Order Code RL31238
Report for Congress
Received through the CRS Web
The Semiconductor Industry and
South Korea’s Hynix Corporation
Updated May 27, 2003
Mark E. Manyin
Analyst in Asian Affairs
Foreign Affairs, Defense, and Trade Division
Resources, Science, and Industry Division
Jeanne J. Grimmett
American Law Division
Congressional Research Service ˜ The Library of Congress
The Semiconductor Industry and South Korea’s Hynix
In 2001, a trade dispute developed between the United States and South Korea
over allegations that the Seoul government was propping up Hynix Semiconductor
Inc., presently the world’s third-largest producer of dynamic random access memory
(DRAM) semiconductor chips. Since late 2000, the entire semiconductor industry
has been mired in its worst slump ever, especially for manufacturers of DRAMs.
Where once there were many DRAM producers, now only four companies, two of
them from Korea, account for over 80% of worldwide sales. Global DRAM sales
had reached nearly $30 billion in 2000, but have declined by almost two-thirds since
then. The U.S. industry has been winnowed from over ten DRAM producers to one:
Micron Technology Inc., the world’s second-largest producer.
Over the past two years, Micron, Members of Congress, and the Bush
Administration protested when Hynix’s leading creditors – most of which are owned
by the Korean government – orchestrated a series of rescue packages that have kept
Hynix in business by enabling it to restructure its debt of 8.6 trillion won (more than
$7 billion). Critics of the support packages have argued that they amounted to
government-sponsored bailouts, and that by keeping Hynix in business they were
contributing to the oversupply of DRAM chips in world markets. In early December
2001, the impetus for the dispute was apparently reduced by the announcement that
Micron and Hynix had begun negotiating a possible strategic alliance. In April 2002,
the two sides announced that Micron would acquire Hynix’s DRAM business.
Hynix’s board, however, vetoed the deal.
On November 1, 2002, Micron filed a countervailing duty (CVD) case under
U.S. law against both Hynix and Samsung, the other Korean DRAM producer. The
U.S. International Trade Commission on December 13, 2002, made a preliminary
finding of material injury. The Commerce Department investigation in April 2003
made a preliminary determination that Hynix had been subsidized and established a
CVD rate of 57% on Hynix imported DRAMs from Korea. Final action on this case
is scheduled for completion in June-August 2003. The European Commission also
pursued a trade complaint against the Korean companies under European Union law,
and in April announced a provisional 33% CVD against Hynix DRAM imports.
In the 108th Congress, legislation has been proposed on the one hand to require
or encourage the Bush Administration to establish a high level of CVDs against
Hynix DRAM imports (S. 492, S.Con.Res. 11 and H.R. 1494), or, on the other, to
caution the Administration on the need to prevent the semiconductor case from
raising tensions with Korea in a difficult period and to endanger the jobs of
Americans who work for U.S. manufacturing plants of Korean semiconductor
companies (S.Con.Res. 29 and H.Con.Res. 124).
This report examines the Hynix controversy. It assesses the status of the DRAM
industry and the impact of the issue on U.S.-Korea relations. The report will be
updated, especially as legal actions against Hynix proceed.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Development of the Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Legal Cases Brought Against Hynix . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The December 2002 Rescue Package . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Congressional Interest in the Hynix Support Packages . . . . . . . . . . . . . 3
Global and Domestic Conditions in the Semiconductor Industry . . . . . . . . . . . . . 4
The Decline of Japanese Semiconductor Companies . . . . . . . . . . . . . . 6
The Consolidation of the DRAM Industry . . . . . . . . . . . . . . . . . . . . . . 7
DRAMs and U.S. National Security . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Dispute over the Hynix Rescue Package . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Details of the Rescue Packages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The December 2002 Rescue Package . . . . . . . . . . . . . . . . . . . . . . . . . 11
Were the Rescue Packages Government Subsidies? . . . . . . . . . . . . . . 13
A Shared Interest in Keeping Hynix Afloat . . . . . . . . . . . . . . . . . . . . . 14
Restructuring by Hynix – Is It a Viable Company? . . . . . . . . . . . . . . . 16
The Micron Countervailing Duty Case Against Korean DRAM Producers . . . . 17
Proposed Legislation on the Hynix Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Continued Shakeout of the DRAM Industry . . . . . . . . . . . . . . . . . . . . 22
A Future Challenge from China? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Korea’s Economic Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
For Additional Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
List of Figures*
Figure 1: World Semiconductor Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 2: World Semiconductor Capacity Utilization . . . . . . . . . . . . . . . . . . . . . . 6
Figure 3: Major World DRAM Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. Hynix Semiconductor’s Major Bank Creditors . . . . . . . . . . . . . . . . . . 14
John Williamson, Technical Information Specialist in the CRS Resources Science
and Industry Division, assisted in designing and producing the figures in this report.
The Semiconductor Industry and South
Korea’s Hynix Corporation
Development of the Dispute. In 2001, a trade dispute developed between
the United States and South Korea over financial assistance provided to Hynix
Semiconductor, presently the world’s third-largest producer of dynamic random
access memory (DRAM) semiconductor chips. As Hynix was forced to the brink of
bankruptcy by plummeting global chip prices, its creditors gave the company a string
of aid packages that restructured the company’s 8.6 trillion won in debt at that time
(more than $U.S. 7.1 billion).1 Hynix’s leading creditor banks have been
government-owned since Korea’s 1997 financial crisis, when Seoul used public
funds to rescue a number of failing banks. Since 2000, Hynix has posted losses of
over 9.5 trillion won (nearly $8 billion). Hynix's net losses in 2002 were over 1.9
trillion won ($1.7 billion). In the first quarter of 2003, Hynix posted a net loss of one
trillion won ($833 million).
For most of 2001, Micron Technology, the Idaho-based company that is the
world’s second largest producer of DRAMs, led a campaign against the support
packages, arguing that they amounted to government-sponsored bailouts, which kept
Hynix in business and allowed it to export at prices below the cost of production.
Micron, which has been suffering from large losses, threatened to submit
countervailing duty and anti-dumping petitions to the Bush Administration. Prodded
by Micron and some Members of Congress, the Bush Administration raised the
matter in bilateral and multilateral meetings with South Korea. U.S. officials
publically criticized the rescue packages.2 The Bush Administration also considered
requesting that the World Trade Organization (WTO) establish a dispute settlement
panel to investigate whether the support packages violate WTO rules against
In December 2001, however, Micron and Hynix announced that they were
negotiating a possible merger. By April 2002, the companies had reached a tentative
deal, whereby Micron would acquire the Hynix business, supported by the largest
Hynix creditors and the Korean government. But in May the Hynix board vetoed the
deal, arguing that the sale price was too low and that a rise in chip prices at that time
meant that the company could survive independently. Hynix’s creditors have
managed the company since June 2002, when they acquired a majority ownership in
Throughout this report, an exchange rate of $1 = 1,200 won is used to approximate the
dollar values of Korean figures.
The Asian Wall Street Journal, November 1, 2001.
the aftermath of the board’s decision to reject the company’s sale to Micron. Micron
states that it no longer has any interest in acquiring Hynix.
Legal Cases Brought Against Hynix. On November 1, 2002, several
months after its bid to acquire Hynix had been rejected, Micron initiated a
countervailing duty (CVD) case against both the Korean DRAM producers, Hynix
and Samsung. Micron alleged that Korean government subsidization enabled the two
competitors to cut prices and take market share in the United States from both
Micron and the fourth major producer, Infineon Technologies. On December 13,
2002, the U.S. International Trade Commission (ITC), acting under Title VII of the
Tariff Act of 1930, made a preliminary finding of material injury to U.S. producer
interests and the Commerce Department made a preliminary subsidy determination
on March 31, 2003. The preliminary finding against Hynix was for a subsidy of
57%, while for Samsung the finding was de minimis (less than 1%). Unless the
Korean and U.S. governments can negotiate an agreement to suspend the preliminary
CVD, it will be applied to Hynix imports, until the Commerce Department completes
its investigation in June 2003 and the ITC makes a final injury determination by early
August 2003. In May 2003, talks between Seoul and Washington over a suspension
agreement broke down.
