Getting DUMPED on
By Tam Harbert - September 1, 1998
By Tam Harbert
illustration by Pierre-Paul Pariseau
Meet Gary Fischer, executive vice president and CFO of a small, fabless semiconductor company in Silicon Valley. Born and raised in Santa Clara County, Fischer has worked for more than 14 years in the semiconductor industry. He speaks with pride of his work in the United States and his home in Silicon Valley. That's why Fischer has a hard time explaining to his friends and family why the U.S. government regards his company as a foreign producer that is dumping static random access memories (SRAMs) when it sells them here.
That was the finding of the U.S. International Trade Commission last spring, when it ruled that the U.S. SRAM industry had been harmed by dumping by Fischer's $108-million company, Integrated Silicon Solution Inc. (ISSI), Santa Clara, and several other tiny U.S. fabless companies who buy their wafers from Taiwanese foundries. The ruling means that these companies are now assessed a duty deposit, ranging from 7.56% to 42% of the price, when importing SRAMs into the United States.
The ruling caught these companies by surprise, and has rekindled a debate over U.S. anti-dumping laws, because it not only resurrects several controversial issues about anti-dumping measures, but also raises new issues that will become increasingly important as the U.S. semiconductor industry becomes more global.
The ruling was the result of a petition filed by Micron Technology Inc., Boise, ID, in early February 1997, in which it claimed to have been hurt by SRAM imports from South Korea and Taiwan. In a preliminary investigation the U.S. Department of Commerce found that Korean and Taiwanese companies had dumped product in 1996, but Samsung Electronics Co. Ltd., which accounts for some 95% of Korea's total SRAM exports to the United States, was dropped from the case because the margins by which it was found to be dumping were below 2% (see "How anti-dumping laws work," p.70).
The International Trade Commission, which is charged with determining whether U.S. industry has been injured by dumping, found in its March ruling that the remaining two Korean companies--LG Semicon Co. Ltd. and Hyundai Electronics Industries Co.--did not injure the U.S. industry because the amount of their shipments to the United States was negligible. That left only the Taiwanese companies. Although the Taiwanese companies argued that they made up only 7.5% of U.S. SRAM consumption, the ITC found that Taiwan imports had injured the U.S. industry. The Commerce Department put dumping margins for ISSI at 7.56%. Alliance Semiconductor Corp. of San Jose, another U.S. fabless company, was assessed a 42% rate. Other Taiwanese producers were assessed rates as high as 114%. ISSI, Alliance and the Taiwan Semiconductor Industry Association are appealing the case to the Court of International Trade in New York, a process that will take at least a year.
The complaint is one of a string of anti-dumping charges brought by Micron over the last several years. Observers say that Micron's use of the U.S. anti-dumping laws is a key element of its business strategy in the memory business, as it battles with Samsung--which dominates dynamic random access memory (DRAM) and SRAM producers--over market share and tries to fend off other up-and-coming Asian producers. In the early 1990s, Micron won a case involving Korean DRAMs. Samsung was initially assessed duties in the case, but in 1996 it was dropped from the case after it won an appeal that forced the Commerce Department to calculate its costs differently, after which its dumping margins were so small as to be meaningless. However, dumping duties of 7.61% and 12.64% are still being imposed on LG Semicon and Hyundai as a result of that action.
The fabless companies were the SRAM small fry caught in a big net cast by Micron to try to rein in cheap imports from Samsung, the biggest DRAM and SRAM supplier in the world, say trade attorneys and executives at competing fabless semiconductor companies who criticized the ineffectuality of the dumping statutes. Some trade attorneys complain that Micron's attempts to use anti-dumping laws to protect itself from a big foreign competitor showed just what bad foreign trade policy these laws amount to. After all, the little U.S.-based guppies got caught, while the Moby Dick of the memory business swam free.
Given such outcomes, are anti-dumping laws a good policy for the United States? "If you mean are they protecting U.S. companies from foreign competition? Then they are working," says Brink Lindsay, director of the Center for Trade Policy Studies at the Cato Institute, a free-trade think-tank in Washington, D.C. "But if you mean are they sound economic policy? No."
