Statement of Steven R. Appleton
Chairman, President and Chief Executive Officer of Micron Technology, Inc.
Regarding the Financial Crisis in Asia
Before the Committee on Banking and
U.S. House of Representatives
February 3, 1998
Good morning Mr. Chairman and Members of the Banking Committee. My name is Steve Appleton, and I am the President, CEO and Chairman of Micron Technology. Micron is the largest, and in fact the last remaining, United States producer of Dynamic Random Access Memory, better known as DRAMs, and recognized as the key memory semiconductor used in everything from computers to defense systems to satellites. I would add that we are the second largest worldwide in this area and among other products we produce, we are the ninth largest maker of personal computers in the United States. We employ over 13,000 people, with significant operations in Idaho, Utah, Minnesota and North Carolina.
I appreciate the opportunity to testify here today regarding an issue that has been threatening the existence of my company for over a decade. I think we all realize the financial situation in Asia and its ramifications for the U.S. economy are complex issues, with a great deal of speculation being injected, and I applaud your efforts to ensure that there is input from all sides. I had the opportunity to listen to most of the testimony in the afternoon hearing last week, and I was encouraged that almost everyone testifying agreed that the current crisis is a result of unsound economic practices by many Asian countries and that assistance without reform will only result in a much greater crisis at a future date.
But more importantly, I hope this committee will not subscribe to the oversimplified notion put forth by others, that if we merely divert enough funding into the Asian market, we will avoid a global economic meltdown. The Administration put forth an admirable effort to install and implement conditions on the initial money provided by the IMF. But as we all know, once the cat is out of the bag, it is difficult to implement greater control. In other words, since we had already funded the money, it was very difficult to then back up and require new conditions.
However, we have an opportunity with any new funding, to require well defined and enforceable reform measures. In the next few minutes, I hope to further illustrate that without adequate conditions, it would be better, by any measurement, to provide no money at all. We would simply be rewarding and perpetuating unsound economic practices that have created the current crisis. And let me add that the "inevitable wreck" next time will be far more costly than this one.
It is well known that Micron has been involved in several dumping cases regarding the non-commercial, predatory practices of Asia, and during recent years I have testified on the topic of international trade before both the House Ways and Means and Senate Finance Committees. In other words, I have been barking about this problem for quite some time, and in fact, have watched one U.S. company after another forced out of this important product area. And now, much of what I said has come to pass, and it is those very same practices that have brought Asia to the brink of economic disaster.
The United States and the international community have not been direct enough in dealing with predatory practices that do not embody market-based mechanisms. Long-term sales below cost and unsound build-up of industrial capacity can only lead to bankruptcy in the long run. United States taxpayers are now being asked to pay the price for those practices and for that failure.
Expansion of the Korean Semiconductor Industry Played a Large Role in Precipitating the Current Economic Crisis in Korea
As is now widely recognized, and as we have already heard today, South Koreas current economic crisis stems from the Korean governments practice of directing lending on non-commercial terms to promote the rapid expansion of favored export-oriented sectors. When world markets could not absorb the resulting excess production capacity, the prices for Koreas major export products declined sharply, thereby threatening Koreas ability to repay the massive foreign currency loans used to underwrite the aggressive capacity expansion.
While characteristic of all three of Koreas largest export sectors semiconductors, automobiles, and steel this pattern of rapid overexpansion, excess capacity, and declining world market prices has been particularly marked in the memory semiconductor sector. Backed by government-directed borrowing, and targeting 90 percent of its production for the export market, the Korean semiconductor industry rose in a few years from an insignificant producer to one of the worlds largest, capturing nearly 40 percent of the worldwide market for memory chips. The three Korean semiconductor producers achieved this by aggressive, highly-leveraged investment in new production capacity at a rate far exceeding that of any other country, and at a rate that could not be economically justified. The result of this additional production capacity has been a worldwide glut of memory semiconductors, and an unprecedented two-year downturn in the industry that has forced most producers to sell memory chips below their costs of production (dumping). As a result, Micron is now the only remaining U.S. semiconductor company producing DRAMs in the United States.
