DRam dumps are the very East of it

Chips Global markets feel the pinch of the Korean collapse

As the attention of the world has fixed on the disastrous effect that a collapse of Far Eastern currencies could have on our own markets, it is the IT sector that is particularly vulnerable, given that many PC components are made by Korean, Japanese and Taiwanese manufacturers.

The danger for the IT sector is that dumping from the Far East, if it happens, could have a severe effect on PC vendors and their routes to market through distributors and dealers.

Hyundai is one of the three major Korean chaebols (industrial conglomerates), which makes DRam memories for PCs, but its decision to delay a #3 billion investment in two semiconductor plants in Scotland is not particularly significant, said Richard Gordon, senior semiconductor analyst at Dataquest UK.

'This is fairly common practice for semiconductor companies, which are generally cautious about their investment schedules,' said Gordon. 'They will wait to see what the market is, but they still need to build fabrication plants. The Korean companies did try to regulate production earlier this year by rejigging the product mix but that action has had little effect on the market and there's still too much DRam around.'

DRamifications

Earlier this year, the Korean government asked Hyundai, Samsung and LG (formerly Lucky Goldstar) to restrict their exports of memories in an attempt to make the price go higher. That itself was prompted by a glut in DRam caused by over-production. At the same time, the European Union imposed some restrictions on memory modules imported from the Far East.

But that has had little effect on the price of memory, said Gordon. 'It was window dressing and didn't have any real effect on the market.'

One of the biggest problems that the non-Korean market faces is that in an attempt to get foreign currency to pay its debts, these companies will embark on a spate of dumping. That could apply not just to memories but to other key PC components, including CD-Roms, hard drives and monitors.

According to Gordon, at this stage it is hard to tell whether or not that will happen. The price of memory is such that Korean companies would have to be 'very naughty' for the European Union to sit up and take notice, he said.

There are signs that the individual chaebols take the situation so seriously, they are tightening their own belts before things get too bad. Samsung, the largest Korean producer of DRam and a major supplier of monitors, hard drives and CD drives, said it will ask for wage cuts from all staff, top to bottom, while looking to halve expenses.

Memory overload

That is a wise step for Korean companies to take, Gordon said. 'People usually pay for memory in dollars, which will help them to pay their debts, but the problem lies with the Korean government's attitude towards debt.

'It is likely to say, "invest from internal sources rather than go to the money market for finance".'

John Byrne, co-managing director of Vanguard International UK, said: 'The market is going down the toilet and it's going to get even worse.

We could all do with at least one manufacturer pulling out. The cost of 16Mb of memory is currently $4.45, while (US manufacturer) Micron has said it can make a profit by selling at $2.90.'

This, claimed Byrne, meant there was practically no incentive for the Korean manufacturers to dump product because there is already plenty of DRam swilling around the market.

Alan Stanley, UK managing director of French distributor Dane Elec, confirmed the market is buzzing. 'The Koreans have tried to push their prices up and LG has been dumping as usual,' he said.

LG had little to say beyond a brief statement from its president of European operations, KH Cho. He said: 'The recent difficulties leading up to the involvement of the International Monetary Fund (IMF) lie very firmly in the banking system of South Korea.

'Korea's underlying economy is still sound, with a GDP growth rate in excess of six per cent. We are confident that the IMF will be effective in finding a rapid solution.'

He added: 'We would like to reassure our customers and partners around the world that LG continues to maintain its strong financial position and that we do not anticipate any problems with the development of our existing or future investments overseas. In fact, we are looking forward to the completion of one of our most successful years on record.'

Stanley added: 'The last thing on Hyundai's mind is memory. It also builds cars, ships and nuclear power stations.'

Mad in Taiwan

That leaves storage. Last week, Micropolis - effectively owned by the government of Singapore - got out of the business. Its dollar currency remains sound because it knows when to exit.

Even though Taiwan has a positive trade gap and is liquid in dollars, Byrne said reports were circulating that there was pressure on the currency there too. If the Taiwanese economy buckles, the whole IT structure could collapse. Acer, one of the biggest OEM PC companies in the world, relies on the power of its homegrown currency to survive.

While Thailand and even Korea, never mind Japan, are against the currency rails, the collapse of the dollar-rich Taiwanese economy could cause an even greater global reverberation.