THE KOREAN SEMICONDUCTOR INDUSTRY:

HISTORICAL OVERVIEW AND PROSPECTS

FOR FUTURE DEVELOPMENT
By
David Mushkudiani

THESIS

Submitted to the School of Public Policy and Management, KDI

in partial fulfillment of the requirements
for the degree of

MASTER OF ECONOMICS AND PUBLIC POLICY

2000

1
 TABLE OF CONTENTS

1. INTRODUCTION 1

2. STATE INDUCEMENT OF FOREIGN CAPITAL (1965-72) 4

3. HCI PROMOTION PERIOD (1973 - 1979) 11

4. THE TECHNOLOGY LEAPFROGGING EFFECT (1980-87) 15

5. FROM IMITATION TO INNOVATION (1988 - 1996) 22

6. THE ECONOMIC CRISIS OF 1997 AND FUTURE PROSPECTS 29

6.1 The Economic Crisis of 1997 29
6.2 The Post Crisis Economic Rebound 33
6.3 Asia/Pacific Semiconductor Market, Revenue Forecast, 1999-2003 34
6.4 Worldwide Semiconductor Market, Revenue Forecast, 1999-2003 35
6.5 Worldwide Semiconductor Forecast: With and Without DRAM, 1999-2003 36
6.6 Creation of World Semiconductor Council (WSC) 37
6.7 Korean Semiconductor Market, Revenue Forecast by KSIA 39

7. POSITIVE SIDES OF THE CRISIS AND ITS LESSONS 42

8. CONCLUSION 44

Annexes 48
Annex I - Semiconductor Classification by Device 48
Annex II - Income and Technological Performance in OECD countries, 1995 49
Annex III - Average annual rates of growth of real GNP (selected years). 50
Annex IV - APEC Economies’ GDP figures (1989 – 1998) 51
References 52
List of Acronyms 54

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 1. INTRODUCTION

We live in a world undergoing an information revolution. As the world

becomes smaller and smaller through the development of information networks

including the internet, the ownership of cutting-edge information and communication

technologies is rapidly becoming a factor of primary importance in both gaining, and

maintaining a position in the forefront of the international political economy.

The semiconductor industry has been termed 'the crude oil of the information

era', a graphic symbolization of the importance of semiconductor devices as an

essential component of information and communications equipment. An increasing

proportion of contemporary manufactured products, from consumer electronic s to

industrial robots, from consumer durables to smart missiles, without their silicone

‘brains’ would be useless. This implies that in the future the semiconductor industry

will increasingly serve in a bed-rock capacity, being the basis for the development of

virtually all other high-technology industries. Furthermore, it is clear that a wide

variety of semiconductors with varying levels of technological complexity are

required to meet the demand for not just high-technology goods but also increasingly

mundane consumer goods such as VCRs and calculators which rely on

semiconductors as well.

The semiconductor industry being characterized by varying levels of required

technology, afforded opportunities for some developing countries, especially Korea,

to overcome the high entrance barriers of the industry. South Korea has been

particularly successful in making a name in the world semiconductor market while

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many American and European semiconductor manufacturers, since the 1970s, have

disappeared without trace.

Starting from scratch, the Korean semiconductor industry was fostered in the

mid 1960s through the assembly of labour-intensive, low technology semiconductor

devices for multi-national companies (MNCs) from advanced countries, particularly

the United States of America and Japan. However, despite this rather inauspicious

start, by 1995 three Korean semiconductor firms (Samsung Electronics, LG

Electronics and Hyundai Electronics) came to be ranked amongst the world’s fifteen

top semiconductor producers. Currently, the Korean semiconductor industry is

dominated by Samsung Electronics and Hyundai Electronics following the merger of

LG Semiconductor with Hyundai in 1998.

From the very beginning of its semiconductor ‘leapfrogging’ phase which

began in 1983, Korea has placed heavy emphasis on the mass production of memory

chips. As of 1996, Korea controlled around 40% of the world DRAM market,

allowing Korea a share of the world DRAM market equal to that enjoyed by its

Japanese competitors. Korea possesses world-class DRAM production and process

technologies. Samsung Electronics, for instance, announced at the end of June 1999

the successful development of the world's first 1 Gb DDR SDRAM (Double Data

Rate Synchronous Dynamic Random Access Memory) at a press conference held at

its US-based production complex, Samsung Austin Semiconductor.

These achievements are a clear warning to developed countries of the

prospect of Korea becoming a world-beater in cutting-edge technologies in the

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coming information era. It is therefore astonishing to note progress made by Korea’s

semiconductor industry, from a scratch starter to a world beater in less than fifteen

years. How has Korea managed to develop its semiconductor industry so successfully

in such a short period of time? What are the historical precedents which allowed

Korean firms such an advantage over international competitors? What effect did the

recent financial turmoil have on the industry, and what are the future prospects in the

wake of the economic crisis? It is the aim of this paper, using broad sources of

information, to firstly outline the historical background, recent economic and political

factors in an effort to provide answers to these questions.

2. STATE INDUCEMENT OF FOREIGN CAPITAL (1965-72)

5
 In the early 1960s semiconductor producers from the United States were

seeking skilled and relatively cheap labour in foreign countries. South Korea was an

ideal place for this purpose because of its highly skilled human resources, low wages,

and peaceful environment ensured by the authoritarian government. The first foreign

investment in the Korean semiconductor industry was made by the U.S. firm Komy,

in December 1965. Although the size of investment was relatively small, this was the

first important step in developing a domestic semiconductor manufacturing industry.

The first sizeable investment was made by Fairchild in 1969. At that time, it

was one of the largest semiconductor firms in the United States. Fairchild set two

preconditions : 100% ownership and free access to the domestic market. It was almost

impossible for the Korean government to satisfy these conditions due to existing

legislation on foreign investment .

The Fairchild conditions were discussed and reviewed by the Economic

Planning Board of Korea (EPB). The EPB decided to use its right to amend the

legislation governing foreign investment with the view to attract more foreign capital

and technologies in the future. Large foreign investment was crucial for the

government-devised plan to promote the domestic electronics industry. We can see

from this fact, that even laws and regulations were changed in order to create

favourable conditions for implementation of a government strategy to induce foreign

investment. As it was planned, many US semiconductor and electronics firms arrived

in Korea attracted by Fairchild’s success and established joint ventures as well as

exclusively owned firms (see table 2.1). Following the example of Toshiba in 1969,

Japanese companies joined this trend as well. (Hong 1997, 82-83)

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 Table 2.1 - Foreign Investment in Korean Semiconductor Firms (1965-1973)
Approval Name of Foreign Country Investment Foreign Location
Date by the Firm Investor Amount Ownership
EPB ($1000) (%)
12.1965 KOMG KOMG USA 76 25 Seoul
4.1966 Semikor Fairchild USA 2250 100 Seoul
7.1966 Signetics Signetics USA 1750 100 Seoul
12.1966 Korea-Micro KMI USA 224 49 Seoul
3.1967 Motorola Motorola USA 8000 100 Seoul
7.1968 IMEC Komy USA 1210 100 Seoul
1.1969 Minsong Han- USA 145 35 Seoul
American
7.1969 Toshiba Toshiba Japan 1400 70 Kumi
9.1969 Samsung- Sanyo + Japan 1500 40 + 10 Seoul
Sanyo Sumitomo
3.1970 Taehan AMI USA 2264 100 Seoul
3.1970 Electrovoice EV USA 50 50 Kumi
7.1970 Varadyne Varadyne USA 294 49 Kumi
7.1970 Korea IC Tesco USA 700 50 Kumi
12.1970 Toko Toko Japan 390 100 MAFEZ
9.1971 KTK Toko Japan 100 MAFEZ
7.1972 Rohm Rohm Japan 95 Seoul
11.1972 Tokyo Sanyo Japan 1624 100 MAFEZ
Silicon
5.1973 Sanken Sanken Japan 700 100 MAFEZ
Sources: Soh Changrok, September 1997

The creation of an electronics industrial complex was amongst the most

important objectives of the Electronics Industry Promotion Law. President Park was

personally involved in this issue. The Kumi Electronics Industrial complex was

officially opened in April 1970. The complex was granted numerous privileges and

government support in the form of infrastructure and facilities development. (Park, et

al 1987)