Alan Greenspan, Chairman of the Federal Reserve, has recognized the role played by the Korean semiconductor industry in precipitating this crisis in his testimony before the Joint Economic Committee on October 29, 1997. He noted that "the glut of semiconductors in 1996 suppressed export growth, exerting further pressure on highly leveraged businesses."
The uneconomic nature of the investment decisions of the Korean semiconductor makers cannot be emphasized strongly enough. I will give you several examples: LG Semicon, one of the three Korean DRAM manufacturers, spent $2.4 billion on new capital investments in 1997 a figure that exceeded its total revenue in that year. LG had to borrow to finance even its day-to-day operations. Another manufacturer, Hyundai Electronics, currently has a debt-to-equity ratio of 850 percent. This means that Hyundai has outstanding loans that equal 850 percent of the total value of the company. By contrast, the average debt-to-equity ratio for U.S. semiconductor makers is about 30 percent. Electronics Buyers News recently reported that Hyundai Electronics plans to invest US$4.5 billion in 1998, despite the fact that, even with distortive accounting treatment of foreign exchange losses, Hyundai will have a negative $1.8 billion cash flow for 1996 and 1997 combined.
If these were companies operating in the United States, they would have two choices bankruptcy or undertake a massive belt-tightening policy, by cutting capital spending and bringing output back into line with current demand. Amazingly, the Korean semiconductor companies are doing neither. In fact, far from going out of business or scaling back production as might be expected during a period of persistent oversupply, they are sticking by their original investment plans and have, at the behest of the Korean government, launched a massive export campaign to export even more semiconductors in 1998 than they did in 1997. Samsung Electronics, for example, announced on January 5 that it will target exports of $14 billion in 1998, up a full 17 percent over Samsungs performance of last year. Korean producers are now producing in record volumes, and selling that production at prices that are well below their costs.
Government encouragement and sponsorship of this export surge is unquestionable. As Kim Chang Ro, director of the export division of the Ministry of Trade, Industry and Energy, said in December, "To overcome this crisis, export promotion is the most important policy of the country." He went on to add, "We are going to try to have the foreign capital investment to support our industry and support exports." The vast majority of these exports are targeted for the U.S. market, and U.S. companies like Micron will bear the consequences of this export surge.
Why do the Korean semiconductor makers think they can possibly afford to do this? The answer is simple. They are an industry that was created and fostered through the clubby, secretive, and non-commercial relationship of the Korean government, the Korean banks and the family-run chaebol. Given this history, and the fact that they are the single largest export industry in Korea, they simply cannot believe that they would be allowed to fail. They are counting on the infusion of capital from the IMF and eventual second-line-of-defense bilateral loans to provide sufficient liquidity to keep them going. In fact, the Korean semiconductor producers have been telling their equipment suppliers in Japan and the United States that as soon as they get the IMF funding worked out, they are going to be able to accept delivery of new capital equipment purchases. I find this extremely disturbing.
What does this mean? It means, basically, that these companies would not be expanding, and would, perhaps, be forced out of business, if it were not for the IMF funding U.S. taxpayers are being asked to fund foreign corporations that compete unfairly and destroy U.S. jobs.
The Korean Economic Model Has Been Harmful to U.S. Semiconductor Producers and Left Unchecked will Cause Further Injury
Government support for the creation and development of the Korean semiconductor industry has permitted Korean chip producers to move from an insignificant market share to become the third leading global producer of semiconductors today. Korean semiconductor sales grew in value eightfold from 1991 to 1996, with approximately 90% of all Korean production going to export markets. The rapid expansion program embarked on by the Korean producers, with the help of the Korean government, has resulted in semiconductors becoming Koreas single largest export product, accounting for approximately 14% of total exports.
Moreover, the overwhelming proportion of Korean production has been in one product area memory semiconductors, primarily DRAMs which accounts for more than 80% of Korean semiconductor production. Koreas overreliance on a single product as the driver for its export-led growth policy has proven to be extremely imprudent. As the Korean industry expanded DRAM capacity to capture even greater market share, it contributed to global oversupply, which in turn precipitated a collapse in the DRAM market prices.