The Congressional Budget Office (CBO) also has exacerbated the debate over U.S. anti-dumping laws. A CBO study published in June found that the United States is the most active user of anti-dumping laws, and that these anti-dumping duties are significant impediments to trade. The study finds that even if imports are priced below their manufacturing cost or their foreign price, such imports are generally helpful to the economy. Current U.S. anti-dumping laws may help a particular domestic industry, but hurt the economy as a whole, the study contends.
Companies such as Micron have used the anti-dumping laws as a defense against what they consider to be predatory pricing strategies. Such a strategy is one in which a company sets out deliberately to undersell its competitors in order to drive them out of business or gain a monopoly. Given the government backing of the Korean chaebol, big companies such as Samsung are often accused of such strategies.
|How anti-dumping laws work
A foreign producer is dumping in the United States if it is selling the product for less than what the Commerce Department deems to be its "fair value" or for less than it sells it for in its home market or another export market. It can also be dumping if it is selling its product in the United States for a price that is less than the cost of producing it.
Dumping cases are handled by two agencies of the U.S. government: the Commerce Department, which is charged with determining whether a company is a foreign producer, whether it is selling for less than fair value, and by how much; and the International Trade Commission, which decides whether U.S. industry has been injured by the dumping.
The case starts when a U.S. company--the petitioner--files a complaint with the Commerce Department's Import Administration Office, which reviews it to decide whether to launch a formal investigation. If the petition is accepted, the case moves on to the ITC, which makes a preliminary determination of whether the affected U.S. industry is injured by the dumped imports. If the ITC decides there is an injury, the case moves back to the Commerce Department for a full-scale investigation.
The Commerce Department typically sends out questionnaires to foreign producers and/or exporters. It analyzes this data, determines a cost of production and then comes up with what it calls fair value. Based on that, it looks at the selling prices of the imports in question and makes a preliminary determination as to whether dumping has occurred.
If dumping has been found to occur, the dumping companies are required to place a cash deposit or bond with U.S. Customs equal to the dumping margin determined by the Commerce Department. (The dumping margin is the percentage difference between the domestic product and imported product prices. If it is below 2%, then anti-dumping duties are not applied.)
After the preliminary determination, the investigation proceeds with on-site verification of the data submitted by the foreign producers. After that a final determination is made, often with new dumping margins. The case then goes to the ITC, which makes a final determination of whether U.S. industry has been injured by the dumping. If it does find injury, then the case returns to the Commerce Department, which then issues a final anti-dumping order, instructing U.S. Customs to collect estimated duties equal to the dumping rates found in the investigation. One year after the order is set, an interested party requests an administrative review to establish the actual dumping margin for a given review period. The estimated duties paid by the importer are adjusted to reflect the actual duty calculated.
But the Cato Institute's Lindsay says the U.S. dumping laws are flawed. Although they are used by companies to try to stop predatory pricing by foreign companies, there is nothing in the law that requires the companies complaining about dumping to prove that the accused is 1) operating from a home market that is protected and 2) that they are pursuing a predatory pricing strategy. The law only requires proof that the product has been sold below cost or below the price in the home market and that material injury to the U.S. industry has resulted. "There is a complete disconnect between the theory of anti-dumping and the practice of anti-dumping," says Lindsay, who has represented foreign importers accused of dumping in the United States.
On the other side of the argument is Greg Mastel, director of studies and vice president of the Economic Strategy Institute, a Washington, D.C., think tank that favors strong anti-dumping laws. He says that if companies are found to be dumping in the United States, then it's ipso facto proof that they are operating from a protected home market, because no company can sell below cost all over the world and survive. Even if both U.S. and foreign firms are selling products at the same price in the United States, the foreign company can be charged a dumping duty, giving the U.S. company an advantage in pricing. That's the way it should be, says Mastel. "They can and should be treated differently because there are different issues at play between companies competing internationally and companies competing domestically."
Micron defends its use of the law as a way to protect itself against foreign companies that don't play by the same rules as U.S. companies.