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 Masan Free Export Zone (MAFEZ) was established together with the Kumi

Industrial Complex, following the instructions of the Korean government. The main

purpose of MAFEZ was to attract Japanese investment. The port of Masan in the

southern part of Korea was especially selected because of its geographical proximity

to Japan. As it was forethought by the government, Japanese capital dominated in

MAFEZ, and in 1974 it accounted for more than 90% in terms of number of foreign

companies as well as in terms of the size of total investment. (Lee Changrok 1974,

1212-1257)

MAFEZ serves as an example of the government’s desire to attract as much

foreign investment as possible. At the same time, it shows the great dependence of

Korean economy on imported capital. MAFEZ made clear the state attitude towards

foreign capital. The government evidently favoured joint ventures over to 100%

foreign owned enterprises. (Soh 1997, 221)

The Foreign Capital Inducement Law was enacted in 1969, providing

different types of incentives for foreign investment such as five year tax holidays,

duty-free imports of capital goods and raw materials, and 50 per cent income tax

reduction. It is worth noting that the Foreign Capital Inducement Law did not have

detailed instructions regarding foreign investment, stating that the process of foreign

direct investment should be regulated by the Economic Planning Board and the

related ministries, including the Ministry of Trade and Industry. (Yoon 1989, 50)

The Korean government continuously promoted the electronics industry even

during the periods of massive foreign investment inflow. The government’s

dedication to developing the electronics industry was announced by President Park in

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the 1967 ‘State of the Nation Address’. Professor Wan- Hee Kim of the Department of

Electrical Engineering at Columbia University was invited by the Ministry of Trade

and Industry in an effort to help promote the Korean electronics industry. Mr. Kim

prepared a report on the issue and submitted it to the president Park in September

1967. The Scientific and Economic Council also prepared recommendations in

March 1967. Both recommendation packages, one by the Economic and Scientific

Council and the other by the MTI were almost identical and included the following

points:

- adoption of systematic industrial policies including the enactment of the

Electronics Industry Promotion Law;

- export promotion;

- long-term policies for the education of technical personnel;

- encouraging the chaebol to enter the electronics sector;

- various tax incentives;

- the establishment of the Electronics Industry Promotion Fund.

(EIAK 1989, 56-61)

These recommendations where again aimed at attracting foreign investment

and export promotion. In order for the industry to become more competitive in the

international market, the government tried to induce large conglomerates to enter the

electronics sector. Two chaebol, Taehan Electric Wire and Samsung, entered the

electronics industry in 1968 and 1969 respectively. One of the most important

milestones in the government’s vigorous efforts to promote the industry was the

enactment of the Electronics Industry Promotion Law in 1969. At the same time, The

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'Eight-Year plan for the Electronics Industry Promotion (1969-76)' was prepared by

the Ministry of Trade. This plan consisted of the following three main points:

1) developing 95 major products;

2) exporting $400 million by 1976;

3) establishment of the 14 billion won Promotion Fund.

(EIAK 1989, 76-82)

As a result of the these government efforts, the Korean semiconductor

industry grew rapidly reaching 5% of total exports by 1973. The share of private

investment into the electronics industry sharply increased in response to the

government’s promotion strategy. The number of firms in the electronics sector in

1968 numbered 120 (115 domestic, 3 exclusively foreign subsidiaries, and 2 joint

ventures). (EIAK 1989, 40) It is obvious from this fact that despite of various

incentives by the Korean government to attract foreign investment into the electronics

industry, the government policies did not bring the desired results due to negative

attitude towards 100% foreign owned enterprises, and constraints in accessing the

domestic market. The situation in the semiconductor industry was quite different from

that described above, as foreign capital and investment were crucial for the

development of this industry. (Hong 1997, 85)

As a part of the plan to promote the domestic electronics industry, The Korea

Electronics Industry Cooperatives (KEIC) were formed in 1967 by private producers,

under the patronage from the Ministry of Trade and Industry. The KEIC was created

in order to establish an effective communication channel between MTI and the

industry as a whole, rather than with individual producers. (EIAK, 1989, 86-90)

10
 Although big conglomerates at that time were not involved in the

manufacturing of semiconductors, the entry of Samsung into the electronics industry

in 1969 was an important occurrence for the long-term development of the industry.

Based on its early entry, Samsung managed first to capture the leading position in the

Korean semiconductor industry, and later, in the world market. Other companies

involved in producing electronics strongly opposed the entry of Samsung. All 59

members of the Electronics Industry Cooperative Association unified in an effort to

prevent the state's approval of Samsung's joint projects with Sanyo and NEC. They

were afraid that Samsung, already superior in many terms, would drive them out of

the domestic market. Responding to the efforts of existing firms, the government

placed two preconditions on Samsung’s joint projects:

1) The entire production was to be exported.

2) Items to be produced were restricted.

(EIAK, 1981)

Samsung's entry into the electronics industry illustrates well the relationships

existing at that time between the state and private manufacturers. Under pressure

from the opposition, the government placed certain constraints on the company

although it actually approved Samsung’s initiative. In March 1971, both of the

restrictions were abolished.

Summarizing the above it could be said that:

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 The creation of the Korean semiconductor industry was initiated as a result of

state efforts to attract foreign investment, and due to the willingness of American and

Japanese companies to develop off-shore production of semiconductor devices.

Based on the outward looking industrialization strategy, the state was

providing various incentives to attract foreign capital. The number of foreign

subsidiaries involved in semiconductor manufacturing was increased substantially due

to the enactment of the Foreign Capital Inducement Law in 1969. It should be noted,

however, that none of these companies represent major semiconductor manufacturers

firms, today.

Despite of the early entry of Samsung into the electronics industry,

semiconductors started to play an important role in the operations of the company

only after the mid-70s, when Samsung absorbed Korea Semiconductor Inc. In general,

we could say that at this stage the state was reasonably successful in the promotion of

exports and attracting foreign capital.

3. HCI PROMOTION PERIOD (1973 - 1979)

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 Due to the high levels of export dependency of the Korean economy, the

world economic downturn of the 1970s, the dismantling of Bretton Woods system, as

well as the announcement of the Nixon doctrine were quite detrimental. The first Oil

Shock of 1973 worsened the situation further. The policy of the United States

government to withdraw a portion of their troops from the Korea, as well as the

uncertainty brought about by the Nixon doctrine pushed the Korean government to

accelerate the implementation of heavy and chemical industrialization. Unlike Japan

and Taiwan, Korean government undertook a sharp expansionary economic strategy.

In the 1973 ‘State of the Nation Address’ heavy and chemical industry development

was announced by the Korean president as the new direction for economic

development.

The main principles embodied in the Heavy and Chemical Industrialization were stated as

follows:

1) six strategic industries shall be intensively promoted;

2) production shall be geared toward export except a small portion of import

substituting domestic consumption goods; and

3) manufacturing facilities shall be built on a large, internationally competitive

scale

Taking into account its high export potential, the electronics industry was

selected for promotion under the heavy and chemical industrialization program. The

electronics industry during that period grew rapidly and was focused mainly on the

production and export of consumer electronics. Rapid development of the electronics

13
industry brought about an increase in demand for semiconductors. The majority of the

domestic demand for semiconductors at that time was met by the Japanese producers.

As Korean consumer electronics were becoming more competitive in the world

market, Korean electronics producers frequently experienced shortages in supply of

semiconductors from Japan. This situation was usually becoming more acute during

the periods of market boom.

Most semiconductor related projects were heavily dependent on both foreign

capital and technologies which were not easy to obtain. This fact created constraints

for Korean companies in exploiting opportunities offered by the latest semiconductor

developments. Overcoming this structural dependence on imports was one of the

main objectives of the Korean government when promoting the electronics industry

under heavy and chemical industrialization plan. In 1975 the Economic Planning

Board further simplified regulations governing foreign investment to create a

favourable environment for inducement of foreign participation in the technology

sector. A six-year plan was prepared by the Ministry of Trade and Industry to promote

local production of six electronic components, including memory devices and silicon

wafers.

The economic boom of the 1970s began to decline in Korea from the mid

1980s. Taking into account the relatively low technological level of the

semiconductor industry in Korea, most of the above-mentioned projects depended on

the acquisition of foreign technologies. It was extremely difficult to obtain such large

quantities of modern technology as foreign (and especially Japanese) firms were quite

reluctant to transfer it to Korean chipmakers. Despite government plans to attract as

14
much foreign investment as possible into the semiconductor industry, it did not allow

more than 50% equity share by the foreign firms, with the result that the level of

foreign investment in Korea changed little.