In addition to the Micron petition, the DRAM companies are involved in other
legal actions. In June 2002 Infineon, the German-based fourth-largest producer of
DRAMs, filed a petition with the European Commission alleging that Hynix and
Samsung Electronics had received illegal subsidies. In April 2003, the Commission
announced a preliminary subsidy finding against Hynix, and established a provisional
countervailing duty of 33% against Hynix imports from Korea (see below). Also in
June 2002 reports emerged that the U.S. Justice Department was pursuing an antitrust
investigation against all four leading DRAM producers -- Micron, Samsung, Hynix
and Infineon – as well as some Taiwanese producers. According to one source, this
step resulted from resentment by computer makers at an effort of DRAM
manufacturers to raise prices earlier in 2002 despite the continuing weak PC market.3
That investigation is continuing.
The December 2002 Rescue Package. Shortly after the ITC’s
preliminary finding, in December 2002, Hynix’s creditors finalized another longanticipated support package that restructured nearly all of the company’s 5.9 trillion
won in debt and provided an additional $188 million in loans to a Chinese company
that was searching for financing to help purchase a Hynix subsidiary. The creditors,
who emerged from the deal with an 86% stake in the company, have announced their
intention to sell off additional assets and seek a buyer for Hynix. This strategy is
believed to hinge upon a future rise in chip prices, which would be necessary not only
to boost Hynix’s value, but also to provide its competitors with the capital to
complete a purchase. Micron and Infineon officials have charged that the latest
rescue package is another instance of Seoul’s subsidization of Hynix.
Wall Street Journal, June 20, 2002; Dow Jones wire service story, “Micron Confirms
Justice Department Investigating DRAM Makers,” June 19, 2002.
Since the dispute first broke out, Korean government and Hynix officials have
countered such charges by arguing that the decisions on whether to aid Hynix have
been entirely in the hands of the company’s creditors. They have pointed out that
some foreign banking interests have supported the rescue packages, while some
government-owned banks have decided to write off their loans to Hynix rather than
increase their exposure to the struggling company. Hynix and Samsung’s
representatives both testified at the preliminary ITC hearing that low prices were a
general condition of the semiconductor market, that Micron had been telling
investors that the company was in reasonable shape to weather the present industry
downturn and, in Samsung’s case, that there was no evidence of subsidies by the
Korean government being paid or needed. The new Korean administration of
President Roh Moo-hyun reappointed the same Minister of Trade, who reiterated
these views. He maintained that Korea was continuing fundamental reforms of the
banking sector, that government ownership of some banks was a temporary measure
and that the government did not become involved in specific lending decisions.4
The economic stakes in this dispute are high. South Korea is the seventh largest
U.S. trade partner, and semiconductors are the number one U.S. import from and
export to Korea. Imports of South Korean DRAMs alone in 2000, before a crash in
world prices, were nearly $2.2 billion, or over 5% of Korea’s exports to the United
States.5 In contrast, Korea’s exports of iron and steel to the United States totaled just
over $1.5 billion in 2000.6 A successful countervailing duty case would compel
Hynix to pay higher duties on its DRAM exports to the United States, or possibly
drive it out of the competitive U.S. market altogether. Any sudden, significant
deterioration in Hynix’s performance probably would have a major impact on South
Korea’s economy. Hynix accounts for an estimated 4% of South Korea’s exports and
over 150,000 Koreans are employed by Hynix and its network of suppliers.
Additionally, Hynix shares are the most widely held stock in South Korea and some
of Korea’s largest banks are heavily exposed to Hynix.
Furthermore, the Hynix packages call into question the Korean government’s
broader commitment to its economic reform program, which it launched in the
aftermath of the virtual collapse of the country’s finances in 1997. At the time, as
part of a $58 billion International Monetary Fund (IMF) rescue package spearheaded
by the United States, Korea pledged to liberalize its corporate and financial sectors,
to make them more responsive to market pressures, and to end the past practice of
rescuing troubled conglomerates that were considered “too big to fail.”
Congressional Interest in the Hynix Support Packages. As with most
high-profile trade disputes with South Korea, Congress has closely monitored the
Hynix situation. Several Members have protested the Korean government’s alleged
Letter from Korean Minister of Trade Hwang Doo-yun to U.S. Trade Representative
Robert Zoellick, March 17, 2003.
Semiconductors of all types accounted for nearly 20% of South Korea’s total shipments
to the United States in 2000.
Compiled from U.S. International Trade Commission, [http://dataweb.usitc.gov].
involvement in the support packages and urged the Bush Administration to act.7 In
September 2001 an amendment sponsored by Senator Larry Craig, which protested
the “Republic of Korea’s improper bailout of Hynix,” was incorporated into the
Senate’s version of the FY 2002 appropriations bill for the Commerce, Justice, and
State Departments, but was stripped from the bill in conference.8 As the Micron case
moved forward in the early months of the 108th Congress, Senator Craig and other
Members in both Houses of Congress introduced legislation critical of alleged Hynix
“bailouts,” and urging or requiring corrective executive action (S. 492, S.Con.Res.
11 and H.R. 1494). On the other hand, resolutions were also introduced regarding
the importance of U.S.-Korean relations and indicating that the dispute over
semiconductors should not increase tensions or lead to U.S. job losses (S.Con.Res.
29 and H.Con.Res. 124). These proposals are discussed later in the report.
The story of Hynix’s support packages is a useful case study of South Korea’s
economic reforms, a process U.S. trade officials and Members of Congress have
monitored closely. Indeed, by virtue of Hynix’s size and political connections, the
company’s fate is being closely watched as a litmus test of the government’s
commitment to reforming Korea’s chaebol (conglomerates). Additionally, the Hynix
case highlights the troubling issue of state ownership of Korea’s banking industry.
Even before the dispute emerged, American officials had been asking their Korean
counterparts to set a timetable for privatizing the banks that had been nationalized in
the wake of the 1997 financial crisis. In the past the U.S. and South Korea have
argued over alleged Korean government subsidies – most prominently in the steel
industry. These bilateral disputes may resurface in the future and form a continued
backdrop to strategic relations made more tense by the dispute over North Korea’s
nuclear weapons and missile programs.
Global and Domestic Conditions in the
The immediate cause of the Hynix dispute was the collapse in DRAM
semiconductor prices and demand that followed the “dot.com” crash and the
electronics industry downturn in 2000. The semiconductor market is both global and
cyclical. Semiconductors and other microelectronic components are the physical
building blocks of industries – including hardware, software and applications – that
are increasingly based on common international standards, worldwide
interconnection, and interoperability. Demand in the semiconductor industry is, of
course, linked to the general business cycle. But the semiconductor industry also has
its own internal product development cycle, first described by the former CEO and
co-founder of Intel, Gordon Moore. “Moore’s Law” states that the transistor capacity
of semiconductor chips will double every 18 months.
See, for instance, July 11, 2001 letter to Ambassador Robert B. Zoellick from four U.S.
Senators, reprinted in Inside U.S. Trade, July 13, 2001.
The amendment appeared as Section 626 of the Senate-passed bill.
Prepared by Stephen Cooney.
This means that the design, engineering and manufacturing of ever more
powerful and compact integrated circuits (ICs) have required higher and higher
investments by the microelectronics industry. Today’s inexpensive pocket
calculators, Palm Pilots and wireless phones contain more computing power than
room-sized Pentagon computers of a generation ago, so manufacturing the
semiconductor chips that are at the heart of these products has become ever more
complex and expensive. A commercial-scale facility to fabricate the wafers from
which chips are cut now cost upwards of a billion dollars to build.10 Moore’s Law
means that suppliers cannot simply shut production down, sit out a downturn and sell
from inventory, as may be possible in some other industries. Inventory and
technology become obsolete in a hurry. Similarly, if producers miss the wave of the
next upturn, they may never catch the competition. Consequently, producers must
expand output rapidly to meet increases in demand, while simultaneously investing
large sums to shift rapidly to higher-speed products. Producers therefore are subject
to serious financial problems when demand suddenly declines. This in part explains
the semiconductor industry’s “boom and bust” cycles.
