The memory chipmaker came back from near death by boosting output with minimal investment. Challenging Samsung may require a different strategy
This year has been brutal on memory-chip companies. The notoriously cyclical industry is plagued with a supply glut and plunging prices for chips storing data, images, and videos on PCs and electronic devices. Taipei-based DRAMeXchange, which tracks semiconductor trends, reckons spot market prices for chips largely used for computer memory have dropped 84% so far this year. Yet visit the offices and factories at South Korea's Hynix Semiconductor (HXSCF), the world's second-largest memory chipmaker, and there's a conspicuous lack of gloom. "I'm most proud of the upbeat morale and can-do spirit shared by all the employees," says Hynix Chief Executive Kim Jong Kap.
Hynix has not bucked the market trend. In the July-September quarter the company posted a 44% year-over-year decline in operating profit, to $273 million, even as sales rose 24%, to $2.62 billion. The share price has dropped 37% so far this year, against a 28% gain by the benchmark Kospi index.
So why the optimism? From its near-death five years ago, Hynix has staged one of the most dramatic corporate turnarounds in recent high-tech history, increasing output while minimizing investment in new facilities. "I'm going to visit Toyota (TM) soon to see if there's anything we could learn from them but I'm not sure there will be, given our vastly improved efficiency," crows Kim.
Only Major Supplier to Increase Average Selling Price
Hynix's achievements aren't small. In a weak DRAM market, Hynix has been "the star performer," beating competitors and closing its market-share gap (BusinessWeek, 6/15/07) with market leader Samsung Electronics (SSNGY), according to market research firm iSuppli.
In the third quarter, Samsung led with 27.7% of the market, followed by Hynix with 22.8% and Qimonda (QI) of Germany with 12.8%. By increasing shipments of more profitable graphic chips and non-PC DRAM (dynamic random access memory) for consumer products, Hynix emerged as the only supplier that increased average selling price among major players.
And despite the fall in earnings, Hynix reported a respectable profit margin of 10% in the third quarter. Apart from cash-rich Samsung, no other memory-chipmaker reported better results. Qimonda, Micron Technology (MU) of the U.S., Taiwan's Nanya Technology (NNYAY) and Powerchip Semiconductor (PWSMY) all reported quarterly losses. "Hynix has emerged as a serious threat to Samsung," says Song Myung Sup, semiconductor analyst at Seoul brokerage CJ Investment & Securities.
Shifting from Survival into Growth Mode
The contrast is remarkable given the dire straits Hynix faced early this decade. It lost a combined $7.2 billion in 2001 and 2002 alone, and its debt load of more than $16 billion almost sank the company. Hynix only survived after its creditors swapped $5 billion in debt for an 81% stake in the company in a debt workout program in 2001 and 2002.
Now, as weaker memory chip makers try to stay afloat, Hynix is bracing for greater challenges. "Our mantra so far has been survival but we are shifting into the growth mode," declares CEO Kim. He plans to add in the next three years three more production lines processing king-size wafers measuring 12 inches in diameter. Hynix now has two such plants, one each in Korea and China, in addition to five handling 8-inch wafers. Kim wants these new factories to boost sales to $18 billion in 2010, from $8.3 billion last year. The migration to the king-size wafer is essential to cut production costs at a time when prices are plummeting, since the 12-inch wafer yields 2.25 times as much surface area as the 8-inch disk, while costing only about 20% more to process.
The rapid price fall, in turn, will help fuel growing consumer demand for faster and more powerful memory chips at a time when a variety of handheld devices require large amounts of data to deliver music, video, games, and other multimedia applications.
Wants to Double Its Share in NAND Drives
Hynix's goal is to boost its market share, particularly in NAND flash chips, which store data even when power is switched off. NAND is the fastest-growing chip segment and iSuppli figures the market will grow to some $20 billion in 2010 from $12 billion last year—despite the fact that prices halve every year. Hynix now accounts for just below 15% of the NAND market and wants to double its share in five years.
J.G. Nam, marketing vice-president at Hynix, says another big driver will be notebook PCs, which will be equipped with NAND-based drives (BusinessWeek, 5/31/07), called solid-state drives. "I expect corporate executives will begin using SSD-equipped notebook PCs next year," Nam says.
The problem is the high investment cost. The price of each 12-inch wafer factory tops $4 billion. In addition Hynix is increasing its research and development costs to 10% of its revenues by 2012 from less than 6% now in order to keep up with the latest technology to supply ever-shrinking chips for the most sophisticated products. "Hynix's strength has been its ability to spend less than its rivals and achieve similar gains in productivity," points out tech specialist Michael Min at fund manager Tempis Capital Management in Seoul. "Now the paradigm has shifted, and Hynix will have to spend as much. It has yet to prove that it will outdo rivals in this new game."
Forging a Network of Alliances
Kim's answer is to forge a network of alliances to tap on each other's strengths and avoid the need to invest in all areas. To secure needed capacity with limited cash, Hynix will strengthen its tie-in with Taiwan's ProMOS Technologies (PTIQL), which this year provided half its output to Hynix in return for licensing the Koreans' technology to print thin circuits on its 12-inch wafer disks.
Hynix will also seek further cooperation with Numonyx, a joint venture between Intel (INTC) and European chipmaker STMicroelectronics (STM) that has a 16.7% stake in its China operation in Wuxi. Another partner is SanDisk (SNDK), which has forged a cross-licensing agreement with Hynix and is in talks to jointly make flash-memory chips.
To complement revenues and cushion against cyclical volatility in memory chips, Kim is also reentering the production of logic chips (or chips that process data), a sector that his company abandoned in 2004 to pare debt. Next year, for instance, Hynix will begin making image sensors used in digital cameras, handsets, and cars. The move means the company could still use the traditional 8-inch lines that are being phased out for memory production.