Despite the vigorous efforts of government and the private sector in

developing domestic semiconductor manufacturing capability there were no

significant changes in the Korean semiconductor industry barring the entry of

Samsung and Goldstar. Priority was placed on the promotion of the heavy and

chemical industries and on the strengthening of country’s export potential. As long as

the exports of electronics were growing, the government did not expend large

amounts of effort in promoting the semiconductor industry despite its original plan to

do so. A major portion of already limited resources were being channeled to the heavy

and chemical industries making further investments into the domestic electronics

industry impossible. The promotion fund, initially planned to be instituted by 1969

upon enactment of the Electronics Industry Promotion Law, was not created until

1979 (EIAK 1989, 174).

“Though the state in this period could be viewed as truly capitalist

developmental state shown in its very strong push for heavy and chemical

industrialization, the achievements in the semiconductor industry were considerably

low. Unlike the Taiwanese state during the same period, the Korean state did not

launch any significant research projects or the construction of semiconductor

facilities, though these were planned as part of heavy and chemical industrialization.

The entry of Samsung and Goldstar in the semiconductor business was a real

breakthrough. These two semiconductor firms, however, largely remained as simple

assemblers, rather than independent manufacturers. Thus what was actually

15
achieved in the semiconductor industry during the second phase was not only far from

the original plans but also not directly linked to the subsequent development in

Korea” (Hong 1997, 94).

During the 1970s foreign companies continued to constitute the bulk of

domestic manufacture and export of Korean made semiconductors. The growth

(46.6% average annual growth rate during 1971-79) of the electronics industry was

based mainly on consumer electronics rather than on production of components and

semiconductor devices. As it was mentioned before, the rapid growth of the

electronics sector increased demand for semiconductors and led to the inducement of

large conglomerates such as Samsung and Goldstar into the semiconductor industry.

Since the beginning of 1980s Korean chaebol specializing in electronics production

started to invest heavily in the semiconductor business, and thus, this period is

considered to be a true start of Korean semiconductor industry.

4. THE TECHNOLOGY LEAPFROGGING EFFECT (1980-87)

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 Starting from the end of the 1970s, the Korean economy was in recession and

its GNP growth declined to 2.5% per year from an average of 9.9% from 1962 to

1978. In 1980 the Korean economy growth rate of -4.9% was Korea’s first experience

of negative growth since 1962. Inflation rates increased to 26.4% in the same year.

Trade deficits rose from $1.8 billion in 1978 to $4.4 in 1979 (World Bank 1980). Part

of the reason for this decline in economic performance may be attributed to external

factors, such as the second Oil Shock in 1979, and rising international interest rates.

Internal factors included the political instability that concluded with the assassination

of President Park in October 1979, (Lee 1980, 63-67) and the tremendous over-

capacity of, and inflation caused by, the heavy and chemical industrialization. (KDI

1981; Haggard and Moon 1990, Woo 1991, 178-82).

In April 1979, President Park's government announced the Comprehensive

Measures for Economic Stabilization (CMES) that differed greatly from the previous

expansionary economic strategy pursued by the government. The main components of

the CMES were the following:

1. "emphasis on comparative advantage rather than industrial targeting and

import substitution;

2. transition toward an economy led by the private sector;

3. a general reduction of state intervention and wider play for market forces;

4. emphasis on social development;

5. vigorous pursuit of macroeconomic stabilization" (Haggard and Moon 1990,

219).

In May 1980, Major General Chun Doo-Whan seized the power in the

country by means of military coup and immediately set about reshuffling the heavy

17
and chemical industries. Those in charge of the creation of CMES continued their

work during the Fifth Republic (1981-87). This gave a new direction to the industrial

policies of the 1980s. Two main objectives were to be reached under the new

industrial policy of the government; liberalization and stabilization. 'Indicative

planning' was to replace active state intervention under these changing conditions.

The new direction of the government policy was also influenced by the

increasing pressure from the developed countries for liberalization of the Korean

market. In response to this pressure in the beginning of 1980s the Korean government

had to introduce new trade and finance liberalization programs. (Yoffie 1983; Odell

1985; Hong 1988).

The Electronics Industry Law was amended in 1981 and a new, long-term

promotion plan for the Electronics Industry was announced by the Ministry of Trade

and Industry. Comparing to previous state devised plans, this plan was less

authoritarian in its tone and basically represented the government guideline for the

further promotion of the Electronics Industry.

In the meantime, by 1986 Samsung’s memory business appeared to be

becoming quite successful. This fact had a great resonance within the Korean

government and private circles, as it was a clear sign of Korea’s future competitive

advantage in high-tech industries.

“A major difference between the policy measures adopted in this period and

the previous ones lies not in the content, but in the nature and process of developing

18
semiconductor policies. In sharp contrast to the promotion efforts up until the 1970s,

the programs in the 1980s were 'indicative' in nature, meaning that the state simply

drew the guidelines rather than actively pushing the policy targets specified in those

plans. In addition, most of these policies were demanded by the private sector rather

than directly initiated by the state. In many cases, the state simply endorsed the

private projects already set in motion” (Hong 1997, 96).

One of the biggest differences between mid 1980s and the preceding period is

that in mid 1980s private businesses took the initiative both in terms of investment

and production. The role of the government in promoting the semiconductor industry

has declined to the degree where some private manufacturers called upon the

government to intervene in the sector (Soh 1997, 234).

In 1981 Samsung Electronics devised a plan to invest some $13 million in

semiconductor mass production facilities. Between 1981 and 1982 Samsung created a

semiconductor research center. In 1982, the former Chairman Lee Byung-chull, and

the founder of the Samsung Group announced that Samsung’s future strategy will be

largely focused on the semiconductor business.

There were several reasons for Samsung to specialize in the production of

DRAM. First of all, DRAM is the most widely used semiconductor device and

consequently has the biggest market share. Secondly, DRAM requires relatively

simple technology allowing its mass production. At the end of 1983 Samsung

developed the 64K DRAM. This was a big technological advancement followed by

many other achievements. In October 1984, Samsung developed a 256K DRAM,

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followed by a 64K SRAM in 1985, a 1M DRAM in 1986, a 256K SRAM in 1986, a 4

M DRAM and a 1M SRAM in 1988, a 16 M DRAM in 1990, a 64M DRAM in 1992,

and a 256M DRAM in 1995. Although the initial technology for production of these

devices was borrowed from abroad we can clearly see that Samsung’s developments

within the semiconductor industry have been astonishing.

Korean semiconductor manufacturers started to increase their foreign

operations and become more internationalized through alliances with foreign

companies. By 1985, all three leading Korean semiconductor producing

conglomerates (Samsung, LG, and Hyundai) established operations in “Silicon

Valley” in the United States with investment s totaling $1 billion. The main purpose of

such investments was the acquisition of modern technology, staff training and

coordination of business with overseas partners. (Business Korea, 1985)

As mentioned above, Korean semiconductor manufacturers were heavily

dependent upon foreign technologies. Therefore, initially between 9% to 23% of total

investment was channeled to the production facilities rather than research and

development. For example, between 1982 and 1986, 53 technology transfer contracts

were signed, from which 48 were related to wafer fabrication. (Park et al. 1987, 281).

The United States provided 36 out of the total 53 (68%) transfers. Japan was the

second main source transferring 13 technologies. Import of similar technologies by

large Korean semiconductor producers indicates the fact of growing competition

among them as well as lack of government coordination in regards to the imports of

semiconductor related technologies from abroad.

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 In 1985 Korean semiconductor producers were severely affected by a volatile

character of the world semiconductor market. The demand and price of memory

devices declined significantly. This forced most of Korean semiconductor companies

to amend their aggressive investment plans.

“Samsung, however, continued its push for the more advanced memory chips

and accelerated the development of more sophisticated DRAMs, though it was the

most severely hit by the price drop. Goldstar took a moderate step, and focused its

production for in-house consumption and the long-term OEM production for Hitachi.

Hyundai had to close down its pilot production facility in Silicon Valley, but

continued investments because it had considerable in-house demand from its

automobile firm. Daewoo also had to scale down its semiconductor project drastically.