Figure 1 shows that the dollar value of global sales of all semiconductors has
increased by more than ten times over the past 20 years. But the industry is presently
in its third sales slump during this period, and one that comes shortly after the
prolonged down market of 1996-98, when the cumulative annual value of sales fell
by 13% over a three-year period. Recovery was sharp in 1999-2000 as sales
rebounded by 63% over two years to $204 billion. But then sales fell again in 2001
by one-third, or $66 billion. Sales rebounded by less than 2% in 2002, to just over
$140 billion – and that gain was solely because of a strong increase (almost 30%)
limited to one region, Asia and the Pacific outside Japan.
Figure 1: World Semiconductor Sales
Latest estimates for developing a new “fab” capable of handling the 12-inch chip wafers
now becoming standard (Infineon already has one in production in Dresden, Germany) are
$3 billion. Forbes, “Hardships Are Driving Chip Rivals Together,” Aug. 2, 2002.
Figure 2: World Semiconductor Capacity Utilization
Figure 2 shows how the industry has been whipsawed over capacity.
Companies were trying to gear up for the high rate of demand at the end of the 1990s,
demand driven by strong U.S. growth, especially in the technology sector. Wafer
manufacturing capacity surged more than 30% from late 1998 to early 2001 (capacity
is shown on the left scale). By the middle of 2001, the industry had achieved a
capacity of more than 1.3 million wafer starts per week. As it added capacity in
2000, the semiconductor industry was running flat out. The factory utilization rate
(right scale) reached nearly 100% in mid-2000. But then, the bottom fell out of
demand. Capacity utilization dropped to about 83% in the first quarter of 2001 and
less than 73% by the second quarter, in keeping with plummeting global demand for
electronics products following the “dot.com” crash. By the latter half of 2001,
capacity utilization fell below 65%. It recovered somewhat in 2002, as small
amounts of capacity went offline, but by the end of the year was still only just over
The Decline of Japanese Semiconductor Companies. The overall
U.S. semiconductor market not only grew phenomenally in the 1990s, but sources of
supply have also shifted dramatically. In the 1980s, U.S. companies were hardpressed by Japanese competitors, whose market share in the Americas (according to
SIA’s world industry statistics) rose from 10% in 1982 to more than a quarter by
1989. Starting with their commanding (86%) share of their home market, Japanese
suppliers led the American companies by 46% to 39% in global market share.
After falling to near 60% of the home market in 1995, U.S. domestic companies
share of this market stabilized at above70% since then, and their annual dollar value
grew rapidly to $45 billion in sales by 2000. Japanese companies’ market share
declined globally in the late 1990s. They were replaced in part by product from third
countries, particularly Korea. By 2000, Japanese company sales were less than 12%
of the Americas market ($7.4 billion), while third-country company sales supplied
18% of the market ($11.2 billion). U.S. companies in 2001 had more than 50% of
the market share in every major regional market except Japan; even there, the home
companies’ share was down to about 70%. While Japan’s global market share fell
from 46% in 1991 to just 28% ten years later, third countries’ market share was now
regularly greater than 20%. Korean and Taiwanese producers have now closed the
technological gap with Japan, not only in chips, but also in many downstream
The Consolidation of the DRAM Industry. The strong recovery of the
U.S.-based semiconductor business in the 1990s did not apply to DRAM chips,
which are the long-time backbone of the semiconductor industry included in most
electronic products. DRAM chips are characterized by an inability to fix or hold
memory when electrically discharged, and have been substituted in many applications
by more flexible, sophisticated and higher-value memory chips. However, in 2000
the global value of DRAM sales was still nearly $30 billion, or more than 14% of all
chips sold. But in 2001, as shown in Figure 3, sales of DRAMs fell by 60%.
While in the mid-1980s there were about a dozen U.S.-based DRAM producers,
only one U.S.-based producer remains in business today – Micron Technology Inc.
of Boise, Idaho. Ironically, the landmark 1986 U.S.-Japan agreement gave a
significant boost to the Korean competition for both U.S. and Japanese-based DRAM
manufacturers. The agreement created a process for monitoring penetration of nonJapanese-company source chips in the Japanese home market. While U.S. producers
gained market share as a result of the agreement, Korea also became a big supplier.
Fluctuations in semiconductor demand in the late 1990s hastened the exit of
most well-known producers from the DRAM market. Four Japanese recessions in
ten years and the East Asian economic crises of 1997-98 strongly affected the
financial viability of many Asian firms, including the predecessors of Hynix. Strong
U.S. growth created a surge in demand and a rise in prices among remaining DRAM
manufacturers, as well as the rapid increase in capacity discussed above. When
demand turned down in 2000, prices collapsed from $12-13 per DRAM chip to as
low as $0.90-1.00.12 Virtually all DRAM manufacturers were producing chips at a
substantial loss. Yet, because of the competitive pressures described at the beginning
of this section, individual producers felt they could not raise prices or temporarily
halt production. Each player hoped that another company would be forced to exit the
industry first, thereby removing capacity from the industry and pushing up prices.
The most significant move in the last two years is the virtual departure of Japanese
companies from the DRAM business.
Wall Street Journal, June 20, 2002.
Nihon Keizai newspaper, quoted in Japan Digest (October 24, 2001). Prices rose again
in early 2002 to $3-4, leading to speculation about price collusion among major suppliers
and a Justice Department investigation.
By 2001, just four major companies dominated the worldwide DRAM market.
Samsung of Korea was the world’s leading supplier in 2000, with about 23% of
global sales; that share increased to about a third of a much weaker market in 2001.
Micron and Hynix, a new company created in 1999 by joining the semiconductor
operations of South Korea’s Hyundai and LG groups, each had about 20% of the
market in 2000 and 2001. Infineon Technologies of Germany, a spinoff from the
Siemens electrical group, is the only remaining significant European-based DRAM
producer. Infineon accounted for only about10% of sales, but now claims to be the
technologically low-cost producer and has been aggressively seeking alliances with
newer Taiwanese companies, having earlier sought its own deal with Hynix.13 The
three Japanese DRAM companies together held a 16% market share in 2000, but
have now almost disappeared. Hitachi and NEC have combined to create a new
semiconductor spinoff, Elpida (to which the DRAM operations of Mitsubishi have
recently been added), while Toshiba is no longer in DRAMs.
Figure 3: Major World DRAM Producers
Infineon press releases, “Infineon to Cooperate with Taiwanese Winbond and Mosel
Vitelic to Secure Higher Memory Chip Capacity” (Mar. 11, 2002) and “Infineon and Nanya
to Cooperate on DRAM Memory Chips by Collaborating on Technology Development and
Founding a Production Joint Venture” (May 2, 2002); Financial Times (Dec. 10 and 11,
Since 1998, most companies producing DRAMs in the United States have
exited the business or are leaving it:
Hitachi sold its DRAM plant in Texas to Texas Instruments, which
subsequently closed the plant and left the DRAM business.
NEC closed its California DRAM plant.
IBM has left the DRAM manufacturing business and sold its share
in a joint venture manufacturing plant in Virginia to Toshiba.
Toshiba subsequently has announced its own exit from the DRAM
manufacturing business and has sold the Virginia plant to Micron.
Motorola has left the DRAM business, deciding instead to focus on
more advanced static random access memory chips. Motorola sold
its share in a joint venture manufacturing plant in Virginia to
Infineon, its original partner there.
The two major Korean companies, Samsung and Hynix, each have
a U.S. wafer fabrication plant. Samsung’s operation is in Austin,
Texas. The Hynix plant in Eugene, Oregon, was closed for a period,
but has been revamped and resumed production in late 2001.
