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March 22, 2007 5:17 pm

Hynix’s new CEO must hit the ground running

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Hynix Semiconductor, which has bounced back from the edge of bankruptcy to become the world’s second-largest memory chip supplier, is eyeing another big leap forward with a new leader.

Analysts say incoming chief executive Kim Jong-kap, set to take office next week, faces many difficult challenges. “The new CEO has lots of urgent and important agenda ahead of him, including building new plants, overcoming tariffs and finding a new owner,” says Kim Jang-yul at Hyundai Securities.

But one key issue has been dropped from Mr Kim’s agenda. On Tuesday, Hynix announced a cross-licensing deal with Toshiba to settle a thicket of patent infringement suits and countersuits in the US and Japan over flash memory technology. Hynix also reached a similar deal on Wednesday with Toshiba’s partner SanDisk. These agreements remove a significant legal liability issue for the Korean chipmaker.

Under Woo Eui-jei, chief executive since 2002 and a representative of Hynix’s leading bank creditor, the company gained financial strength and reinvented itself as a competitive memory chipmaker.

Hynix now controls 13.2 per cent of the memory chip market. It is only behind cross-town rival Samsung Electronics, which has a 28.1 per cent share, according to market researcher iSuppli. Hynix reported a net profit of Won2,055bn last year on operating profit margins of 33 per cent in the fourth quarter, among the fattest in the industry.

“Hynix’s success has been its top-notch fab process and production efficiency. Since the D-ram industry is all about scale, the company successfully increased its chip volume in a very productive way,” says Kim Nam-hyung, analyst at iSuppli.

But Hynix’s growth plans have been stalled by the government. It wanted to spend Won13,500bn on three new chip plants in Ichon, South Korea, by 2010 but the plan was rejected on environmental grounds. The company is now looking for other sites.

Analysts say a breakthrough in this project is the most urgent task for the new CEO. Mr Kim, who served in the government as vice commerce minister until February, also needs to find ways to overcome heavy tariffs imposed by the US, Europe and Japan.

Hynix embarked on aggressive growth after graduating from a creditor-led restructuring programme last year. The company was on the brink of collapse after the chip industry slump in 2000-2001.

After spending $3.6bn in 2006, the company plans to invest another Won4,400bn in new facilities this year, only a little below Samsung’s planned Won4,800bn memory chip capital budget.

Analysts attribute Hynix’s record earnings last year to its fast ramp up of its Wuxi fab plant in China, a joint venture with STMicroelectronics, and its smooth migration to 80-nanometre process technology.

Hynix is also aggressively migrating to more advanced technology. The company aims to shift to 66-nanometre technology in the second half, putting it ahead of all rivals except Samsung, which is expected to adopt 68-nanometre technology in the first half.

But some analysts caution that aggressive investment could lead to worse profitability in the short term given high cyclicality in the industry.

Hynix shares have been in the doldrums recently amid concerns over falling chip prices. But James Kim, vice president of investor relations, says market conditions will improve from the second quarter.

A longer-term problem facing Hynix is uncertainty over its ownership. About 4 per cent of Hynix’s shares, held by creditors, were freed up this year and creditors can start selling their remaining 36 per cent stake next year with the expiry of lock up restrictions.

Analysts say Hynix needs ownership clarity to make timely investments to maintain its competitiveness in the capital-intensive industry.

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