When the market recovered in 1986, Daewoo was far behind in the semiconductor

business and never came back to the leading position, Samsung, LG and Hyundai

continued their business, and by 1986, the combined sales of these firms accounted

for more than 90 per cent of Korean wafer fabrication” (Hong 1997, 103).

Nonetheless, during that period South Korea along with other East Asian

nations significantly improved its ranking following the regional pattern of rapid

economic development (see Table 4.1)

Table 4.1 GNP per capita levels and country rankings (US$, current prices) 1962 and 1986

1962 Comparable b 1986 Comparable

21
 Rank a/ economies Rank/ Economies
amount Amount
Taiwan 85/ Zaire 38/ Greece
170 Congo, PR 3,580 Malta
South Korea 99/ Sudan 44/ Surinam
110 Mauritania 2.,372 Argentina
Hong Kong 40/ Spain 28/ Saudi Arabia
450 Malta 6,906 Israel
Singapore 38/ Greece 25/ New Zealand
490 Spain 7,411 Bahamas
Notes:
a- Ranking out of 129 countries
b- Comparable refers to countries immediately above and below the four dragons in
the World Bank Atlas listing.
Source: (Hobday M., 1995, p.15)

If we look at the sources of investment into the Korean semiconductor

industry we will observe the following picture: only 20% of the investment was

financed by the industry itself before 1986. The remaining 80% came in the form of

loans from domestic and foreign financial markets. Foreign borrowing accounted for

almost 32% of investments made until 1986 (Park et al. 1987, 278). Consequently,

about 48% of the required investment was provided by the domestic financial market

where the state still played a dominant role. For example, some semiconductor R&D

related projects received funding under government sponsored programs for Special

Research Projects.

Summarizing the above, it could be said that after 1983 large conglomerates

have taken the initiative in expanding production as well as R&D related activities

within the semiconductor industry in Korea. The difference between government

directed development of the semiconductor industry in 1970s and private sector led

22
reinforcement of the sector is evident. During this period chaebol participated actively

in the strengthening of the semiconductor industry not due to the incentives offered by

the government, but because of the importance of the industry itself for the future of

these groups.

5. FROM IMITATION TO INNOVATION (1988 - 1996)

1987 was marked in the history of Korea as another period of political

transition. Roh Tae-woo, a retired military general and a close friend of President

23
Chung became the next president of Korea representing Democratic Justice Party.

There was also growing pressure for democratization from different strata of society

including the labour unions, the opposition political parties, church and students. The

atmosphere was generally tense and further exacerbated by labour unrest and student

demonstrations.

Increasing demands from the United States for the liberalization of trade after

1988, import restriction by advanced countries as well as the appreciation of the

national currency, put Korean businessmen and politicians in a difficult situation.

Starting from the mid 1980s, Korea opened its wine, tobacco and insurance markets

and made an effort toward liberalizing the banking sector. Under pressure from the

United States, Korea was also forced to appreciate its currency from W890 per dollar

in 1986, to about W720 in early 1991. The main reason for this appreciation was to

reduce bilateral trade deficits ($9.9 billion in 1988) between Korea and the United

States.

All of the aforementioned changes resulted in decreased competitiveness of

Korean exports in the world market. For example, the annual growth rate of

electronics exports decreased from 35.4% in 1988 to just 9.5% in 1989 (Hong 1997,

105).

During this period the chaebol gained more and more independence. The

state could no longer disregard private sector opinion “given the dominant economic

position of the chaebol, and taking into account that their performance was a crucial

factor contributing to the government’s political legitimacy”. (Soh 1997, 234).

24
 Since 1988 there was an ever- increasing pressure for more equitable wealth

distribution. Huge profits earned by the chaebol were considered by a majority of the

public to be unfair. During that period government was frequently blamed for

facilitating the expansion of chaebol. As most of the Korean semiconductor industry

was owned by large conglomerates such as Samsung, LG and Hyundai, it became

very difficult for the government to continue to promote it.

There was also an external constraint in the form of US giant electronics

manufacturers. Following Vernon’s product life cycle theory (Vernon 1966, 1971),

US MNCs scattered their production facilities in different countries to increase their

competitiveness in the world markets, and transferred relatively simple technologies.

Based on these technologies, countries like Korea developed quite sophisticated

technologies able to threaten even US semiconductor manufacturers. U.S companies

already had unpleasant experiences with the Japanese leapfrogging and were

undertaking protective measures against transfer of technologies able to undermine

their competitive advantage in the semiconductor sector.

Because of the increasing pressure from the United States, Korea had to

comply with the international norms for intellectual property right protection that

absolutely prohibits reverse engineering by semiconductor firms. Since then, Korean

semiconductor firms have had to deal with numerous lawsuits, mostly by US

semiconductor companies accusing Korean producers of being in violation of patent

rights. The Uruguay Round and the resulting World Trade Organization (WTO) have

25
also increased restraints on the Korean government with regard to promoting

particular industries.

The state-private partnership in formulating and implementing science and

technology related policies has significantly increased during that time under the

pressure of the aforementioned constraints. At the same time, the state’s reduced

ability to promote the semiconductor industry was counterbalanced by the growth and

increased strength of chaebol.

Despite of the fact that the private research capabilities were increasing

rapidly during 1980s, still most of the advanced technologies were purchased from

abroad. Before 1993 R&D investment from private sources was around 14% of total

revenues, and it decreased to less than 10% afterwards. This does not mean that R&D

spending has decreased, on the contrary, the absolute amount of investment by private

companies in research and development in the early 1990s increased significantly.

In 1990 around US$650 million were spent by Samsung on R&D (30%

increase comparing to the previous year). Still this amount was smaller than of

Japanese Matsushita and Sony who spent US$2.3 billion and US$1.1 billion

respectively. (Asian Business, October 1990, pp. 28-29).

Table 5.1 points out the smaller size of Korean electronics companies

comparing to Japanese ones. For example Samsung’s electronics operations are

approximately 25% of Sony’s operations. Nevertheless the sales were frequently

larger comparing to the majority of European and US companies (except IBM). Even

26
during the global economic recession in 1992 were quite profitable, while many

Japanese, European and US companies suffered from heavy losses (Hobday 1995,

p.72).

Table 5.1 - Sales of Electronics by South Korean and Japanese conglomerates; 1991
and 1992 (trillion Won, US$ billions)

1991 1992 1992 net profits

Trillion Billion Trillion Billion Trillion Billion
Won US$ Won US$ Won US$
Korean
firms
Samsung 6.0 7.9 6.1 7.8 0.72 92
Goldstar 3.8 5.0 3.8 4.8 0.27 34
Daewoo 1.6 2.1 1.7 2.2 0.17 22
Japanese
Firms
Fujitsu - 29.0 - 30.0 - 0
NEC - 31.5 - 29.0 - -100
Sony - 32.0 - 32.5 - 210
Toshiba - 39.0 - 39.0 - 200
Source: (Hobday 1995, p.73)

We should also pay attention to the improved organizational capacity of the

chaebol involved in the semiconductor industry. Utilizing their worldwide presence

and marketing networks, planning and coordination departments of the chaebol were

able to efficiently gather information about the semiconductor market including future

market size, strategies of rival companies and related government policies in different

counties.

27
 Despite of the fact that the Korean semiconductor manufacturers attained

success in production of memory devices, many structural imbalances still remained

unchanged. For instance, according to 1995 figures, the share of memory products in

total semiconductor production was around 91% and only the remaining 9% was

devoted to non-memory devices. Such concentrated production patterns may be

explained by the shortage of advanced technology and by insufficient development of

related industries involved in production of materials and equipment.

Imbalances of the production structure led to the imbalances in the

export/import pattern. For example, around 90% of Korean semiconductor production

was exported, whereas, almost 70% of domestic semiconductor demand (mainly for

devices of relatively high sophistication) has been met by imports (see table 5.2 and

5.3) (Hong 1997, 113).

Table 5.2 - Domestic Market Sizes and Imports of Semiconductors, (1991-96

$million, %)

Year 1991 1992 1993 1994 1995 1996

Markets (A) 2,320 2,570 3,080 3,500 4,399 5,300

Markets (B) 1,879 2,107 2,402 2,660 3,035 3,604

B/A (%) 81 82 78 76 69 68

Notes: Estimated figures after 1995 Source: KSIA (1996), p.14.