This wave of mergers, closings and exit decisions leaves Micron’s three wafer
fabrication plants (two in Idaho, one in Virginia) as not only the last U.S.-owned
DRAM manufacturing facilities, but also among the few still operating in the United
States. In its 2001 and 2002 financial years, Micron’s total losses were $1 billion per
year.14 On February 18, 2003, the company announced its first layoffs since 1985:
10% of its workforce, or about 1,800 people. This included 560 workers in Virginia,
about half of that plant’s workforce, with most of the remaining reductions at the
DRAMs and U.S. National Security. With respect to national security
implications, Micron reported that primary Defense Department contractors use their
products in “a wide variety of military products, including satellites, smart bombs,
rockets, rocket launchers, tanks, ground combat vehicles, communications devices
and recording devices. In addition, Micron memory is used in the F15, the F16, the
F22, Comanche helicopters and Stinger missiles.”16
The Department of Defense Office of Industrial Policy was contacted with
respect to the national security implications of relying solely on offshore or foreignowned DRAM producers for defense-related applications. The response was that the
Testimony of Micron CEO Steve Appleton, USITC staff conference (Investigation no.
701-TA-431), November 22, 2002, p. 5.
Washington Post, February 22, 2003.
Memorandum from Bonnie Byers, Hale & Dorr, on behalf of Micron Technology Inc.
(October 22, 2001).
Defense Department currently does not maintain a broad program regarding
semiconductor availability and relies on the commercial market. The Defense
Advanced Research Projects Agency (DARPA) in the 1990s did have a program to
sustain a U.S.-based source for active-cell matrix liquid crystal displays used in
aircraft instrument panels, but this project failed to sustain a U.S. manufacturing
base. Currently the sole manufacturing source for active-cell matrix LCDs is from
Korea, and the office noted no other special domestic semiconductor industry
programs. South Korea and the United States have shared a Mutual Defense Treaty
since the end of the Korean War.
The Dispute over the Hynix Rescue Package17
The collapse in DRAM prices in 2000 and 2001 had a particularly devastating
effect on Hynix. As mentioned above, Hynix was formed in May 1999 by the merger
of rivals Hynix18 and LG Semiconductor. The merger was one of the so-called “big
deals” the South Korean government instigated in the aftermath of Korea’s 1997
economic crisis to try to force each of the country’s largest conglomerates to
concentrate in fewer business activities. As a result of the merger, Hynix took on 6
trillion won in LG’s debt on top of its own.19 Simultaneously, other members of the
Hyundai conglomerate began to suffer from cash-flow shortfalls. Since Hynix was
flush with cash due to the electronics boom of 1999 and 2000, it was tapped for funds
to prop up ailing members of the Hyundai corporate family – then a common practice
among Korean conglomerates. Thus, Hynix had few reserves to draw upon when the
bottom fell out of the DRAM market in 2000.
Since the beginning of 2001, Hynix has been kept afloat by four financial
assistance packages, the first three of which are the centerpiece of Micron’s
countervailing duty petition.20 (See box below.21) This section of the report deals
only with these cases of specific assistance to Hynix. Note that additionally, Micron
alleges that Hynix (as well as Samsung) have benefitted from certain types of
subsidies that have been given to the Korean semiconductor industry in general.
The debate over Hynix’s financial assistance packages has revolved around three
Prepared by Mark Manyin.
Until it separated from the Hyundai conglomerate in March 2001, Hynix was known as
Hyundai Electronics Industries (HEI). For the sake of simplicity, the name Hynix will be
used to refer to HEI throughout this report.
Business Asia, September 19, 2001, as published by the Economist Intelligence Unit
Countervailing Duty Petition (Public Version) Submitted by Micron Technology Inc.,
“Dynamic Random Access Memory Semiconductors from Korea,” Case No: C-580-851.
Because the petition covered the period from January 1, 2001 - June 30, 2002, Hynix’s
December 2002 rescue package was not included in the countervailing duty investigation.
Note that the box does not list Hynix’s June 2001 sale of $1.3bn via global depository
receipts because, in contrast to the other new financing Hynix received in 2001, this sale
To what extent is the Korean government involved in the Hynix
rescue? That is, were the rescue packages market-based initiatives
or government subsidies?
Is Hynix suffering from structural problems or temporary liquidity
Finally, does the Korean government’s involvement violate the
WTO rules prohibiting certain subsidies?
These issues will be examined after a review of the details of the rescue
Details of the Rescue Packages. Only the first of the four assistance
packages ostensibly was sponsored by the government. In January 2000, the stateowned Korea Development Bank (KDB) unveiled a bond-refinancing program to
assist companies that were likely to default on their debts at a time when the Korean
bond market had effectively ceased to function due to a severe credit crunch. Hynix
was one of four affiliates of the Hyundai conglomerate (and six companies overall)
to qualify for the program, under which 80% of the company’s 3.6 trillion won ($3
billion) in maturing debt was rolled over, repackaged (with government guarantees)
and resold to the public. Charging that the program amounted to a government-led
bailout of Hyundai, the Bush Administration raised the issue in a WTO subsidies
committee, and told Seoul that it was considering filing a case against Korea at the
WTO. The Korean government denied these charges, arguing that the program was
open to all “qualified” and economically viable firms, would run for only one year,
and used market-based interest rates.
The Korean government did not play a direct role in subsequent assistance
packages to Hynix, perhaps because of the criticism of the KDB plan. Instead, when
Hynix’s cash flow problems worsened in the winter and spring of 2001, it was
Hynix’s creditors that orchestrated the company’s bailout. On October 31, 2001,
after months of negotiations, over 100 creditors agreed upon a massive financial
assistance package that restructured virtually all of the company’s then 8.6 trillion
won ($7.2 billion) in debt, including 650 billion won ($541 million) in fresh loans
from five creditor banks. The package was widely interpreted as an attempt to tide
Hynix over until semiconductor prices recover and presumably restore the company’s
The December 2002 Rescue Package. Hynix, however, continued to post
huge losses. In December 2002, over 100 creditors agreed to another large scale
rescue package that granted the company relief on all but 1 trillion won of its 5.9
trillion won ($4.92 billion) in debt, three-quarters of which was due to mature in
2003 and 2004. The net result of the package reduced Hynix’s total debt to 4.3
trillion won ($3.6 billion) and reduced its monthly interest payments from 35.4
billion won ($29.5 million) to 20 billion won ($16.7 million). The creditors had
taken a controlling stake in June 2002, shortly after Hynix’s board had rejected a deal
between the creditors and Micron for the latter to purchase the company.
The December package included a $188 million in loans to Beijing Orient
Electronics (BOE) Technology Group Co. to help the China-based company finance
its $380 purchase of Hydis, Hynix’s flat-panel display unit. $180 million of these
loans are to be issued by the Korea Development Bank (KDB, $100 million), the
Korea Exchange Bank (KEB, $50 million), and Woori Bank ($30 million), banks in
which the Korean government has a majority ownership stake.22 Officials with KEB,
Hynix’s lead creditor, have stated that the debt restructuring is designed to put
creditors in a better position to eventually sell Hynix. At a February 25, 2003, Hynix
general shareholders’ meeting, the debt relief plan was approved over the loud
protests of a group of minority shareholders. In the days after the meeting, about 50
top executives, including the Chief Executive Officer, resigned.
Summary of Financial Support Packages for Hynix in 2001 and 2002
January 2001 - 1.3 trillion won ($1.08 billion) in new aid. The state-owned Korea
Development Bank (KDB) unveiled a bond-refinancing program to assist several troubled
major companies that were likely to default on their debts at a time when the Korean
bond market had effectively ceased to function due to a severe credit crunch. Hynix was
one of four Hyundai affiliates (and six companies overall) to qualify for the program,
under which creditor banks rolled over 80% of the company’s 1.625 trillion won ($1.35
billion) in maturing debt that was rolled over for one year, repackaged (with government
guarantees) and resold to the public.
May 2001 - 17 of Hynix’s Korean creditor banks agreed to buy 1 trillion won ($833
million) in Hynix bonds.
