Korea Plant Tours: Tigers of Passive Components

By Dennis M. Zogbi
President, Paumanok Publications Inc.

Dennis Zogbi, Paumanok CEO with Senior Staff of Samsung Electronics

In the fourth quarter of 2004, I took a tour of some key electronics facilities in the Republic of Korea to determine trends and directions with respect to consumption of passive electronic components. Here are the results of this fact-finding tour.

Samsung Electronics, Suwon City, Korea
Samsung Electronics (SEC) manufactures and exports a wide range of consumer and industrial electronic equipment and products like wireless handsets, memory chips, TFT-LCD, PCs, peripherals, monitors, TVs and home appliances. Paumanok estimates 2004 revenues at approximately 58 trillion won ($55.8 billion USD), up 32% from 2003 revenues of 44 trillion won ($42.4 billion USD). SEC revenues were divided into five major product segments, including telecom/handset sales (33% of total revenue), semiconductor sales (32%), TFT-LCD displays (15%), digital media (14%) and large home appliances/ other (6%). Paumanok estimates total DRAM sales for SEC to have been 1.35 billion units for 2004, and flash memory unit sales of about 600 million units. LCD monitor shipments for the year were an estimated 30 million sets (these devices are V-chip aluminum capacitor intensive). Paumanok estimates 2004 handset unit sales at 87 million units, up an estimated 35% over 2003. Total passive component requirements for SEC handsets are an estimated 25 to 30 billion pieces. GSM handsets accounted for 70% of unit shipments, CDMA accounted for 29% of shipments and TDMA accounted for 1% of unit sales. About 86% of total handsets shipped by SEC had color displays for the year (4Q estimates 95% of handset shipments were color displays), while 42% of handset shipments contained camera modules in 2004 (53% of 4Q shipments had camera modules). SEC is focused on long-term growth and stability, which based on the past several years, has proven successful for the business. Since 1999, average growth rate of the top line was 17%, with a substantial net margin of 13%.

Paumanok believes SEC’s success continues to be based upon its excellent global sense of brand building. SEC was successful at convincing the world that it offered an excellent product at a fair price, regardless of the line produced. In global marketing, the company is now more adept at brand building than Sony. Regardless of Sony’s higher display in Times Square, Samsung’s is far more interesting. The store they have opened in Manhattan beneath the exclusive “Per Se” restaurant is one of the most modern visions of retail electronics ever imagined. Paumanok believes SEC has a more than probable chance of growing 20%
in revenues each year over the next five years. The collection of three prime digital electronics sectors (wireless, display and large home appliance) puts the company in prime position to experience large-scale digital convergence beginning in residential environments from Shanghai, China to Cary, North Carolina. On a more personal note, my visit to SEC in Suwon was fascinating. Mr. James Lee, a senior member of the passive component commodity council, was a most excellent host; his description of the massive campus, its history and historical relationship with Samsung Electro-Mechanics (their passive components division–see visit below) was excellent. I commented that their security was serious. I still have the security tapes and plastic bags placed upon the devices I carried with me undergoing the digital convergence. I thought perhaps my new camera phone might make a different sound, as if returning to the home nest. Our conversation with respect to passive components dealt primarily with vendors, new technology, pricing and component availability.

LG Electronics, Seoul, Korea
LG Electronics (LGE) has a global business in electronics and telecommunications, with forecasted 2004
revenues of 25 trillion won ($24.1 billion USD), up about 25% over 2003, when sales were approximately 20 trillion won ($19.2 billion USD). Key product lines include digital appliances (25% of sales), display & media (37% of revenue), wireless handsets (34% of revenue) and telecommunications equipment (4% of revenue). Paumanok predicts that 1H05 earnings will continue to increase, especially in light of increased handset shipments, which were up for the eleventh consecutive month. For calendar year 2004, total handset production by LGE was an estimated 47 million units, up 72% year-over-year from 2003, when handset sales were approximately 28 million units. The company reported a sharp increase in export sales of both CDMA and GSM phones for 2004. The company’s handsets are MLCC, tantalum, chip resistor, chip inductor and chip varistor intensive, requiring a total of about 14 to 17 billion passive components for the handset division alone, up from 8 to 10 billion passive components required in 2003 for CDMA and GSM handsets. Other products produced by the company that are passive component intensive, include flat panel displays (where LGE has major global market share), large home appliances (where digital convergence is boosting passive component requirements in refrigerators, washing machines and HVAC systems produced by the company), and telecommunications infrastructure equipment.