The impact has been particularly destructive in the U.S. market, where Korean overcapacity has directly contributed to a crash in semiconductor prices that started in 1995 and continues today. The U.S. market has been and remains the single largest destination for Korean semiconductor exports. The resulting supply glut caused the spot price of memory chips to fall from $50 for a 16-megabit chip in December 1995 to under $2 at the end of 1997, a drop of 96 percent. For the U.S. industry, this price decline led to drastically reduced profit levels and a prolonged delay in the industrys own plans to replace aging production facilities.
Price declines of this magnitude have been devastating for Micron. In 1995 we announced that we would be constructing a multi-billion dollar, state-of-the-art fabrication facility in Lehi, Utah. In 1996, we were forced to put completion of the project on hold because of suppressed prices and resulting low profitability. This facility is slated to employ 5,000 people. We will not start that plant until we can do so profitably. The Korean producers need to stop flooding the market with dumped product. Rational companies cut back production when supply exceeds demand.
The economic fallout from the overexpansion of the Korean semiconductor industry and its resultant flood of low-priced exports to the United States can only be understood in the context of the industrys dynamics. First, semiconductor production is extremely capital-intensive, with a single fabrication facility costing $2 billion or more. At its inception and throughout its history, the Korean semiconductor industry has obtained an enormous competitive advantage through access to resources underwritten by the Korean government. The pace and scale of the capacity and market share expansion of Koreas semiconductor industry is simply unprecedented in the history of the electronics industry. No other country has moved so quickly from the position of insignificant outsider to market leader in such a capital-intensive industry.
Second, semiconductors such as DRAMs are a commodity product, and therefore are highly price-sensitive. When an industry such as semiconductors is effectively championed by the state, as occurred here, it allows the industry to produce and sell its product in an economic vacuum without true regard to market forces.
This basic strategy was successfully employed by Japanese producers in the 1980s, and the result was the near extinction of the U.S. semiconductor industry. During that period 9 U.S. producers went out the DRAM business, including National Semiconductor, Motorola, Fairchild, AMD, Intel, and Mostek. Today, accelerating foreign government targeting of the semiconductor industry in Korea and other Asian economies foreshadows the prospect of a much larger and even more devastating period of excess capacity, predatory pricing, closed markets, and unfair competition.
As noted, Korea exports 90% of its semiconductor production, and the excess capacity in memory semiconductors has led Korean producers to sell well below their costs of production in 1996, 1997, and into 1998. Under international standards this amounts to dumping, which is condemned by the World Trade Organization. The U.S. Commerce Department has already made two findings of dumping by Korean semiconductor producers, including an existing antidumping order on Dynamic Random Access Memory semiconductors (DRAMs), and a preliminary finding of dumping of Static Random Access Memory semiconductors (SRAMs) made last year. In addition, the European Union has had an antidumping undertaking in place to counteract the pricing practices of Korean DRAM manufacturers, and has recently concluded an agreement with those same producers under which the companies are required to monitor prices and costs to avoid dumping.
U.S. memory semiconductor companies continue to suffer financial injury as a result of Korean dumping. The growth of jobs in this sector has been stagnant over the past two years. U.S. producers have drastically reduced the investment in the new plant and equipment that is necessary to stay on the technological cutting edge in this industry. Micron and Texas Instruments (who produces DRAMs overseas) cut capital spending by 42.7 and 33.5 percent, respectively, in 1997 over 1996 figures. In July of this year, Motorola, who had gotten back into the DRAM business in the late 1980s, announced that it was exiting the DRAM business altogether, an industry it had helped to pioneer. There is now only one U.S. manufacturer of DRAM semiconductors still producing DRAMs in the United States -- Micron. All the others have been driven out of the business. The damage from Korean targeting is not limited to DRAMs, however. Producers like Cypress Semiconductor and IDT who make another type of memory semiconductor, SRAMs, have also had to cut production and investment plans because of competition from Korean producers.
Thus, for companies like Micron that have been directly injured by Koreas overexpansion of its semiconductor industry, the stakes in the IMF proposal are enormous.