October 2001 - Over 5 trillion won ($4.2 billion) in new aid. More than 100 creditors
agreed to a sweeping plan to restructure virtually all of the 8.6 trillion won ($7.2 billion)
they held in Hynix debt. The package included: a 3 trillion won ($2.5 billion) debt-forequity swap, which will take place in 2002, until which time Hynix will make no interest
payments; a 3-year rollover of 4.4 trillion won ($3.7 billion) in debts and maturing bonds,
with interest rates slashed in half (a reduction of about 276 billion won [$230 million] in
interest burdens); an infusion of 650 billion won ($542 million)in new loans by five
creditors; a writeoff of 1.2 trillion won ($1 billion) in debt at just over 25% of face value
by seven banks that refused to issue fresh loans to Hynix. Hynix pledged to raise 2.6
trillion won ($2.2 billion) by the end of 2002 by selling assets and retiring debt.
December 2002 - Hynix received relief on all but 1 trillion won of its 5.9 trillion won
($4.92 billion) in debt, three-quarters of which was due to mature in 2003 and 2004.
Over 100 creditors agreed to a package that included: a rollover until 2006 in the maturity
of 3 trillion won ($2.5 billion) in debt, the interest of which was reduced from 6.7% to
3.2%; a 1.9 trillion won ($1.6 billion) debt-for-equity swap; a 21-1 capital write-down
(i.e. every 21 shares of existing Hynix stock will be converted into 1 share); the sale of
future Hynix assets; and $188 million in loans to BOE Technology Group Co. to help the
Chinese company finance its $380 purchase of Hynix’s flat-panel display unit. $180
million of these loans are to be issued by creditors that are owned by the Korean
government. This rescue package was not included in Micron’s anti-subsidy petition.
As of the end of 2002, the South Korean government’s stakes were as follows: KDB,
96%, KEB, 43.17%, Woori, 100%. As of December 2002, the South Korean government
also owned 80.04% of Chohung Bank, another major Hynix creditor.
Were the Rescue Packages Government Subsidies? Critics of the
Hynix support packages have charged that they have been orchestrated by the
government. As evidence, they point out that the assistance packages have been
organized by a consortium of banks that have been owned or controlled by the
Korean government since 1998, when Seoul nationalized many weak banks in the
aftermath of the country’s 1997 financial crisis. As Table 1 shows, for instance, over
90% of the new loans given in October 2001 to Hynix were from banks whose largest
shareholder is the Korean government. This has led to widespread speculation that
Seoul financial officials, who historically have maintained a considerable
involvement in the financial system, put direct or indirect pressure on Korean banks
to bail Hynix out.23
Critics of the bailouts also charge that Korean government officials had broader
political and diplomatic motives for allegedly orchestrating the rescue packages.
Government support was given to Hynix, the argument runs, in part to repay Hynix
for taking over LG Semiconductor in 1999. The Kim government pushed for the
dismantling of the Hyundai conglomerate – a process that began in the spring of 2001
– and thus had an interest in having the process proceed with a minimum of
disruption. Furthermore, it has been widely speculated that the South Korean
government was reluctant to cause economic disruption before the December 2002
presidential election, in which Roh (pronounced “noh”) Moo-hyun, the candidate of
current president Kim Dae Jung’s party, won a narrow victory.
Some suspect that the Kim government may have allegedly pursued a bailout
to repay the Hyundai conglomerate for being the only major South Korean
conglomerate to support Kim Dae Jung’s “sunshine policy” of engaging North Korea
by investing in the North.24 Indeed, Hyundai officials have admitted they illegally
transferred $500 million to North Korea just days before President Kim’s historic
summit in June 2000 with North Korean leader Kim Jong-il. Hyundai and Korean
government officials deny any linkage between the payments and the summit, saying
the payments were made to win the North Korean government’s support for business
Hynix’s backers, as well as some independent analysts, argue that the evidence
of government involvement in the creditors’ decisions is circumstantial at best.
Seoul and Hynix officials repeatedly have argued that the decisions on whether to aid
For an example of such speculation, see Don Kirk, The New York Times, November 10,
2001, in which the soon-to-retire President of Korea First Bank, Wilfred Horie, speaks about
the indirect pressure he received when his bank refused to participate in the January 2001
KDB bond rollover program. For more on the history of government intervention and
guidance of the banking system, see Marcus Noland, Avoiding the Apocalypse: The Future
of the Two Koreas, (Washington, DC: Institute for International Economics, 2000); and
Catherine L. Mann, “Korea and the Brave New World of Finance,”in Joint U.S.-Korea
Academic Studies, Vol. 10, 2000, (Washington, DC: Korea Economic Institute of America).
Jay Soloman, Hae Won Choi, “Southern Exposure: At Huge Korean Conglomerate,
Bridge to North Takes Its Toll – Leading the Drive for Business Across the DMZ, Hyundai
Suffers Big Losses, Scandal,” Wall Street Journal, March 4, 2003.
Hynix have been entirely in the hands of the company’s creditors. They point out
that many foreign banking interests – notably Citibank and Commerzbank (which
oversees the credit decisions of Hynix’s leading creditor, the Korea Exchange Bank)
– have supported the rescue packages.25 Non-Koreans sit on the boards of directors
of several of Hynix’s creditors, including the Korea Exchange Bank, Kookmin Bank,
Hana Bank, and KorAm Bank. Also, at the time of the October 2001 rescue package,
some government-owned banks (such as Seoul Bank) decided to write off their loans
to Hynix, accepting 75% losses rather than increasing their exposure to the struggling
Table 1. Hynix Semiconductor’s Major Bank Creditors
(Billions of won)
Korea Exchange Bank (KEB)a
Korea Development Bank
Oct. 2001 Package
Hanvit Bank (now part of Woori
Korea First Bank
Source: Korea Exchange Bank (KEB) for 2001 figures; Korean Financial Supervisory Service for
Note: Shaded rows indicate banks in which the Korean government is the largest shareholder.
KEB’s second largest investor, Germany’s Commerzbank, oversees KEB’s credit decisions.
Includes figures for Korea Housing & Commercial Bank, which was absorbed by Kookmin in
A Shared Interest in Keeping Hynix Afloat. The reality may be more
nuanced. Even if Hynix’s most enthusiastic supporters – KEB, Hanvit Bank, and
Note that, as Table 1 shows, Citibank’s exposure to Hynix was relatively low (110 billion
won, or $92 million) and accounted for less than 2% of Hynix’s total bank exposure at the
time the latest support package was unveiled in October 2001.
Chohung Bank – were not owned by the government, they would have powerful
incentives for keeping Hynix afloat. These institutions are among Korea’s weakest
banks, which is why they were taken over by the government in the first place. A
default by Hynix would be financially damaging to these banks, which have invested
large sums in the company. Furthermore, a Hynix collapse could have a cascading
effect that would further hurt these banks, which are known to have significant
exposure to other members of the former Hyundai conglomerate. Although the
Hyundai group is being dismantled under pressure from creditors and the
government, several members of the former Hyundai corporate family still own
nearly 10% of Hynix shares.
Thus, at the very least, Hynix’s leading creditors share the government’s interest
in propping up the company in the hope that DRAM prices will recover. Hynix
accounts for an estimated 4% of South Korea’s exports, employs over 14,000 people
directly, and has approximately 2,500 subcontractors and suppliers that employ
another 150,000, representing over 0.5% of South Korea’s total workforce.26 Hynix
also is the most widely held stock in South Korea, with over 300,000 individual
Moreover, the institutional culture of the Korean banking industry is likely to
have played a role in the decision to keep Hynix on life-support. Historically, Korean
financial institutions have been silent partners in the government-business-finance
relationship. Credit was allocated to politically connected or preferred firms, not
according to an assessment of risk and return.27
By many accounts, this banking culture has been changed – or at least, has
begun to be changed – by the economic reforms enacted in the aftermath of South
Korea’s financial crisis in 1997. Since then, the country’s financial industry has
undergone a fundamental restructuring. After 1998, nearly a quarter of Korea’s
financial institutions, including 9 of 26 banks, were merged or liquidated, and
thousands of financial service employees were laid off. The government imposed
more stringent accounting rules, including a requirement that banks raise their capital
adequacy ratios to over 10%, above the international standard of 8%.
However, it is unclear whether these broader changes apply to the case of large
companies; in other words, there is anecdotal evidence that in some cases, the “too
big to fail” dynamic may still be at work in South Korea. Furthermore, the
government has preferred to deal with insolvent manufacturing firms primarily by
relying upon bank-led workout programs rather than legal bankruptcy proceedings.
