STRATEGIES

The spreads are thinning fast. Besides other players jumping in, growth in demand for integrated circuits is slowing. Last year $54 billion worth of DRAMs were sold, 43% more than in 1994. This year growth is projected at over 26%. That still sounds respectable, except for all the new suppliers and the high inventory levels. The semiconductor industry now holds orders amounting to $90 for every $100 worth of goods being shipped. That book-to-bill ratio of 0.9 is the lowest in six years. In addition, the time it takes to develop more powerful microchips, which lengthened in the last four years to boost profit margins, is once again shortening.

The price of 4-megabit DRAMs, until recently the industry standard, has fallen from $13 last November to less than $7 now. Large players like Samsung are now betting on 16-megabit chips. But since most major manufacturers are moving upscale, 16-megabit prices have dropped as well, from $48 each in December to $28. A year from now, the circuits could be selling at $15-$16, the price of 4-megabits last July. Expect computer prices to follow chips downward.

All that is prompting lower profit forecasts for chip makers. At current prices and trends, Rhee expects Samsung Electronics' bottom line to decline 17% this year and 10% next. Other analysts starting to revise their earnings forecasts for Samsung fear a drop of as much as 24% in 1996. The stock lost 40% of its value between early January and mid-March before recovering a bit. At the current price of about 90,000 won, Samsung's price is a very low 5.5 times its 1996 earnings, based on the most conservative forecasts. Texas Instruments, the cheapest semiconductor stock in the U.S., is selling at a price/earnings ratio of more than 8. Boosted by mammoth DRAM profits, South Korea's two other big producers, Hyundai Electronics and LG Semicon, planned to list this year. But the microchip downturn has delayed their plans.

Furious over the negative publicity about its earnings, Samsung Electronics has put out its own figures. It expects profits to grow 9%, on better margins in non-DRAM businesses, particularly telecommunications equipment and consumer electronics. "Samsung has made so much money in the past three years that they can now do a little creative accounting and, presto, their profits will surge in 1996 and 1997," says one electronics analyst. Others add that although semiconductor prices are falling, profits are not declining as fast because the raw materials for integrated circuits are getting cheaper.

Until the late 1980s, DRAMs were all made by a handful of Japanese firms, with some U.S. and European companies producing some higher-end microchips. But since then, the U.S.-Japan semiconductor deal has forced the Japanese to slow their growth -- opening a window of opportunity for Korea's top manufacturers Samsung, Hyundai and LG. Last year the country earned $22.1 billion from chip exports and surpassed Japan in DRAM production. Now, Taiwan is adding the most capacity, trying to replicate Korea's success.

Despite the slump in memory semiconductors, Korea's giants are pouring more money into R&D and new facilities. This year alone, Samsung Electronics is to invest $3.6 billion in new plants, LG Semicon $3.5 billion and Hyundai Electronics $1.3 billion. Suh Jang Weon, an analyst at LG Economic Research Institute, maintains that the chip slump is temporary. "Demand for PCs is still rising," he says. "The chip content in end-products from computers to home appliances and cars is growing, and Korean companies are fast diversifying away from their heavy reliance on DRAMs." And three years of surging profits have put the top three Korean makers in good stead. Their shareholders can only hope that Suh is right.