IMF Funding Must Not Be Used to Bail Out the Korean Semiconductor Industry
I believe that it would be devastating to permit U.S. taxpayer dollars to be spent on bailing out the Korean semiconductor industry, particularly since their irresponsible and non-commercial actions led to this crisis. I simply cannot believe that the U.S. Congress or the American people would allow this to happen. What we need to do is to simply let market mechanisms work. This may mean that some of the Korean producers will go bankrupt, but we do not tolerate corporate pork within our own borders, so why would we provide funding to save insolvent industries abroad?
How do we keep this from happening? First, I believe that the IMF, the U.S. Treasury Department, and the U.S. Congress must make it absolutely clear to the Korean government and Korean industry that no IMF, World Bank, Asian Development Bank or bilateral funding will be used to help the Korean semiconductor industry, in any form. This principle is already embodied in the Korean IMF bailout package which requires an immediate termination of directed-credit to Korean companies. The IMF and the United States must, however, provide greater specificity regarding this requirement. It should be made clear that this means no new loans to Korean producers whether through Korean government-owned or government-directed banks. It should also be clarified that Korean semiconductor producers should not be allowed to renegotiate the terms of existing loans on a more favorable basis (no interest moratoriums, no roll-overs, and no conversions of debt to equity.) Neither the Korean government nor the IMF should be permitted to guarantee or underwrite the private loans of Korean manufacturers, as has been discussed as a possibility in the Korean press. The analogy would be the U.S. government guaranteeing Microns debt. I think we can rest assured that this is not likely.
I also believe that it is wrong for private banks in the United States and Japan to roll over and repackage loans to Korean banks based on Korean government guarantees and/or government assumption of debt, especially when they are pressured by the U.S. government to do so. When this occurs, the U.S. government essentially underwrites that debt by virtue of its role in brokering the renegotiation. Moreover, when the government of Korea gets involved in this way, it may give rise to subsidies under the WTO Subsidies Agreement
Second, steps must be taken to hasten adoption of reforms by the Korean conglomerates. The IMF Economic Program for Korea that accompanied the stand-by credits, contains a variety of required structural reforms, that, if implemented properly and on a timely basis, could result in positive market-based restructuring in Korea. The IMF program requires not only a massive overhaul of the Korean banking sector, but also requires complete restructuring of the Korean family corporate groupings known as chaebol. The "corporate governance" provisions contained in the IMF reform program are designed to do this. These provisions include:
These are very broad brush objectives. I believe that it is the responsibility of the IMF, the Treasury Department and this Committee to ensure that these broad objectives are translated into concrete criteria with well-delineated timetables for implementation, and that these performance criteria be embodied in the reviews scheduled for March and June 1998. Moreover, IMF and Treasury personnel should be assigned to monitor compliance and implementation of these provisions on a real time basis. If we can afford to give the IMF another $18 billion, we can afford to pay several hundred thousand to pay for a monitoring team that can ensure we are not simply throwing money down the drain. If this Committee does appropriate additional funding for IMF credits, it should include money for a monitoring team.
In addition, it is essential that the IMF and the U.S. government intervene immediately when they see policies being adopted in Korea that contradict the letter and intent of the Korean reform package. To begin with, the IMF and the United States must ensure that Korea does not implement a program of "special loans" to encourage Korean exports, as was reported January 14, in the Wall Street Journal. Such loans are "red lighted" under the GATT Subsidies Code, and violate Koreas commitment to the World Trade Organization. They contradict both the trade and corporate governance provisions of the IMF loan package to Korea, and should be strictly prohibited. The IMF package also requires greater accountability and transparency in Korean accounting practices, including the adoption of internationally-recognized accounting standards. In 1996, the Koreans adopted an accounting standard that lets companies hide foreign exchange losses by taking them off their income statement, thus distorting a firms true financial picture. The Korean accounting standards board recently issued another accounting change that appears to permit other foreign exchange losses to be spread over some future period, creating further distortion. Both provisions clearly contradict the treatment of foreign exchange losses outlined in international accounting standards, and distort the true financial condition of Korean companies. The Koreans are going in exactly the wrong direction on these accounting standards. The Korean government must adopt and implement immediately, internationally-recognized accounting standards. First quarter financial results should be required and monitored by U.S. and international financial officials.