The result has been that relatively few failing firms have been forced to change
management, and even fewer have exited the market. While the policy may have
helped to avoid widespread corporate and financial crises in the short term, it has
allowed hundreds of non-profitable, “zombie” firms to continue operating, thereby
draining financial resources and creating incentives to dump products on the market
in the medium term. For instance, generous debt relief packages kept financially
Financial Times, August 31, 2001. 0.5% of the U.S. workforce is nearly 700,000.
Mann, “Korea and the Brave New World of Finance,” p.56-58; Noland, Avoiding the
Apocalypse, p. 199-203.
ailing Daewoo Motors in business for nearly three years after the collapse of the
Daewoo conglomerate. Many of Hynix’s leading creditors – including Korea
Development Bank, Woori Bank, Chohung Bank and Korea Exchange Bank – were
also major lenders to Daewoo Motors. In 2002, General Motors purchased the
company for a fraction of the offer it made, and the government rejected, in 1999.
Restructuring by Hynix – Is It a Viable Company? A related issue is
whether the financial assistance packages have been accompanied by restructuring
plans from Hynix. On the one hand, there have been a number of changes since the
KDB program was unveiled in January 2001. Most importantly, after changing its
name from Hyundai Electronics in the spring of 2001, Hynix left the Hyundai
conglomerate, as part of the dismantling of the Hyundai corporate family. Other
steps have included the sale or spinning-off of most of Hynix’s non-semiconductorrelated assets, the temporary suspension of production in the company’s factory in
Oregon, the sale of Hydis, and rotating furloughs given to Hynix’s Korean
employees. None of these moves has entailed significant layoffs in South Korea.
Supporters of the Hynix bailout packages have argued that Hynix continues to
be a highly competitive company that only needs short-term assistance to weather the
current downturn in global demand for semiconductors.28 Their position assumes
that chip prices rebound significantly in near future. Others, however, contend that
Hynix is suffering not from temporary liquidity problems, but from fundamental
structural flaws that will prevent the company from becoming self-sufficient in the
near future. Additionally, Hynix’s financial troubles are preventing it from keeping
pace in technological improvements. For example, one source noted that Samsung,
spending about $4 billion in technology upgrades in 2001, would outspend Hynix by
20-to-1.29 Hynix’s December 2002 rescue package did not include funds for such
investments, meaning that Hynix somehow will have to raise on the order of 1 trillion
won to keep pace with its competitors. In recent months, Hynix has announced new
investments in research and development, including $100 million to upgrade its DRAM chip manufacturing facilities of the Eugene plant. In the first quarter of 2003,
Hynix posted a net loss of one trillion won ($833 million), the fourth consecutive
quarterly loss and the largest shortfall since the fourth quarter of 2001.
Business Week, October 1, 2001.
Asian Wall Street Journal, October 26, 2001. More recently, Samsung announced
increased planned capital expenditures for 2003, despite declines in quarterly profits in
semiconductors – a move designed apparently to increase pressure on both Hynix and
Micron; Financial Times, April 19-20, 2003.
The Micron Countervailing Duty Case Against
Korean DRAM Producers30
On November 1, 2002, Micron filed a countervailing duty case under U.S. law
against both Korean DRAM producers, Samsung as well as Hynix. The petition
charges that the Korean companies are subsidized by their government, enabling
them to continue to sell DRAMs into the U.S. market at competitive prices, a practice
that has consistently undercut the market shares of Micron and Infineon. The
Commerce Department announced in a November 27, 2002, Federal Register notice
that it would pursue an investigation of the alleged subsidization.31
The ITC on December 13, 2002, made a preliminary determination of material
injury to the petitioner, based on its initial investigation.32 Subsequently, the
Commerce Department made a preliminary determination on March 31, 2003, that
subsidies are being provided to Korean producers, and announced its findings in an
April 7, 2003, Federal Register notice.33 The Department determined that the total
estimated net countervailable subsidy rates for Hynix and Samsung are, respectively,
57.37% and 0.16%.34 According to a Financial Times analysis, if the Hynix
preliminary countervailing duties stand, “it could be a fatal blow” to Hynix. The
This section is written by Stephen Cooney and Jeanne J. Grimmett. More detail on
relevant U.S. trade law is available in Antidumping and Countervailing Duties, by Jeanne
J. Grimmett, from the CRS Trade Briefing Book at [http://www.congress.gov/brbk/html/
Dept. of Commerce. International Trade Administration. “Initiation of Countervailing
Duty Investigation: DRAMs from South Korea,” November 21, 2002, and 67 Fed. Reg.
70927 (2002); “U.S. to Pursue Micron’s Chip Charges,” Wall St. Journal, November 25,
2002; DER, “Commerce to Investigate Allegations of Subsidies for Korean Semiconductors”
(Dec. 3, 2002).
USITC. News Release 02-114, “ITC Votes to Continue Case on DRAMs and DRAM
Modules from Korea,” (Investigation No. 701-TA-431), December 13, 2002; International
Trade Commission. “Drams and Dram Modules from Korea,” 67 Fed. Reg. 79148 (2002);
DER, “Korea Semiconductor Imports Injurious, ITC Reports in Preliminary Determination”
(Dec. 16, 2002).
Dept. of Commerce. International Trade Administration. “Preliminary Affirmative
Countervailing Duty Determination: Dynamic Random Access Memory Semiconductors
from the Republic of Korea,” 68 Fed. Reg. 16766 (2003).
The Department also found an “all others” rate of 57.37 % (the rate applies to companies
not individually investigated and new exporters and producers). Once it made its
affirmative preliminary determination and announced estimated countervailable subsidy
rates, the Department was also required to order the posting of cash deposits, bonds or other
security for each imported entry based on the estimated rates, and to order the suspension
of liquidation of entries of the subject merchandise entered on or after the date the
preliminary subsidy determination was published in the Federal Register. Tariff Act of
1930, § 703(d), 19 U.S.C. § 1671b(d). Entries from Samsung are not subject to this
suspension of liquidation because Samsung’s rate was preliminarily determined to be de
minimis. See 68 Fed. Reg. at 16783, and note 14, infra.
subsidy findings on Samsung were described in the same article as “insignificant.”35
The Korean government tried to have the imposition of preliminary countervailing
duties suspended, in talks associated with the visit to Washington of President Roh
in May 2003, but this effort was unsuccessful.36
The Commerce Department must now make a final determination within 75
days of its preliminary finding, or on or about June 14, 2003. If the Department
makes a final determination that confirms subsidization, the ITC must then make a
final determination as to whether material injury to the domestic industry is caused
or threatened by the subsidized imports. The ITC currently lists a completion date
of August 4, 2003, for its investigation.
Under U.S. trade law, domestic antidumping (AD) and countervailing duty
(CVD) proceedings may be self-initiated by the Department of Commerce or, as in
this case, requested in a petition filed with the Commerce Department by an
“interested person,” including a firm, on behalf of the affected domestic industry. In
deciding whether to initiate a case by petition, the Commerce Department had to
determine whether there was sufficient industry support for the proceeding. While
it decided that there is sufficient domestic industry support in the case, it also
determined that wafers fabricated at the Hynix and Samsung facilities in the United
States are not included in the scope of this case, even if the chips are then shipped to
Korea for final assembly in modules and re-imported into the United States. “The
principal reason for this determination is that in numerous past proceedings on
DRAMs and similar products...the Department has consistently maintained that the
country of origin is the country where the wafer fabrication has occurred.”37 This
could ultimately be of some significance in the determination of the final level of
Micron alleges in this case that the financial arrangements involving Hynix, as
noted in the table in this report, are direct and indirect subsidies from the
government-controlled banks. With respect to Samsung, Micron stated that it “has
not received subsidies of the same magnitude as Hynix,” but “the subsidies it has
received have provided the company with an unfair advantage over non-subsidized
competitors outside Korea.” These subsidies have included direct government
support of product development, export subsidies and a structure of the Korean
“financial and banking system [to funnel] both public and private resources and
financial assistance to favored industries.”38 These subsidies allowed both Hynix and
Joshua Chaffin and Andrew Ward, “Huge Import Sanctions May Cripple S. Korea’s
Hynix,” Financial Times (April 2, 2003).
