Reference no: EM132278411

Case Study HYNIX SEMICONDUCTOR OF SOUTH KOREA AND RESTRUCTURING

As noted, one means Korea had used to formulate its economic growth has been to rely on a business form called chaebol. These business groups were typically active in a very wide range of businesses and were also officially favored by the government (the organizational structure of a business group will be discussed more in Chapter 13.). One aspect of the government support was that the firms carried relatively large debts from banks because they were viewed as low risk. This structure served the country well until the value of the nation’s money (the won) rapidly dropped in value in 1997. The result was that the large debts held by the chaebols could no longer be serviced because their debts were valued in dollars, which did not drop, and they were generating Korean Won, which now took many more to be equal to a dollar. This created a downward spiral in the economy as many businesses began to fail and created an economic crisis in Korea, popularly referred to as the IMF crisis. This is because the general population blamed the IMF-imposed monetary controls for the crisis. One troubled firm that emerged from this difficulty was Hynix. The firm was created in 1999 when the government directed that Hyundai Electronics Industries take over LG Semiconductor. This was accomplished by having different chaebols combine their semiconductor units into one entity. The new entity also took on the existing firms’ debt. This situation was made more difficult as the semiconductor market went into decline in 2001 with the prices of semiconductors dropping an estimated 80 percent. This resulted in the prediction for the firm’s failure. However, management began an aggressive turnaround effort in 2000. The firm turned much of its debt into equity in 2001; many of the banks that held that debt was owned by the government and encouraged officially to make the exchange. The existing shareholders’ equity was diluted by this debt-for-equity swap, but it was better than the firm going into bankruptcy. Additionally, this allowed the firm to limit its debt payments. The firm then also began aggressive cost-cutting measures. These measures included not only laying off employees but selling five business units. Both actions culturally are not widely done in Korea. The crisis situation facing the firm gave it greater cultural flexibility in making such changes. The operational changes were so significant that within a few years the firm became one of the world’s most efficient manufacturers. A key partner in these efficiency moves was the firm’s unions. The union movement in Korea is quite strong, and the firm’s unions became active players in helping to increase the success of the firm. The active-union movement in Korea is unique in Asia, which has notoriously weak unions and a very unsupportive environment to even seek to organize unions. In many nations, union organizers lives are still threatened for their beliefs. Another key component were the ethical standards pursued by the firm, which included an aggressive effort to create transparent operations and finances in which individuals clearly can see what the actions were and why they were taken. Historically, Korean firms’ transparency was low. The move to international standards on transparency encouraged confidence by suppliers, customers, and investors, which also aided the firm’s recovery. Although the firm in 2005 was fined $185 million dollars in the United States for price fixing of dynamic random-access memory (DRAM) chips. U.S. computer makers, including Dell and Gateway, claimed that inflated DRAM pricing was causing lost profits and hindering their effectiveness in the marketplace. The U.S. government then charged a variety of firms including Hynix under antitrust laws and won. Here are a few key points in the company’s history: 2007 Achieved the top-level operating profit margin in the firm’s history Appointed Mr. Jong Kap Kim as the new chairman and CEO 2006 Posted record high revenues Established global manufacturing network with complete construction of Hynix-ST Semiconductor Inc. a wholly owned manufacturing subsidiary in China 2005 Emerged from Corporate Restructuring Promotion Act ahead of schedule Signed System IC Business Transfer Agreement with System Semi- conductor 2002 Sold HYDIS, TFT-LCD Business Unit 2001 Spun off Hyundai Syscomm, Hyundai CuriTel, and Hyundai Networks 2000 Spun off Hyundai Image Quest and Hyundai Autonet Today Hynix is the world’s sixth largest semiconductor manufacturer in the world and is argued to have the largest market share for semiconductor chips in the fast-growing China market. The restructuring of the business group was critical to this success. Interestingly, because the economy of Korea has recovered since the 1997 crisis, such reform occurs far less frequently today. Choe, Sang-hun. (2005, September 2). Hynix has become comeback darling. International Herald Tribune, pp. 1, 8. Lee, J. (2004, April 29). S. Korean Hynix eyeing China venture.

1. Discuss why you think business groups have developed in environments, such as Asia but not in North America? (We will discuss this issue later in the book to a greater degree.)

2. Why do you think South Korea has developed a tradition of strong unions when most of the rest of Asia has not? How will this impact your business dealings in the country?

3. Why do you think the effort to reform business groups has now slowed as the economy has improved, especially when the result for Hynix looks so good?