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  • [Crisis Fallout] Korean Electronics Firms Bet Their Future on Exports
  • May 4, 1998 (SEOUL) -- The rallying cry of Korea's electronics industry in the 1990s was globalization, and the country's electronics conglomerates went abroad, setting up shop in rapid succession in the United States and other advanced markets to make a name for themselves.
    That was before the financial crisis, a landmark event that pushed one of the world's largest economies to the brink of collapse a few months ago. The crisis has forced Seoul to agree to a bailout by the International Monetary Fund (IMF) in return for tough economic reforms.

    The reform program have also forced the country's leading electronics companies to change their strategy from globalization back to exports and even more exports, a gospel of the 1970s and 1980s.

    The Federation of Korean Industries, a collective voice of Korean business conglomerates, said the conglomerates will help turn the country's current account deficit to a US$50 billion surplus this year with strong export campaigns.

    The early results have been impressive: exports to the United States, Korea's largest export market, increased 17.4 percent on a customs-clearance basis in the first three months over a year ago. The growth of exports to the United States was flat throughout last year. Total exports rose 9.3 percent during the period, compared with a 5.6 percent drop a year ago.

    The Electronic Industry Association of Korea (EIAK) estimates the country's electronics exports will reach US$46.6 billion in 1998, up 10.4 percent from a year ago. Exports of semiconductors alone will increase some 9 percent to US$19.3 billion.

    Behind the upsurge in exports is the Korean won's nearly 57 percent drop against the U.S. dollar between March 1998 and the same month the year before, which makes Korean exports of semiconductors, computers and other electronic equipment so much cheaper. The Korean unit stood at 1,378.8 won to the U.S. dollar as of the end of March, compared to 879.4 a year earlier.

    Computer manufacturers are gearing up their assembly lines for exports. TriGem Computer Co. targets US$500 million in PC exports to the U.S. and Europe in 1998, up from US$300 million in 1997. LG Electronics Inc., which began exporting notebook computers to Digital Equipment Corp. last year under original-equipment-manufacturing contracts, plans to expand its U.S. marketing network to sell a variety of multimedia equipment, such as personal digital assistants (PDAs), hand-held PCs and digital video disks (DVDs).

    Semiconductors, which accounted for 45 percent of all Korean exports of electronics and other information-related products in 1997, are on the leading edge of Korea's renewed export drive. Korea's three dynamic random access memory makers -- Samsung Electronics Co., Ltd., LG Semicon Co., Ltd. and Hyundai Electronics Industries Co., Ltd. -- registered nearly 15 percent growth in exports during the first quarter. The steady changeover of mainstay memory chips to 64Mb DRAMs from 16Mb DRAMs, on top of the moderate recovery in the prices of 16Mb DRAMs, helped boost their sales.

    Increased exports from Korean DRAM producers are a cause of concern to their rivals in the United States. Micron Technology, for example, is leading the anti-Korean crusade, with its chairman publicly attacking Korean firms for dumping their products on U.S. soil. Micron has repeatedly raised questions about the IMF program, saying it unfairly benefits Korean DRAM producers by channeling international bailout funds to their operations.

    The Korean companies have been partially vindicated by a recent ruling from the U.S. Department of Commerce that Hyundai and LG had been erroneously accused of dumping. In March, it said the two Korean DRAM makers were exporting their products at dumping margins of 12.64 percent and 7.61 percent each.

    The Korea Semiconductor Industry Association (KSIA) has said Micron's allegation that Korea had begun dumping on the back of a weak Korean won is unfounded. "There may be misunderstanding that the won's steep depreciation since late 1997 had significantly improved the export competitiveness of Korean makers," it said in a recent statement.

    But Korean electronics companies have to deal with growing demand from their U.S. customers, which are finding excuses in the exchange rates for even lower prices, adding to the pressure on profit margins. Their profitability will be further strained when long-term contracts held at higher exchange rates begin to expire.

    Sharp price swings in the global semiconductor market are also hampering the Koreans' efforts to export their way out of the crisis. There are already signs of a glut and price collapse for the 64Mb DRAM generation. Spot prices for 64Mb DRAM products are hovering around US$10, down from about US$50 a year ago. The Korean DRAM makers forecast their DRAM output this year will actually decline in dollar terms, despite their top share of the global market.

    It will not be long before the Korean companies realize that exports do not solve all of their financial problems. Analysts say overseas borrowings by Korean electronics companies have almost dried up. Their funding situations will remain extremely difficult until their own and Korea's credit ratings improve sufficiently. Capital spending in the electronics industry is expected to fall sharply this year and next, blurring the prospect of sustained export growth.

    "Local companies have been delaying capital spending under the IMF regime," said Kim Chi-luck, president of the KSIA. Kim and others say the cash flow situation of the Korean companies will remain precarious, making it difficult for them to finance both exports and investments over the coming years.

    (James Lim, Asia BizTech Correspondent)

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    Updated: Sun May 3 20:02:59 1998