Vision repaid with growth

These days Hynix executives like to brag that Samsung Electronics looks to the smaller South Korean chipmaker as a benchmark.

“The top management is pushing their working-level people very hard – go to Hynix and look at their secret. They spent nothing but in the end gained 15 per cent Nand market share. How could they do that?” laughs Kwon Oh-chol, senior vice-president of strategic planning at Hynix. “So they have a lot of stress.”

While Samsung remains the industry giant, such a tale highlights Hynix’s metamorphosis from a company struggling to stay afloat to a competitive producer of Nand flash chips used in digital cameras and MP3 players, and of D-ram that powers computers.

Hynix’s secret is efficiency. By increasing the productivity of facilities and workers, Hynix has become the world’s most cost-efficient chipmaker. Three years ago it produced 225,000 memory wafers a month but has since more than doubled output.

The company’s M10 plant in Ichon, south of Seoul, is a good example of how Hynix, once on the brink of bankruptcy, streamlined procedures and invested a minimal amount to give its rivals something to worry about.

The chipmaker began to produce 4,000 12-inch wafers in October 2004, when it renovated the plant. But by the end of this year, it is aiming to churn out 50,000 a month at the plant, where automated production lines operate 24 hours a day.

“We spent far less than our competitors yet we increased our output capacity and we gained more market share,” Mr Kwon says. “The secret is all about our efficiency or productivity.”

Hynix is the fastest-growing chipmaker, with its 2005 revenue rising 23.4 per cent to $5.7bn, according to Gartner, a market researcher. The company reported an operating profit margin of 27 per cent in 2005, the second highest after Samsung among memory chipmakers.

Conversely, Micron Technology reported a 2 per cent margin, and Elpida Memory and Infineon Technologies suffered -2 per cent and -10 per cent margins respectively.

“This earnings superiority at Hynix, we believe, is due to enhanced cost competitiveness and richer product mix in D-rams, and successful diversification into Nand flash through efficient utilisation of existing fabs” Deutsche Bank says in a recent report.

In spite of being a latecomer, Hynix has become the world’s third-largest flash memory chipmaker with a 12.7 per cent market share, behind Samsung Electronics’ 52.9 per cent and Toshiba’s 21.9 per cent, according to iSuppli, another market researcher. And the company is determined to increase its market share further in the lucrative market, challenging its bigger rivals.

Hynix is set to start on its next phase of growth through aggressive spending. The company is planning $3.6bn spending on facilities and equipment this year, including its joint venture plant in China with ST Microelectronics. And it estimates that it could spend $20bn over the next seven years, and may tap financial markets, if necessary, to finance capacity expansion.

The planned investment is much more than other memory chipmakers such as Micron and Infineon, but is still dwarfed by that of Samsung, which has earmarked about $4.6bn for its memory business this year and plans to spend $33bn over the next seven years.

But Hynix is trying hard to reduce the gap with Samsung by investing heavily in 300mm production lines and strengthening its strategic alliances with other chipmakers such as ST Micro and Taiwan’s Promos.

The increasing portion of premium products including flash memory chips has reduced Hynix’s exposure to the volatile industry cycle. But analysts remain concerned about its ability to tide over cyclical downturns since Hynix has sold its non-memory, flat screen and mobile handset businesses in the restructuring process.

“Memory business is very volatile so there is always a potential risk. Hynix is basically more exposed to an industry cycle than its competitors, because it is a pure memory producer,” says Kang Sang-wan, an analyst at Lehman Brothers.

Hynix shares recently took a pounding as flash memory chip prices fell more than expected amid growing concerns that the market may face oversupply, with chipmakers expanding capacity rapidly.

But Mr Kwon remains optimistic, saying that lower prices will spark more demand in the long run and its migration to more advanced technologies will help cut costs.

“Last year was a good year. This year, it may not be as good as last year, but it will still be a good year,” he says.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.