EU investigates South Korean chip makers

The European Commission confirmed Thursday that it has opened an investigation into alleged unfair public subsidies to two South Korean computer chip makers, Samsung Electronics Co. Ltd. and Hynix Semiconductor Inc.

“There is sufficient evidence to justify the initiation of a proceeding. The Commission hereby initiates an investigation,” the European Union executive said in a statement published Thursday in its Official Journal.

The probe was sparked by a complaint last month from German chip maker Infineon Technologies AG. Infineon is concerned about the effect of subsidies on the DRAM (dynamic RAM) chip market.

The alleged subsidies take the form of tax benefits, export credits, subsidized loans, debt rollovers and debt-to-equity swap programs, the Commission said. The Commission is expected to conclude its investigation in the first half of next year.

The probes come as chip prices are tumbling. Hynix alone has benefitted from subsidies worth US$7 billion, said Michael Schuette, a lawyer in the Brussels office of law firm Freshfields Bruckhaus Deringer, which is acting on behalf of Infineon.

“These subsidies enabled Hynix to stay in business even though it has been unable to pay its debts,” Schuette said. “They have been granted at a time when closure would have been the right thing for Hynix.”

Infineon claims that the South Korean government granted loans to Hynix at rates of between 6 per cent and 10 per cent, at a time when credit agencies had downgraded the company to junk bond status. Junk bond financing typically costs about 20 per cent in interest.

Subsidies to Samsung have been smaller. Infineon claims that the Korean government granted Samsung tax benefits for losses it made on its exports. These amounted to 2 per cent to 3.5 per cent of its export revenue to Europe, worth 764 billion South Korean won (US$658 million), Schuette said.

Samsung is the biggest DRAM producer in the EU and worldwide. It has a 25 per cent market share in Europe, while Hynix, its nearest rival, has between 15 per cent and 18 per cent of the European DRAM market, according to Infineon. Third is Micron Technology Inc., based in Boise, Idaho, which has about 13 per cent of the market, followed by Infineon with 8 per cent.

Both Hynix and Samsung deny violating trade rules, and say they will cooperate with the EU investigation.

Infineon and Micron are considering lodging a similar complaint with U.S. trade officials. “We are thinking about doing the same thing in the U.S. We have been waiting until an investigation gets going in Europe first, though,” Schuette said.