Table 5.3 - Domestic Demands, Production, and Imports of Equipment and Materials,
(1990-95, $million)
Year 1990 1991 1992 1993 1994 1995

28
Equipment

Demand 717 904 874 1,392 1,977 2,174

Production 53 75 94 107 171 391

Import 664 829 780 1,285 1,806 1,783

Materials

Demand 508 591 714 946 1,314 1,872

Production 160 193 239 347 553 876

Import 348 398 475 599 761 996

Notes : Estimated figures after 1995 Source : KSIA (1996), pp.18-24.

To overcome such weaknesses, Korean companies were trying to devise

various globalization policies. After 1993, the Korean government strongly pushed for

creating industrial alliances with foreign and especially the U.S. semiconductor

companies. One of the reasons for forming such alliances was to press jointly for the

opening of markets in Japan as well as challenging Japan with technological

achievements. As the United States were competitive in cutting the edge technology,

it was thought to combine this advantage with Korea’s manufacturing strength and

highly skilled labour force to counterbalance the structural weaknesses outlined above.

(Kim Wan- Soo, April 1996, 15).

Newly industrialized economies have a slightly different pattern of

specialization comparing to the advanced economies. Catch-up hypothesis

(Abramowitz, 1990) argues that a relatively low income economies may be able to

advance faster than the ones with high income levels since they have an opportunity

to utilize technological innovations developed by the latter. (OECD, 1999, p.30).

When we look at figures for Korea (see Annex 1), a number of differences are

29
obvious. Intensity of Korea’s R&D as well as the number of scientific and technical

articles per unit of GDP is quite low in comparison to other advanced nations. In

general Korea’s innovative activity appears to be lower comparing to the advanced

countries and the transfer and adoption of foreign technology still plays an important

role.

Summarizing the aforesaid, we could say that during this phase the private

sector has been the major driving force of the semiconductor industry in Korea. Smart

decisions taken by Korean private businessmen were the main factors in Korea’s

leapfrogging in the semiconductor industry. At the same time, it should be noted that

such decisions were supported by the government, which at that time was still in

control of the country’s banking sector.

6. THE ECONOMIC CRISIS OF 1997 AND FUTURE PROSPECTS

30
 6.1 The Economic Crisis of 1997

South Korea has transformed itself from the position of being one of the

world’s poorest countries at the end of WWII into the eleventh largest economy in the

world by 1998. It has developed several industries including automobiles,

shipbuilding, and semiconductors. The semiconductor industry has become especially

synonymous with this economic expansion as it saw South Korea build a dominant

position in the memory market. But, in 1996, the collapse of prices within the world

DRAM market seemed to predict the imminent demise of Korea’s economic boom

years.

Korean manufacturers have historically experienced large increases in their

market shares of DRAM. According to 1995 and 1996 statistics, the three major

Korean manufacturers enjoyed at that time more than 30 percent of total

semiconductor production. Although the entire market share was less than that of

Japan, Korea was establishing its position in the market. From 1993 to 1995, the

DRAM market reached its climax with profitability being high. Under such

circumstances, Korean manufacturers invested heavily in order to rapidly expand their

production capacity in an effort to increase their market share in this highly lucrative

market. However, as a result of such hasty expansion in DRAM production capacity

and improvement of production process, toward the end of 1995, the supply of

DRAM came to exceed market demand. New production capacity was downscaled

continuously, but the problem of overproduction was never effectively addressed

throughout 1996 or 1997. As a direct consequence the market price of DRAM

dropped. Although Korean manufacturers continued to improve production

capabilities and strove to win further market share of DRAM, since 1996, both

31
earnings and profits were decreasing continuously. Finally, under bitter market

competition, semiconductor manufacturers started to incur losses in 1997.

Due to the expansion of its economy, South Korea has suffered from a

situation of chronic excess capacity, not only in the semiconductor industry but also in

automobiles and other products. Companies that could not make adequate returns on

their heavy investments began to default on loan repayments, consequently, foreign

investors lost confidence. Finally, the Won came under attack ending Korea’s years of

market boom.

Like Japan, South Korea’s banks became over-burdened with bad debts

during Korea’s rapid economic expansion and many of the bank’s assets were held in

the form of stocks or real estate rather than in hard currency. Nevertheless, there are

some significant differences between South Korea and Japan. Japan had very small

amount of foreign debt, especially in dollars. On the contrary, while Japan was

running large trade surpluses in years when the economy was booming, it was able to

amass significant holdings of foreign currency. In comparison with Japan, Korea had

a very large level of foreign debt and relatively low foreign capital reserves.

Many of Korea’s banking institutions may be classed as “merchant” banks.

They differ greatly from the kind of merchant banks which may be found in the

United States. U.S merchant banks specialize primarily in loans to businesses,

whereas, the Korean “merchant” banks specialize in short-term loans. Many of these

banks were established in 1972 in an effort by Korean government to draw money

from Korea’s illegal ‘curb’ money markets to legitimate banking institutions within

32
government control. Many of these “merchant” banks took on short-term loans from

international money markets to lend to their customers, taking advantage of

favourable exchange rates. The problem occurred when the customers started to

default. The merchant banks had insufficient reserves to pay back their offshore loans.

At the same time, there was an unusual problem with credit checking, “cronyism” and

other related issues in many Asian countries.

For several weeks during 1997, the South Korean government tried to survive

without requesting help from the IMF. But finally, in December, an agreement was

reached for $57 billion dollars of IMF loans to be paid to Korea. The won was

depreciated by 40.0% against the U.S. dollar, and Korea finally had to face the reality

of its situation. The IMF stand-by agreement included clauses that stipulated that the

government must let banks fail rather than bailing them out, and financial markets

must be thrown open to foreign investment. Other significant weaknesses brought to

public attention by the crisis included unbelievably high debt/equity ratios, massive

foreign borrowing and the lack of discipline within the financial sector.

“Since the typhoon of the International Monetary Fund hit the South Korean

Peninsula, the semiconductor industry in Korea has been among the most seriously

affected industries. As a result, the export of Korean semiconductors in 1998 fell to

$13.5 billion, 5% lower than the same period in 1997” (H.Y. Kim, 1999).

Due to the terms and requests of the IMF stand-by agreement, the Korean

government had to suppress funding to the semiconductor and automobile industries.

As a result, Hyundai Electronics refused to make a planned investment in Scotland,

33
UK and LG Semiconductor postponed indefinitely a similar investment project in

Wales, UK.

As a next step, the government, influenced by the IMF, pushed Hyundai

Semiconductor to merge quickly with LG Semiconductor. This merger in-turn

delayed investment into a new facility for the development and production of 256 Mb

DRAM, until the merger was complete.

Hyundai and LG negotiations regarding the terms and conditions of this

merger proved to be time consuming. In the meantime, at the end of 1998, Samsung

announced that it was going to complete its ninth fabrication facility for 64 Mb

DRAM by the first half of 1999. This would allow Samsung to keep its status of being

number one producer in the world memory device market.

The final decision regarding the merger of Hyundai Semiconductor with LG

Semiconductor was taken at the end of 1998. According to U.S. consulting firm,

Arthur D. Little, Hyundai was given the controlling stake of the merger. As a result of

this merger Hyundai becomes the second largest company in the world DRAM

market. By means of this merge r, the Korean government and the industry authority

assert that up to $2.5 billion of duplicated investment on R&D, royalties and expenses

for patents may be saved.

The financial crisis of 1997 caused the worst recession in Korea since the

postwar era and had a devastating impact on the economy of the country. Real GDP

fell from 5% to 10% before crisis to -5.8% in 1998. Unemployment increased from

34
pre-crisis levels of 2% to 6.8% in 1998 and 8.1% in March 1999. (Joon-Ho Hahm,

Frederic S. Mishkin, 1999).

6.2 The Post Crisis Economic Rebound

Avoiding years of decline and depression, the crisis affected economies of

East and South-East Asia are revealing a striking ability to recover rapidly to the

surprise of international spectators. The semiconductor industry is showing a similar

tendency toward recovery in response to the improving business environment. The

Korean Semiconductor Industry Association (KSIA) estimates that total

semiconductor exports in 1999, including those by assembly and packaging firms,

will reach $18.2 billion, an 11% increase compared to 1998. (H.Y. Kim, 1999).