What other Korean government initiatives are we seeing that contradict the commitments they made to the IMF? The Korean Maeil Business Newspaper reported on January 14 that the Korean government will provide about $US69 million to companies in the telecommunications industry to "help ease their financial difficulties". The Korea Herald reported on January 15, that the Korean government will invest a total of 763.6 billion won in 1998 to promote the Korean information technology sector. This represents an increase of 20 percent over government investment in 1997. The goal of the IMF restructuring program is to sever the relationship between the public and the private sector. Infusing public capital into privately held telecommunications and information technology companies is not a step towards this goal.
Third, the IMF, Treasury and Congress must promote and reinforce a credible enforcement mechanism to ensure that funding is not provided to the semiconductor industry and that reforms are implemented on schedule that enforcement mechanism must be the withholding of any future funding if all pre-conditions are not met. While the first installment of funding amounting to about $10 billion was provided to Korea at the end of December, provision of future installments must be conditioned on clear performance criteria. The Administration and the Korean government need to certify that all conditions are being met.
Fourth, a strong message must be sent to the Koreans that they will not be permitted to export, and in the case of the semiconductor industry, dump, their way out of this situation. We should not send tax dollars to Korea to brace up insolvent companies, on the one hand, while turning a blind eye to their export surge strategies which are harming U.S. companies, on the other.
Finally, the U.S. Congress is being asked to appropriate an additional $18 billion to replenish nearly-depleted IMF credits. You have the ability, and in my view, the responsibility, to ensure that if such additional funds are appropriated, strict conditions are put into place so that funding results in real market-based reforms, and that funding does not go to brace up foreign companies that would otherwise go bankrupt. If you fail in this, you send the unmistakable message to foreign corporations that it is O.K. to invest recklessly and ignore market signals the U.S. will be there as the lender of last resort to help them pick up the pieces.
I would like to also make an observation about the current crisis in Asia and the appropriate policy response in this country. It is fairly clear that lending to Korea was accelerated back in December out of fear that absent a rapid infusion of capital, Japan would be rendered vulnerable to a similar economic collapse. I think the adage that "as Korea goes so goes Japan" is an exaggeration of the market reality, and that if we play into it, we run the risk of pouring public funds into Asia for no legitimate reason. Japan recently announced that it has about US$580 billion in bad or questionable loans, the vast majority of which are domestic, not foreign, loans. Korean companies now owe about US$24 billion to Japanese banks, not all of which are non-performing loans. With bad Korean loans accounting for only a small portion of total lending from Japan, the direct connection between the financial situation in Korea and that in Japan is not compelling. I urge that you assess the purported domino effect of the Korean financial crisis very carefully. If Japan is on shaky ground because of domestic bad loans, pouring money into Korea isnt going to save Japan.
In terms of the appropriate policy response in the case of Korea, I would also urge you to look closely at the precedent of the savings and loan crisis in this country. The S&L crisis ended up costing the American taxpayer about $120 billion, about what the Asian bailout has cost so far. But the policy response in the S&L crisis was very different. The only people that received government assistance in the S&L crisis were the depositors in failed savings and loans. The failed institutions themselves had all their assets liquidated and other suppliers of debt to the S&Ls lost money, as well. Moreover, a host of new and stricter controls were put into place. By contrast, the IMF package permits many failed businesses to stay afloat. The S&L owners had to learn the hard way, through failure. Our Asian competitors will never take away a similar lesson, if market mechanisms are not allowed to work, and they are not permitted to fail.
In closing, let me say that we can compete on a fair basis with Korean producers and remain a strong and growing U.S. company. We have had a profit every quarter for the last five years, albeit a smaller profit more recently. But we cannot compete with a Korean industry that is braced up by IMF funding, Korean government funding, and by U.S. taxpayer dollars funneled through international institutions. The prospect of $57 billion going to the Korean economy, and a portion of that going to bolster an uneconomic semiconductor sector, is unacceptable. If behavior that is not based on sound market principles is left unchecked, we will lose the last remaining U.S. DRAM producer making chips in this country.
Thank you for your attention. I would be happy to answer any questions.