"There is a complete disconnect between [the theory] and the practice of anti-dumping."--Brink Lindsay, Cato Institute
"Until the entire world and every country compete fairly and openly, you have to have [the laws] to provide some balancing," says Kipp Bedard, Micron's vice president of corporate affairs. Korean companies have been funded by government loans and bank guarantees that have allowed them to operate with debt-to-equity ratios ranging from 800% to 1,200%, he says. "In a true open market, that would never happen. How do you balance that out? That's what the dumping laws attempt to do."
But as the semiconductor industry becomes more global, as more and more fabs are being shared as joint ventures, and as more semiconductor companies adopt a fabless business model, that balancing act is becoming increasingly tricky.
NEC Electronics Inc., Santa Clara, for example, now has a fab in Roseville, CA. Lucent Technologies Inc., Murray Hill, NJ, has a $1-billion-plus joint-venture fab with Chartered Semiconductor Manufacturing Ltd. in Singapore. Santa Clara's National Semiconductor Corp. has said it may draw on foundry partner Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) in Taiwan for future production of its PC-on-a-chip. Even though the U.S. trade laws work in Micron's favor now, that may not always be the case. For it, too, has started broadening its production base. As a consequence of its recent acquisition of Dallas-based Texas Instruments Inc.'s DRAM business, Micron gets TI's 25% share in two foreign joint-venture DRAM fabs. Micron plans to take 100% of the output of those fabs, according to published reports.
At the heart of the problem is the fact that the Commerce Department typically defines a foreign producer based on where the wafer is made. This definition served the industry well in the 1980s, when the U.S. semiconductor industry won a dumping case against huge Japanese electronics companies who were flooding the market with DRAMs made in Japan. But today, many companies make wafers in one place, assemble the chips in another location and test them in yet another.
|Top 10 DRAM vendors worldwide
(Based on 1997 sales, $ in billions)
|*After TI acquisition
With its announcement this summer that it would acquire all of TI's DRAM business, Micron catapulted itself from fifth into the number two spot in DRAM sales. Given Micron's huge capacity build-up this year while Samsung has started shutting down production for one week every month, Micron could end up being the number one DRAM producer in 1998, says Steve Cullen, DRAM analyst at Cahner's In-Stat Group in Scottsdale, AZ.
SOURCE: CAHNER'S IN-STAT GROUP
|Top 15 SRAM vendors worldwide
(Based on 1997 sales, $ in billions)
|Micron ranked 15th in worldwide sales of SRAMs, far behind other huge U.S. suppliers IBM and Motorola.
SOURCE: CAHNER'S IN-STAT GROUP
The U.S. SRAM companies that joined Micron in its petition, Cypress Semiconductor Corp., San Jose, and Integrated Device Technology Inc. (IDT), Santa Clara, both perform assembly and test overseas, notes ISSI's Fischer. Cypress has facilities in the Philippines and Thailand; IDT has facilities in the Philippines and Malaysia.
"How is it that they can manufacture overseas and hire foreign locals, but the U.S. fabless producers are subject to attack for doing this same thing?" he asks. ISSI itself has half its workforce--250 people--at its own assembly and test plant in Taiwan.
Fischer does not advocate scrapping U.S. anti-dumping laws. "It's a real hornet's nest," he says. "Trade laws exist. My argument is that they should be fairly applied to all companies." Rather than focusing solely on the origin of the wafer, the Commerce Department should look at the several stages where value is added to the product, Fischer suggests. For example, is the company of U.S. origin and is it U.S. controlled? Where does the company perform R&D? Where does the company manufacture wafers? Where does it test and assemble its chips? On three of these four points, ISSI can be considered a U.S. company, he argues.
But getting the government to adopt such a system is a long shot. In the SRAM case, the Commerce Department dismissed ISSI's arguments and reiterated its determination that the place of wafer fabrication determines the country of origin.
In addition to the disputes over how to determine the country of origin of a product, critics such as Lindsay and trade attorneys charge that the U.S. laws are unfairly skewed in favor of U.S. companies. For example, the Commerce Department has a lot of latitude in calculating the costs of foreign producers. It takes cost data from the foreign producer--including material, labor, overhead, and general, selling and administrative costs--compares it to what the petitioner claims those costs are, and then has to decide who is right. If the Commerce Department thinks the foreign producer is misrepresenting its costs, it can simply raise the figures.
