Updated from 6:13 p.m. EDTToday the official government word came down: Korean chipmaker Hynix will be saddled with a fat duty on all imports to the U.S., amounting to nearly 45% of the cost of its goods. The move is intended to level the playing field for DRAM makers such as Micron ( MU), which has complained that Hynix has unfairly benefited from heavy subsidies courtesy of the Korean government. But it's still unclear whether the decision will translate to a gain for Micron. On Wall Street, some analysts hailed the news as a net plus for the U.S. DRAM (dynamic random access memory) vendor. Others cautioned that in a global market, a penalty imposed in one country won't make much difference, because Hynix may compensate simply by trying to sell more chips outside American borders. More to the point, the continuing saga underscores that Hynix, one of the top few producers, remains in the DRAM game, despite persistent rumors that it was teetering on bankruptcy. That means the overcapacity that has weighed on DRAM prices shows no signs of disappearing. "There's no doubt, I think, that Hynix is not going to be allowed to go under. It would be too damaging to the Korean economy," said Richard Gordon, memory analyst for Gartner. "I think we're past the point of maybe six months ago when Hynix was looking very dodgy. Now that's past; they've restructured their debt and they're investing in technology." Gordon argues the imposition of a duty on U.S. imports is essentially meaningless. "Hynix isn't going to build DRAM and stick it in a warehouse in Korea; it's going to end up in the market somewhere," he says.
Chip Here, Chip There, Chips EverywhereIn practice, the company may react to the duty by shipping more chips into the Asia-Pacific market, which would have the effect of pulling down prices there. And falling prices in Asia would in turn force U.S. and European DRAM makers to lower their own prices -- in effect, canceling out the benefits of a duty. "I think in a global industry, customers will buy DRAM wherever it's cheapest," sums up Gordon.
Hynix in a FixIn 1999, Hynix claimed 21% of the worldwide DRAM market. By last year, its share had sunk to 16%, he points out. In the meantime, Samsung, Infineon ( IFX), Nanya and Micron have all seen net share gains, he says. "Everybody has gained market share and now they're trying to blame us," complains Tabrizi. Indeed, reflecting its abysmal business fortunes and slumping DRAM prices (which have since firmed somewhat), Hynix posted a massive quarterly loss of $876 million for the quarter ended in March. In a statement, Hynix CEO E.J. Woo called the penalty "outrageous," suggesting it's motivated by political concerns. "The only possible explanation is that the DOC has decided to use this case to pressure the Korean government on the question of economic restructuring," he said. Practically speaking, the duty must pass one more U.S. government hurdle before it goes into effect. Following the Department of Commerce decision, Hynix now awaits a ruling from the International Trade Commission, a separate U.S. agency. That decision is expected on July 31. The ITC must decide that dumping poses a threat or potential threat to the U.S. DRAM industry in order for the DOC's duty to become effective. For now, some analysts see upside for Hynix rivals in today's news. "I'm surprised, frankly, that they've lasted this long -- I think this does make life a little more difficult for them," says Dan Scovell, an analyst at Needham. Not only does Hynix face a dumping penalty imposed by the European Union, but it's rumored that competitors in Taiwan and Japan may press their governments to pursue similar dumping charges against the company as well, he notes.
"Our thesis is that it's certainly negative for Hynix, therefore it's probably positive for all the other DRAM guys," says Quinn Bolton, an analyst at Fahnestock. "Hynix has about a 15% share, so it's a pretty sizable player in the DRAM market facing U.S. tariffs. What the tariffs probably serve is just to limit supply from one of the major players into the U.S. markets, which will effectively tighten or potentially constrain supply to the U.S. market, therefore resulting in a better pricing environment for other DRAM players." That would benefit Samsung, Micron and Infineon.Yet Hynix remains in the game, he concedes. Indeed, on the same day the decision was announced, Hynix trumpeted that it was the first DRAM company to be qualified by Intel ( INTC) for a new memory component. "I don't know if you can rule them out yet, based on achievements like the one announced this morning," says Bolton. Meanwhile, other DRAM market watchers question whether the DOC decision amounts to anything more than a temporary distraction. "It really doesn't affect how we look at Micron in the grand scheme of things. The competitive issues in the DRAM market are going to remain pretty much the same," says Clark Fuhs, an analyst at Fulcrum Global Partners. Agreed Gartner's Gordon, "Our view of this is that fundamentally the market remains oversupplied. If you just take a step back, what determines the pricing at the end of the day is global supply and demand, and at the moment we're still oversupplied and the demand side is very weak now." That doesn't seem likely to change much in the second half of the year, he added. Tuesday, Micron shares hardly budged, however, losing 3 cents, or 0.2%, to $13.16 a day before it reports earnings. Infineon also was nearly flat in trading, gaining a penny, or 0.1%, to $10.57.