When the crisis started, foreign investors and businessmen working in East

Asia thought they were the unluckiest people on the planet. One day they benefited

from an economic miracle and the next they fell into a financial crisis, as capricious

foreign capital fled the currenc y and stock markets, for no obvious reason.

The same foreigners, it emerged, thought in reality they were inefficiently

managed economies with an element of cronyism. Nevertheless, fortune appears to

be returning to them and the capital is flooding back in. It seems now that affected by

the crisis economies of East and South-East Asia are capable of making rapid

recoveries. Next, probably, will come a gaggle of books and articles promulgating a

new economic miracle.

35
 In South Korea, for instance, the recovery has been exceptional. Private

economists are forecasting 5 - 8% GDP growth this year. Thailand and Malaysia are

also rebounding quickly. Even Indonesia, which has experienced a 20% drop in GDP,

is expected to return to expansion at the end of 1999. (The Economist, 08/21/99)

Although a relatively quick recovery was forecasted by many economists, its

speed and magnitude has surprised even the optimists. Looking at the change in

sentiment in the stock markets we can see that over one year after the crisis those in

Thailand and Malaysia have almost doubled. The major indexes in Seoul and

Singapore are now above the pre-crisis levels.

Responding to the signs of recovery, consumer spending is growing

everywhere throughout the Asia. As domestic demand increases, so do exports (See

Graph # 1) within the region. Now, export volumes are soaring. The even more

speedy recovery of imports is actually decreasing current-account surpluses, but the

process itself shows us that a recovery of East Asian economies has actually started.

6.3 Asia/Pacific Semiconductor Market, Revenue Forecast, 1999-2003, Millions of Dollars

Graph 1.
25,000

20,000
Memory

15,000 Microcomponents
Digital Logic
10,000 Analog-Monolithic
Discrete
5,000 Optical

0
1999 2000 2001 2002 2003

36
 Asia/Pacific semiconductor consumption started gradual recovery during at

the end of 1998. It is expected to have positive growth in 1999 due to increased

production of electronic equipment.

According to Dataquest, the semiconductor revenue in Asia/Pacific will

increase by 14 percent in 1999 and total $35 billion. This follows a 4 percent decline

for 1998. Long-term regional revenue will grow at a 13 percent CAGR (Compounded

Annual Growth Rate) and reach $58 billion by 2003 (Graph 1).

Semiconductor consumption will be based on a stable growth of data

processing and communications applications. Micro components and memory

products will achieve the highest regional growth rates. Communications equipment

will also contribute to the rapid Asia/Pacific semiconductor growth. This application

will support the demand growth for ASICs, DSPs, ASSPs, and analog ICs (Dataquest,

Spring 1999).

6.4 Worldwide Semiconductor Market, Revenue Forecast, 1999-2003, Millions of Dollars

Graph 2.
100,000

80,000 Memory
Microcomponents
60,000
Digital Logic
40,000 Analog-Monolithic
Discrete
20,000
Optical
0
1999 2000 2001 2002 2003

37
 Dataquest forecasts that worldwide semiconductor revenue will grow by 12.6

percent in 1999, totaling $153 billion following a 7.5 percent reduction in 1998. By

2003 (Graph 2), worldwide semiconductor revenue is predicted to reach $244 billion,

which is a 12.4 percent compound annual growth rate for the five-year period 1998-

2003.

Growth is estimated to speed up in the year 2000, but is expected not to

exceed 20 percent, due to continued weakness in DRAM pricing through at least the

first half of the year. While economic conditions in Japan continue to be inert, the

worst of the economic crisis in the Asia/Pacific region appears to have been overcome.

Demand in the Asia/Pacific region is expected to partially decrease in 1999, but is

forecasted to hasten considerably in 2000. (Dataquest, Spring 1999).

After analyzing the worldwide semiconductor market revenue and growth

rate for 1999-2003, I feel it is pertinent to examine the semiconductor forecast for the

same time period including and excluding DRAM (see graph 3).

6.5 Semiconductor Forecast: With and Without DRAM 1999-2003

Graph 3.
45

40

35

30

25
+ DRAM
20 - DRAM
15 DRAM
10

5
1999
2000 0
2001
DRAM
2002 - DRAM
2003 + DRAM

38
 This Graph provides a somewhat different forecast. It shows the worldwide

semiconductor market growth rates for 1998 through 2003 for total semiconductor,

DRAM, and non-DRAM semiconductor (that is, total semiconductor, excluding

DRAM). The graph shows a somewhat more stable and flattering long-term

semiconductor market growth rate prediction when DRAM are excluded. It also

highlights the more volatile growth rate forecasted for DRAM (Dataquest, Spring

1999).

The information we may attain from this graph is important in helping us to

understand the difficulties in predicting Korea’s semiconductor market trends. The

forecast is complicated by the high share of DRAM in total semiconductor production.

6.6 Creation of World Semiconductor Council

One of the important developments in 1999 is the creation by the world’s

major semiconductor manufacturing nations of an organization aimed at lowering

trade and investment barriers against hi-tech commodities.

In a joint statement issued at European headquarters in Belgium, the new

organization, called the “World Semiconductor Council,” (WSC) announced its main

objectives as being “to implement market principles in creating barrier-free trade in

semiconductors by minimizing government intervention and discrimination”. The

WSC stated that it “condemns dumping” and appealed to the governments undertake

effective anti-dumping measures in compliance with the rules and regulations of the

General Agreement on Trade and Tariffs (GATT).

39
 “The competitiveness of companies and their products, not the intervention of

government and authorities, should be the principal determinant of industrial success

and trade,” the statement said.

According to the statement by the Korea’s Ministry of Commerce, Industry

and Energy the council will consist of representatives from Korea, the United States

the European Union, Japan and Taiwan. The meetings of the council will be held

annually with the aim to discuss the semiconductor related government policies in the

participating states.

“Until now, international semiconductor meetings focused on regulatory

measures aimed at opening up the Japanese market,” the ministry statement said. “But

the new system follows independent agreements made at the private sector levels

between the United States, Japan the European Union and Korea.”

The founding members of the WSC are the Electronic Industries Association

of Japan, the U.S. Semiconductor Industry Association, the European Electronic

Component Manufacturers Association and the Korea Semiconductor Industry

Association (Korea Herald, 06/11/1999).

40
6.7 Korean Semiconductor Market, Revenue Forecast by Korean Semiconductor

Industry Association (KSIA) 1998-1999 (Millions of Dollars)

$7,700 $7,554 $7,900

8000
7000 $6,218
6000
5000
4000 $3,238 $2,900 1998
1999
3000
2000
1000
0
Memory Non-memory Assembly

The semiconductor industry in Korea has been seriously affected by the East

Asian Financial Crisis of 1997. Even prior to the crisis, the semiconductor industry

had been influenced by the price drop in the world memory market.

As mentioned above, the export of Korean semiconductors in 1998 reached

$13.5 billion, 5% lower than the same period in 1997. Nevertheless, the Korean

Semiconductor Industry Association (KSIA) forecasts that the total exports in 1999,

including those by assembly and packaging firms, will total around $18.2 billion, an

11% increase compared to 1998 (H.Y. Kim, 1999).

Due to the decline in the semiconductor industry and the fall-out from the

IMF sanctions, equipment and materials industries in Korea experienced a serious

slowdown in 1998. There was virtually no new investments made by semiconductor

41
manufacturers in Korea in 1998 except the investment made by Samsung at the end of

the year.

“Samsung Electronics is restructuring its business around sophisticated,

value - added areas such as computer central processor units (CPU), application

specific integrated circuits (ASICs), and next generation wireless communications

and multimedia semiconductor products. Samsung is also planning to invest $1.2

billion to expand the company’s monthly production capacity of non-memory

products. With the expanded capacity, Samsung has projected sales of system LSI

chips will increase by at least 44% per annum, from $1.2 billion in 1999 to $1.8

billion in 2000, and further to $2.5 billion by 2001. At the same time Samsung plans

to structure its business around ‘system-on-chip’ devices, microprocessors, and Alpha

CPU, as well as on its mobile communications, multimedia and network products”

(Kim Chang Soo, 1999)

For the Korean semiconductor industry the future looks bright. WSTS

forecasts that the memory market in 1999 will expand by 13% to $14.6 billion, by

26% to $18.4 billion in 2000 and by 28% to $23.7 billion in 2001. The supply is going

to be supported by an estimated 13% to 16% annual growth of a market for personal

computers, as well as by the rapidly growing internet and communication applications.