There are many gray areas that make the cost-determining process subject to interpretation that favors U.S. producers. In the first place, the Commerce Department must rely to some extent on numbers supplied by the companies themselves. Foreign producers can try to twist the numbers to make their costs look lower, whereas domestic producers submit data that shows that the foreign producers' costs are higher. "There are a lot of differences in the interpretation of the accounting," says Steve Cullen, a DRAM analyst for Cahners' In-Stat Group, Scottsdale, AZ, who had first-hand experience dealing with Korean DRAM dumping duties when he held a manufacturing position at a large U.S. OEM in the mid-1990s. For example, a foreign producer may be focused on DRAM production, but trying to move into other product areas. In that case, the producer would want to allocate much of its R&D cost to products other than DRAMs, but the Commerce Department might insist that it be allocated to DRAMs, which has the effect of increasing the cost of the DRAMs, making it more difficult for a producer to defend a low selling price in the United States.
A second gray area might be how to depreciate fabs. A company may have shut down a fab, but still needs to depreciate it. The Commerce Department could insist that that depreciation be added to the production costs of the DRAM, which again would make it more difficult to defend a low price in the United States.
Because the Commerce Department keeps secret the market data and individual company data that it collects in these investigations, there is no way for an independent entity to verify the production cost estimates the Department develops.
For its part, the International Trade Commission (ITC) also gives U.S. producers a rather large benefit of the doubt. Under its regulations, if the six-member commission has a tie vote, the decision goes in favor of the U.S. producers. At times the results of the deliberations have been highly questionable. When the SRAM case was argued, for example, three ITC seats were vacant. Of the three commissioners present, one recused herself from voting on the Taiwan part of the case, and the remaining two had opposite opinions. Thus, the decision favored the U.S. producers.
Finally, U.S. companies simply use the anti-dumping laws when doing so will benefit their bottom line, says Lindsay. This sometimes means that U.S. companies disagree about whether dumping is harmful. For example, in the SRAM case, IBM Corp., Armonk, NY, and Motorola Corp., Schaumburg, IL--the two biggest U.S. SRAM producers--were conspicuously absent. That's at least partly because both are also big users of SRAMs, say industry analysts. In fact, Motorola initially supported Micron's complaint in the SRAM case, but once Samsung was dropped, the company switched sides, saying that it was not being materially injured by the remaining Korean and Taiwanese imports.
Despite the criticisms of U.S. anti-dumping laws, there is no real push to change them. That's because large U.S. companies such as Micron benefit from them. It's also because large users of chips--such as Compaq Computer Corp., based in Houston, or IBM--haven't been hurt enough by higher prices to put up much of a fight. And the laws do sometimes prompt companies to manufacture in the United States. ISSI, for example, has a 5% equity investment in WaferTech, a foundry being built in Camas, WA, by TSMC. If the company's appeal fails, ISSI will move all of its production to the WaferTech facility, says Fischer.
But other fabless SRAM companies are simply shifting their production to other Asian foundries outside of Taiwan, because the anti-dumping duties levied in the current SRAM case pertain only to chips made in Taiwan. Alliance Semiconductor is shifting at least some of its production to Singapore, says Michael Davis, senior product marketing manager at the company. Paradigm Technology Inc., Milpitas, CA, a $12.5-million company that sold its own U.S. fab in 1996 to get more advanced wafers from Taiwanese foundries, is diverting more of its production to its Japanese fab partner NKK, according to Michael Gulett, former president of the company. Aptos Semiconductor Corp. of San Jose, a 12-person company that was hit with a 42% duty, has shifted its production to Singapore, says Lowell Turriff, president and CEO.
Some of these recourses will undoubtedly work. Certain fabless semiconductor companies will continue to follow the business model they've chosen--to let somebody else do the manufacturing for them, often somebody abroad. If what they are doing is dumping, the current enforcement of the anti-dumping laws has not deterred them or forced them to pursue a different manufacturing strategy. It has just encouraged them to bring in chips from a country that is not one of the perpetrators in the Commerce Department's current line-up. All the recent SRAM case demonstrates for sure is that the enforcement of the anti-dumping laws is an elaborate game in which those companies who know how to work the system can avoid penalties while companies who are less clever about it get convicted and punished.