Andrew Ward, “Hynix Semiconductor Loses US Tariff Battle,” Financial Times (May 19,
Dept. of Commerce. International Trade Administration. “Notice of Initiation of
Countervailing Duty Investigation: Dynamic Random Access Memory Semiconductors from
the Republic of Korea,” 67 Fed. Reg. 70927, 70928 (2002); DER, “Commerce to Investigate
Allegations of Subsidies for Korean Semiconductors” (Dec. 3, 2002).
On Samsung’s inclusion, see Micron Technology Inc. Countervailing Duty Petition before
Samsung to keep up with Micron in technological developments and to price product
at a level low enough to hold or gain market share, Micron argued in the ITC
preliminary injury staff conference on November 22, 2002.39
In response, counsel for Hynix argued that Micron in statements to investors
emphasized the company’s relative health and strong cash position, despite expected
operating losses during a periodic industry downturn. And counsel for Samsung
stated that there was no evidence at all that Samsung had received subsidy assistance,
implying that Samsung was only included in the petition to inflate the amount of
subject imports and therefore the likelihood of a material injury finding.40
The South Korean government has vigorously denied that any government
subsidization of Hynix occurred and has threatened to take the issue to the WTO,
should U.S. trade penalties be imposed. Although some banks were nationalized
during the 1997-98 financial crisis, the government did not directly control their
subsequent lending decisions, Korean government officials argued at the time that
the U.S. anti-subsidy case was filed.41 The Korean Minister of Commerce, under the
administration of newly elected President Roh Moo-hyun, reiterated this point in a
March 12, 2003, letter to the Commerce Department. Furthermore, in a separate
attachment, the Minister made the case that as the Hynix market share of the U.S.
DRAM market fell during the ITC period of investigation in 2001, Hynix could not
have been a source of injury to Micron, whose own market share in the United States
remained stable during the period, the Minister claimed. His conclusion is that the
general fall in world DRAM market prices, not Korean government subsidization of
Hynix, is the source of Micron’s problems.42
In its preliminary determination, the Department of Commerce found that the
government of Korea directed loans to the semiconductor industry through1998, and,
for the period from 1999 through June 30, 2002, directed or provided loans and other
benefits that were specific to current or former Hyundai Group companies, including
Hynix.43 It also determined, however, that the Korean government did not direct
the International Trade Administration of the Dept. of Commerce and the U.S. International
Trade Administration (public version). Dynamic Random Access Memory Semiconductors
from Korea (Nov. 1, 2002), pp. 124-26.
USITC staff conference (Investigation No. 701-TA-431), November 22, 2002. Testimony
of Steve Appleton and Michael Sadler, Micron Technology, Inc., and Bonnie Byers, Hale
and Dorr, LLP.
Ibid. Testimony esp. of James P. Durling of Wilkie Farr & Gallagher, on behalf of Hynix
and Warren E. Connelly of Akin, Gump, Strauss, Hauer & Feld, LLP on behalf of Samsung.
“U.S. to Pursue Micron’s Chip Charges,” Wall St. Journal, November 25, 2002.
Letter, with attachment, of Korean Minister of Commerce, Industry and Energy Yoon Jinsik to U.S. Secretary of Commerce Donald Evans, March 12, 2003.
For a domestic subsidy to be countervailable, it must be specific in law or in fact to an
enterprise or industry, or group of enterprises or industries, within the jurisdiction of the
authority providing the subsidy. Tariff Act of 1930, §§ 771(5)(A), (5A)(D), 19 U.S.C. §§
credit to Samsung or the semiconductor industry as a whole during the latter period.
The benefits to Hynix were found to be conferred primarily through programs
associated with its financial restructuring and recapitalization, including benefits
from long-term and short-term loans, new bonds, and debt-to-equity swaps. The
Commerce Department further determined that Hynix benefitted from debt
forgiveness and the Korea Development Bank “Fast Track” Debenture program,
developed to enable companies to deal with liquidity problems from especially heavy
corporate borrowing following the 1997 Korean financial crisis. Commerce also
found that both Hynix and Samsung benefitted from government-directed loans
provided prior to 1999. The net countervailable subsidy from the above-described
programs and activities was determined to be 57.23% for Hynix and 0.01% for
The Commerce Department additionally determined that benefits accrued to
Samsung from a temporary investment tax credit and to both Hynix and Samsung
from a government interest-free loan program supporting new semiconductor
technologies; countervailable benefits of less than 1% were found for the companies
from these two programs. Thus, while Samsung is found to have received some
benefit from Korean government programs, the level of benefit is considered de
minimis under U.S. trade law.44 Should subsidization of imports from Samsung be
found to be de minimis in the final Commerce determination, a question the ITC may
consider is whether imports from Hynix alone could be a source of material injury
If both the Commerce Department and the ITC make affirmative final
determinations in the case, duties will be imposed on the subject DRAMs and
DRAM modules in the amount of the net subsidy. The Commerce Department could
also subsequently suspend an investigation, if it enters into an agreement with
exporters or with the government of a country where the countervailable subsidy
practice is alleged to occur either for the exports to cease, or for the subsidy to be
offset or eliminated.45
Beyond the U.S. action, the European Union has also hit Hynix with heavy
countervailing duties. Infineon filed an anti-subsidy and antidumping petition with
the European Commission, which claimed that Samsung and Hynix are subsidized
by the Korean government. Micron, which has EU manufacturing facilities as well,
In the case of imports from developed countries, a countervailable subsidy is considered
de minimis if DOC determines that the aggregate of the net countervailable subsidies is less
that 1% ad valorem or the equivalent specific rate for the merchandise under investigation.
Tariff Act of 1930, § 703(b)(4), 19 U.S.C. § 1671b(b)(4). The Tariff Act requires the
Commerce Department to disregard any de minimis countervailable subsidy in making
preliminary and final determinations in a CVD proceeding. Accordingly, under DOC
regulations, the Department excludes from an affirmative final subsidy determination any
exporter or producer for which it determines an individual net countervailable subsidy rate
of zero or de minimis. 19 C.F.R. § 351.204(e)(1).
See Asian Wall Street Journal, April 8, 2003.
agreed with the substance of this complaint. The European Commission pursued this
petition and sent its investigators to Korea.46 They returned with a finding that Hynix
was subsidized in two ways, a bond program set up through the Korean Development
Bank to benefit Hynix, and the October 2001 financing package provided by Korean
banks. On April 24, 2003, the European Commission applied a provisional 33%
CVD on imports of Hynix DRAM chips, pending a final decision that will be taken
by the Commission in August 2003. As with the U.S. Commerce Department, the
European Commission also found subsidization of Samsung to be below the de
minimis threshold.47 The Financial Times article cited above concludes that,
“Together the Washington and Brussels sanctions ... will price Hynix out of the U.S.
and European semiconductor markets, making it heavily reliant on sales in Asia.”48
Proposed Legislation on the Hynix Issue
Members of Congress, especially from directly affected states and districts, have
been closely following the Hynix subsidy issue and semiconductor trade case. In
September 2001 an amendment sponsored by Senator Larry Craig of Idaho, which
protested the “Republic of Korea’s improper bailout of Hynix,” was incorporated into
the Senate’s version of the FY 2002 appropriations bill for the Commerce, Justice,
and State Departments.49 The amendment noted that in 1998, the Omnibus Fiscal
1999 Appropriations Act (P.L. 105-277) required that the IMF’s $58 billion
assistance package not be used to support South Korean companies that compete
unfairly with U.S. companies. The Craig amendment was stripped from the bill in
conference. Senator Craig also joined in co-sponsoring the controversial DaytonCraig Amendment to the Senate version of the 2002 Trade Act that granted President
Bush trade promotion authority. The amendment would have required a separate
vote in Congress to approve any changes negotiated in trade agreements to U.S. trade
remedy laws. While approved 61-38 in the Senate, the provision was dropped in
Early in the 108th Congress, legislation was introduced in the Senate that
specifically focused on the issue of Korean government subsidies to Hynix, in the
wake of the case brought by Micron, and following large layoffs announced by
Asian Wall Street Journal, July 25, 2002; Dow Jones International News, “South Korea
Government Denies Providing Subsidies to Chip Makers,” Sept. 24, 2002.