(H.Y. Kim, 1999)

The September 1999 earthquake in Taiwan will strengthen the position of

Korean semiconductor and LCD manufacturers in the world market. According to the

Korea Information Society Development Institute (KISDI), the price rise in computer

42
parts is unavoidable due to interruptions in supply of Taiwanese semiconductors and

circuit boards. The price of DRAM was rising even before the earthquake with

Dataquest predicting a 0.4% oversupply. However, after the natural disaster in Taiwan

the world market is going to experience around 5% shortage of memory devices. The

price of TFT/LCD, one of the strategic products for Korean semiconductor producers

is also expected to rise due to the damage to Taiwanese production lines. It will be

also beneficial to the Korean semiconductor companies if the Japanese industries’

strategy to hinder the growth of Korean semiconductor companies through

establishing subsidiaries in Taiwan will fail. (Korea Herald, 14/10/1999)

Worldwide, the beginning of 1999 could be considered as a turning point in

the semiconductor industry after troublesome 1998. According to Dataquest, analog,

discrete, and optical semiconductor suppliers and distributors reported raising demand

and relative price stability. Early second quarter Dataquest reports show raising

demand for the majority of semiconductor products. DRAM price reductions that

began in the second quarter caused an insignificant growth decline in the second

quarter of 1999. The aforementioned price reductions caused concern throughout the

semiconductor industry over revenue expectations for the second half of 1999.

Nevertheless, world semiconductor industry continues to experience a return to

growth in the third quarter of 1999 with a strong fourth quarter forecast. (Dataquest,

Spring 1999)

43
 7. POSITIVE SIDES OF THE CRISIS AND IT’S LESSONS

Although in the short term Korea's economy was badly damaged, in the long

run, it will be able to recover, and build a more solid structure due to the following

reasons:

- Korea has adopted restructuring measures towards chaebol.

- Future investment plans will be prepared more carefully.

- The Korean monetary system is facing a rearrangement.

- Financing for Korean manufacturers will not be as easy as before.

- In terms of semiconductors, the country will focus on the domestic

production processes and materials especially for logic devices.

Another positive outcome of the IMF crisis is that most of Japanese DRAM

manufacturers have already decided to drop the production of memory devices, as U.S.

manufacturers did in the past due to low profitability and intensive competition

caused by the excess supply. There was an opinion that Korean DRAM manufacturers

will face the same problems within five years because of strong challenges from the

Taiwan semiconductor industry. However, due to the IMF, Korean manufacturers are

restructuring themselves and are becoming more competitive.

It could be said that the IMF provided the Korean semiconductor industry

with an opportunity to prolong the enjoyment of its leading position in the world

memory market.

44
 In order to ensure healthy economic environment and stability of the Asian

economies the following lessons should be learned from the crisis of 1997:

- Reforms aimed at allowing market forces to operate freely must be

implemented. Investment, production and export should not be subsidized or

assisted by the state but should instead be governed by market forces.

- Asian economies should not try to achieve economic recovery only

through exports. Subsidies to exports as well government designed export targets

will only further aggravate the existing problems. Government directed lending to

certain companies has already caused over-capacity in several industries,

including semiconductors.

- Any new financing for industry must be commercially feasible and not

government instructed. Loans to businesses must be entirely market-based and not

be below a benchmark rate based on the individual credit-worthiness of a

borrower. Companies that cannot operate in the free market environment must be

restructured or sold.

Decisive actions are to be taken to improve the quality and transparency of

corporate balance sheets through the adoption of international accounting standards.

The accounting system used should be clear enough to allow effective monitoring of

the financial performance of a company.

45
 8. CONCLUSION

As we observed previously, the role of the state in the development process

of the Korean semiconductor industry has changed with time. The Korean

government which put a lot of efforts into the promotion of heavy and chemical

industrialization in the 1970s was not in a position to offer similar incentives during

the take-off of the domestic semiconductor industry in the beginning of 1980s. This

was caused by structural constraints (discussed in Chapter 5) both in Korea and

abroad. Because of these changes in business and political environment, private firms

decided to enter the risky semiconductor business. In the following development of

the industry, the government and chaebol cooperated actively in elaborating and

implementing the semiconductor related policies.

We can say that the existing economic structure in Korea was not favourable

to innovation in the semiconductor industry. Partly this is because of the nature of

Korean industrialization that was focused on imitation rather than innovation. From

the very beginning it happened to be based on foreign designs and borrowed

technologies. At the same time, it was overstressing the importance of the economies

of scale. In this regard we can recall Alice Amsden stating (Amsden 1989) that that

learning is a new mode of industrialization for the late industrializing countries.

The main question is if Korea is able to change from imitator to innovator.

Starting from the 1970s, the Korean economical structure was very well suited to the

learner’s requirements and mentality. Eventually, a special set of conditions is

46
essential for innovation mechanism to start working. The institutional arrangements

that facilitated Korea’s rapid late industrialization based on foreign technologies are

now starting to have negative influence on the advancement of domestic technological

knowledge. (Soh 1997, 259)

Samsung’s example clearly illustrates that Korea is gradually becoming an

innovator in the semiconductor industry. Although skeptics claimed that it lacked the

technological capability to enter and remain competitive in the semiconductor

business, Samsung Electronics has, in only a decade, transformed itself from a mere

producer of discrete devices to the renowned leader in the world memory market.

(Kim Linsu 1997)

Recent developments in Korea indicate major changes in the national

environment. The strong authoritarian bureaucracy of the previous years has been

gradually loosing its power, while private businessmen have started to realize the

necessity to restructure their companies. Still and all, a switch from one system to

another is a quite complicated task to carry out.

South Korea’s admission to the OECD in 1996 concluded 35 years of rapid

economic development. The strong fundamentals conducive to this rise were - export

oriented industrialization, high rates of savings, and investment as well as highly

skilled and educated labour force. One year later, in 1997, the uncompromising

financial crisis sweeping over entire Asia region has damaged the Korean economy

significantly.

47
 “Tthe South Korean economy has been shaken to its very core and the ability

to recover to the prosperous levels of the past decades will require more structural

reform. With the rest of Asia recovering and with the re-emergence of the several key

semiconductor markets, conditions in South Korea are improving. However, long-

term growth depends directly on the government’s ability to implement economic

reforms that will bolster the financial sector, improve corporate management

practices and further open the once closed economy to more foreign

investment ”.(Cahners In- Stat Group 1999)

Graph 5 shows South Korea’s GDP rates/forecast according to Cahners In- Stat Group

Graph 5

12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0

South Korea: Real GDP Growth (Annual % Change)

Source: 1999 Cahners In- Stat Group – S19903SF

48
 Many of East Asian countries consider the on-going recovery as a return to

the phenomenal growth rates they enjoyed in early 1990s (see annexes No.2 and

No.3). Eventually such speedy growth will be much harder to achieve now than it was

in the past. Asian economies are more developed now than they were in the beginning

of their developmental take-off. They will retain the advantages of youth for many

years yet, but growth will depend less on injecting more people and capital, and more

on something rather harder - raising productivity. That demands comprehensive

reforms. If Asian governments will find themselves unable to implement their

promised reforms, they will fail to lay the groundwork for more efficient use of

capital and for faster growth in productivity not only in the semiconductor industry

but across the entire economies of their respective countries.

