win solution for the creditors and our company," says Kwon Oh Chul, Hynix' senior vice-president in charge of strategic planning, "but nevertheless trade disputes stemming from it pose a big challenge for us."

Hynix has so far been able to skirt the restrictions. Since many PCs sold in the U.S. and Europe are made in Asia, Hynix can ship chips directly to manufacturers and avoid the duties. And Hynix has an Oregon plant -- which isn't subject to the tariffs -- that can help it meet U.S. demand. If Japan imposes duties, though, it could be a bigger problem, since fewer Japanese PC makers outsource their manufacturing. Meanwhile, Hynix is teaming up with European chipmaker STMicroelectronics to build a $2 billion plant in China -- which also won't be subject to the penalties.

Dodging duties won't help Hynix in the event of an abrupt drop in the price of notoriously volatile DRAM chips. But Hynix officials say their focus on commodity chips was the right move. "If you maintain two mediocre businesses, both will become burdens in a downturn, but if you excel in one business, you can ride out a down cycle," Kwon says. Time will tell whether that bet pays off. For now, though, Hynix is back from the dead.

By Moon Ihlwan in Seoul, with Cliff Edwards in San Mateo, Calif.


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