DER, “EU Commission Imposes Interim CV Duties on Korean DRAM Chips Produced
by Hynix,” April 25, 2003.
Financial Times (April 2, 2003). Reflecting its own concern with a diversion of Korean
DRAMs, Taiwan is also reportedly considering initiation of a trade safeguard action and an
antidumping investigation; Financial Times, April 19-20, 2003.
The amendment appeared as Section 626 of the Senate-passed bill.
Congressional Record (May 14, 2002), pp. S4299-4326; BNA. Daily Executive Report
(DER), “House Democrats Push to Include Dayton-Craig in Trade Conference Bill” (May
24, 2002) and “TAA Deal, Dumping of Dayton-Craig Clause Crucial to Agreement on
Omnibus Trade Bill” (July 29, 2002). The 2002 Trade Act, without the Dayton-Craig
amendment, was signed into law by President Bush as P.L. 107-210 on August 6, 2002.
Micron at its plants in Idaho and Virginia. On February 27, 2003, Senator Craig
introduced S. 492, which would direct the Secretary of Commerce and the Customs
Service effectively to impose an 80% ad valorem countervailing duty on all DRAM
semiconductors entered into the United States that are “produced or imported by
Hynix Semiconductor.”51 On the same day, Senators Crapo and Allen introduced
S.Con.Res. 11, which would urge the Administration to consult with Korea, while
undertaking trade enforcement actions against alleged Korea government
subsidization of Hynix.52 Both S. 492 and S.Con.Res. 11 were referred to the
On March 27, 2003, the two House members from Idaho, later joined by a
member from Virginia, introduced H.R. 1494. The bill was similar in intent to S.
492, in that it mandated an 80% CVD, but only when and if the “administering
authority” made an affirmative subsidy determination against Hynix Semiconductors.
The 80% level was established in the bill “in lieu of any amount that would otherwise
be ordered.” H.R. 1494 was referred to the Trade Subcommittee of the Ways and
Members of Congress from Oregon, where Hynix has its U.S. wafer fabrication
plant, have responded by sponsoring resolutions urging caution in managing the trade
dispute with Korea on semiconductor issues. S.Con. Res. 29, introduced on March
25, 2003, by Senators Smith and Wyden, and H.Con. Res. 124, co-sponsored two
days later by the five members of the Oregon House delegation, sought to moderate
concerns on the issue. These two identical resolutions noted current “geopolitical
tensions” involving Korea. They emphasized that semiconductor trade issues should
not “create geopolitical or economic tensions between the United States and the
Republic of Korea,” nor “result in the loss of highly skilled jobs in the United
States,” including jobs at U.S. “facilities of Korean semiconductor manufacturers.”
These resolutions were also respectively referred to the Senate Finance Committee
and the House Ways and Means Committee Trade Subcommittee.
Continued Shakeout of the DRAM Industry. The Hynix dispute
highlights important economic transformations that are currently taking place. One
is the increased globalization and concentration of the semiconductor industry,
including its requirement for repeated expensive upgrades in manufacturing
equipment. Whether U.S. companies, and, for that matter, European and Japanese
companies, stay in the DRAM business would appear to depend in part on whether
their governments are willing to undertake, or at least to threaten, trade remedy action
against alleged dumping by and subsidization of the other countries’ producers, such
as, in the present case, Korea. While “national champion” companies are no longer
S. 492 §2 (a).
See introductory remarks by Sen. Crapo, Congressional Record, pp. S2979-80 (February
Prepared by Mark Manyin and Stephen Cooney.
fashionable in international trade, that may well be what is emerging with respect to
DRAM production, along the following rationalized lines:
Samsung, as the major Korean producer;
Micron, the U.S.-based producer, which recently acquired Toshiba’s
remaining U.S. plant;
The Japanese Hitachi-NEC-Mitsubishi consortium, Elpida;
Infineon, the remaining European producer;
A group of Taiwanese producers, which generally began as
semiconductor foundry operations, and of which the largest is
A Future Challenge from China? A significant unknown factor, and
perhaps the key reason Micron was interested in Hynix, is China. China is emerging
as a major semiconductor customer, especially given its potential appetite for cheaper
DRAM applications. The Chinese market for many applications, notably
telecommunications equipment, is substantial, but still largely in the future. But the
experience with China so far, as it emerges as a new and active WTO member, is that
its government and industry appear not be content only to supply the domestic
market. It appears also to have significant export ambitions.54 Additionally, the
president of Hynix’s leading creditor, the Korea Exchange Bank, has said that
Hynix’s creditors may try to sell the firm, or shares in it, to buyers in China.55
Korea’s Economic Reforms. Another significant transformation is South
Korea’s attempt to create a domestic economic system less concentrated in the hands
of a few giant conglomerates, less reliant upon guidance from the central
government, and more responsive to the information, incentives and pressures
provided by the market. The ambiguity of the Korean government’s role in rescuing
Hynix encapsulates the mixed record of President Kim Dae Jung’s economic reform
program. For instance, two of the country’s largest conglomerates, Hyundai and
Daewoo, have been dismantled since 1999. But many of their constituent parts
continue to remain in business despite insolvency.
It is unclear how the administration of newly inaugurated South Korean
President Roh Moo-hyun ultimately will handle the Hynix issue. On the one hand,
Roh campaigned on a platform of improving income distribution and reforming
Korea’s conglomerates, which continue to dominate the country’s economy. Roh’s
early moves indicate a commitment to follow through on his pledges. Additionally,
unlike his major opponent in the 2002 election, Roh did not endorse explicit
government support for Hynix. It is unclear what level of priority Roh gives the
Hynix issue. To date he has made few if any public comments on the Hynix
situation, and during his trip to Washington, DC, in May 2003, Roh reportedly did
not raise the subject in meetings with U.S. government officials.
Business Week has particularly focused on the phenomenon of Chinese development, as
in “High Tech in China: Is It a Threat to Silicon Valley?” (Oct. 28, 2002) and “Greater
China” (Dec. 9, 2002). See also Electronic News, “China Gains as U.S. Economy
Struggles,”(Sept. 23, 2002).
“Hynix Semiconductor Sale In China Possible,” Korea Industry Update, May 8, 2003.
On the other hand, Roh campaigned as a populist candidate, and clearly
benefitted from a surge in Korean nationalism that has occurred over the past year.
Additionally, if his government does not support Hynix, Roh could risk antagonizing
South Korean organized labor, which is one of the few big and coherent interest
groups with which Roh has close ties. These political considerations may lead his
government to be more supportive of – or at least not to oppose – granting further
support packages to Hynix. Reportedly, the Hynix dispute was not raised by Roh or
U.S. government officials
A key determinant will be how quickly Roh’s administration moves to continue
the privatization of the Korean financial sector. Over the last four years, Korea’s
banking system has undergone a major restructuring, including the merging or
liquidating of one-third of the country’s banks. However, most of these actions were
made possible through nationalization. The government has only begun to follow
through on its pledge to privatize its stake in the financial industry.
The government’s ownership of major Korean banks at best raises questions
about the independence of those banks’ decisions. As the Hynix case shows, these
decisions can have global repercussions. At worst, government ownership provides
a vehicle for Seoul to influence bankers’ lending decisions – through direct pressure
or through subtle guidance. Either way, the partial nationalization of the Korean
banking system is inhibiting the development of a system of credit-analysis that
rewards profitability, not size or personal connections. These characteristics of the
Korean financial industry will no doubt be highlighted if the Hynix controversy
remains a significant U.S.-Korean international trade dispute.
For Additional Reading
CRS Report RL31708. Semiconductors: The High-Technology Downturn and Issues
in the 108th Congress, by Stephen Cooney.