49
 Annex I

Semiconductor Classification by Device

Semiconductors

Integrated Circuits Discretes

Transistors Diodes Others

Linear Digital Hybrid

DRAMs

Memory Logic
Others

Microprocessor Application
Specific Devices

TVs, Radios Computers Watches, Calculators

Representative End-Users

Source: Soh Changrok, September 1997

50
 Annex II Income and Technological Performance in OECD countries, 19951
Country Income level, 1996 In
dicators of scientific and technological performance
GDP per head Gross Researchers Scientific Government Government Business Technological Technologic
Domestic al
of population Expenditure per 10,000 and technical financed R&D financing expenditure strength intensity,
as a % of OECD On R&D labour force articles as a % of of R&D on R&D as per US$ of 19954
GDP a% R&D
average as a % of GDP 1995 per unit 1995 as a % of total of business 19953
1995 of GDP R&D, 1995 GDP, 1995
19952
United States 140 2.6 74 20 0.9 34.6 2.1 410 10.4
Norway 128 1.7 73 21 0.8 43.5 1.4 .. ..
Switzerland 126 2.7 46 37 0.8 28.4 2.2 .. ..
Japan 121 2.8 83 15 0.6 20.9 2.2 354 10.6
Iceland 118 1.5 72 23 0.9 62.9 0.8 .. ..
Denmark 117 1.8 57 31 0.7 39.2 1.7 87 1.6
Canada 114 1.7 53 25 0.6 33.7 1.4 203 3.3
Belgium 112 1.6 53 20 0.5 26.4 1.4 111 1.8
Austria 111 1.5 34 18 0.8 47.6 1.1 125 1.9
Australia 107 1.6 64 24 0.8 47.5 0.9 .. ..
Germany 107 2.3 58 21 0.8 37 1.9 215 5.0
Netherlands 106 2.0 46 31 0.9 42.1 1.3 170 3.5
France 103 2.3 60 20 1.0 42.3 1.9 115 2.7
Italy 102 1.1 33 13 0.5 46.2 0.8 101 1.0
Sweden 100 3.6 68 41 1.0 33 3.9 147 5.3
United Kingdom 98 2.1 52 29 0.7 33.3 1.8 160 3.2
Finland 96 2.3 61 35 0.9 35.1 2.2 114 2.7
Ireland 92 1.4 59 16 0.3 22.6 1.4 69 1.0
New Zealand 88 1.0 35 29 0.6 52.3 0.3 .. ..
Spain 77 0.9 30 16 0.4 43.6 0.5 21 0.2
Korea 72 2.7 48 5 .. 19 2.3 25 0.7
Portugal 70 0.6 24 7 0.4 65.2 0.2 8 0.0
Greece 67 0.5 20 16 0.2 46.9 0.2 .. ..
Czech Republic 64 1.2 23 15 0.4 35.5 0.9 .. ..
Hungary 47 0.8 26 20 0.4 47.9 0.4 115 0.7
Mexico 36 0.3 6 2 0.2 66.2 0.1 15 0.0
Poland 35 0.7 29 17 .. 64.7 0.4 .. ..
Turkey 30 0.4 7 4 0.2 64.5 0.1 .. ..
1. Or latest available year.
2. Scientific and technological articles per billion of US$ of GDP. See National Science Foundation (1988).
3. Technological strength is determined by multiplying the number of patents with an index of their impact. This index measures how frequently a country’s recent patents are cited by all of a current year’s patents. The patents refer those
granted at the US Patent Office. Data are from CHI research.
4. Technology intensity compares the technological strength of a country with its GDP expressed in PPP$. See OECD, Science, Technology and Industry Outlook 1998 for details. Source: OECD calculations on the basis of the MSTI database.
CHI Research, National Science Foundation (1998), and OECD, Science, Technology and Industry Outlook 1998.

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 Annex III

Average annual rates of growth of real GNP (selected years).

Country/group 1960-69 1970-79 1980-88 1988 1991 1992 1993a 1994 1995 1996 1997 1998
Four NIEs
Hong Kong 10.0 9.4 8.0 10.5 3.9 5.2 5.6 12.9 6.1 10.8 11.7 -4.8
South Korea 7.7 9.5 8.7 15.9 8.4 5.5 6.3 14.4 19.7 6.4 -8.7 9.5
Singapore 8.9 9.5 7.0 10.0 6.7 5.6 6.5 22.4 19.7 10.6 2.1 6.0
Taiwan 9.5 10.2 7.5 9.5 7.0 6.7 n/a 8.1 7.9 4.6 4.0 0.1
ASEAN-4
Indonesia 3.4 7.8 5.8 7.5 7.0 5.5 6.0 12.0 14.1 12.4 -5.3 3.0
Malaysia 6.5 8.1 5.3 6.6 8.6 8.5 8.0 14.1 19.2 13.8 -1.0 0.2
Philippines 3.0 6.3 1.6 6.4 0.0 3.3 1.5 18.5 15.6 12.2 -1.2 7.8
Thailand 8.3 7.4 5.6 7.1 7.9 7.5 7.8 15.2 16.7 7.7 -14.9 7.7
Other Asia
China 2.9 7.5 9.2 10.2 4.6 12.0 10.0 -8.7 30.0 17.3 10.1 -1.7
Developed
Canada 5.7 4.7 3.1 4.3 -0.2 0.3 2.8 -1.1 4.9 4.9 2.7 -1.6
Japan 10.9 5.2 5.3 5.1 3.1 0.9 2.4 9.7 9.6 -10.6 -8.7 14.8
United States 4.1 2.8 2.6 3.6 0.4 2.2 2.5 5.8 4.7 5.1 5.8 -3.7
a – official 1992 estimates
Updated from Michael Hobday, 1995, p.14. (Source for all economies 1994-1998 - APEC Secretariat Web-site: www.apecsec.org.sg/member/gdp.html)

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Annex IV APEC Economies’ GDP figures (1989 – 1998)

Current Price GDP 1989 (a) 1990 (a) 1991 (a) 1992 (a) 1993 (b) 1994 (b) 1995 (b) 1996 (b) 1997 (b) 1998 (b)
(US$ billion)
Australia 292 296 283 300 285 327 353 395 394 394
Brunei Darussalam 3.5 3.6 3.7 3.7 4 4 5 5 5 5
Canada 575 574 561 564 553 547 574 602 618 608
Chile 29 30 32 35 44 51 65 69 77 77
China 356 370 399 452 599 547 711 834 918 902
Hong Kong, China 69 72 75 79 116 131 139 154 172 163.8
Indonesia 99 106 113 121 158 177 202 227 215 221.5
Japan 2817 2952 3079 3120 4275 4689 5137 4595 4193 4812.1
Korea 232 254 277 291 333 381 456 485 443 485.2
Malaysia 39 43 47 50 64 73 87 99 98 98.2
Mexico 234 244 253 260 403 421 286 329 403 348.6
New Zealand 44 44 43 43 44 51 60 66 65 59.5
Papua New Guinea 3 3 4 4 5 5 5 5 5 4.2
Peru n.a. n.a. n.a. n.a. 41 50 59 61 65 63.7
Philippines 43 44 44 44 54 64 74 83 82 88.4
Russian n.a. n.a. n.a. n.a. 173 279 348 434 450 394.9
Singapore 34 37 39 41 58 71 85 94 96 101.8
Chinese Taipei 153 161 173 183 223 241 260 272 283 283.4
Thailand 73 80 93 100 125 144 168 181 154 165.8
USA 5478 5522 5458 5637 6553 6936 7265 7636 8080 7783
Vietnam n.a. n.a. n.a n.a. 13 16 20 23 26 24
(a) figures are expressed in 1990 prices and exchange rates
(b) figures are expressed in 1997 prices and exchange rates
Source: The APEC Region Trade and Investment, http://www.apecsec.org.sg/member/gdp.html

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55
 List of Acronyms

ASICs Application Specific Integrated Circuits

ASSPs Application Specific Standard Products
APEC Asia Pacific Economic Cooperation
CAGR Compounded Annual Growth Rate
CMES Comprehensive Measures for Economic Stabilization
CPU Central Processing Unit
DRAM Dynamic Random Access Memory
DSP Digital Speech Products
EIAK Electronics Industry Association of Korea
EPB Economic Planning Board
GATT General Agreement on Trade and Tariffs
GDP Gross Domestic Product
HCI Heavy and Chemical Industries
IC Integrated Circuit
IMF International Monetary Fund
KDI Korea Development Institute
KEIC Korea Electronics Industry Cooperatives
KSIA Korea Semiconductor Industry Association
LCD Liquid Crystal Display
LSI Large Scale Integration
MAFEZ Masan Free Export Zone
MNC Multinational Corporation
MTI Ministry of Trade and Industry
OECD Organization for Economic Cooperation and Development
OEM Original Equipment Manufacturer
R&D Research and Development
SRAM Static Random Access Memory
WSC World Semiconductor Council
WSTS World Semiconductor Trade Statistics
WTO World Trade Organization

56