The interesting aspect about LGE is the fact that its products and technologies are quite similar to that of SEC, and they too will benefit from the coming digital convergence. However, it is just beginning to benefit from its global branding efforts (as we discussed the transition from brand in Lucky Goldstar to LG Electronics), and are already growing at a rapid rate in revenues. Paumanok estimates that revenue growth at LG Electronics may exceed 20% per year over the next five years, as they benefit from the duel concept of digital convergence and the benefit of spectacular branding similar (and sometimes better) to that of SEC. During my meeting with Mr. Ken Ahn, senior member of LGE’s Commodity Council for Passive Components in the grand LGE Twin Towers in Seoul, I discussed passive component vendors, technology trends, pricing and availability and the potential affects of digital convergence upon LGE’s requirements for capacitors and resistors by dielectric and resistive element.

Samsung Electro-Mechanics (SEMCO),
Suwon City, Korea
SEMCO has been a major customer of Paumanok Publications Inc. since 1993, and it was a very positive experience for me to have so many of the senior staff of SEMCO to engage in extremely detailed discussions about the global MLCC industry faceto- face, which is by far the best way to do business on the Peninsula. The company’s product lines are divided into four segments; mobile and passives (which includes the MLCC segment), with 17% of total sales, or 640 billion won, with MLCC sales at approximately 300 billion won for 2004, up 15% from approximately 260 billion won in 2003; HDI and BGA packaging, which accounted for approximately 880 billion won in 2004; displays, which accounted for 540 billion won in 2004; and the precision technology group, which accounted for the largest product
group, at 1.6 trillion won. Camera modules produced by the precision technology segment grew from 53 billion won in 2003, to an estimated 300 billion won in 2004, or similar in size to the MLCC group. Overall, MLCCs account for about 8.2% of consolidated sales in 2004, up from about 7.5% of total SEMCO revenues in 2003. In my meeting with SEMCO, we discussed its 28 billion won loss in MLCC business in 2003 and the estimated break-even margins for their 2004 ROI. Our discussions centered on strategies for increasing MLCC profitability and best practices in conjunction with the corporate “New Strategy” set in motion in the later half of 2004.

Ceratech Corporation, Seoul, Korea
Ceratech is a major component supplier to the Korean supply chain for chip, bead and bead array inductors, common mode filters, multi-layered varistors and polymer PTC thermistors. The company includes both LGE and SEC as customers. In 2004, the overall yearly performance growth rating in sales was 29%. In 2004, the company hired a new Chief Executive Officer, Mr. Sang Hur, to begin to expand production of core product lines in their new state-of-theart seven-story factory in Seoul. Ceratech’s major shareholder is JP Morgan Partners Asia Limited. new state-of-the-art seven-story factory in Seoul. Ceratech’s major shareholder is JP Morgan Partners Asia Limited. During my visit with Mr. Sang Hur, we discussed global market trends and technology developments, the continued movement to smaller case size chip inductors, arrays and ferrite beads, the rapidly growing market for 0402 chip varistors in Korea, Taiwan and Japan and opportunities for their high voltage polymer PTC line in telecommunication subscriber line interface cards in the United States and Europe.

Amotech, Seoul, Korea
Amotech remains the talk of Seoul and the global ESD protection industry, with their rapid rise to the number one global unit producer for multi-layered varistors. At each meeting I had– SEC, LGE, SEMCO, and Paumanok’s respective financial customers in Seoul– the subject of Amotech’s success and good fortune were discussed. The general consensus is that Amotech emerged with the correct product offering in conjunction with increased requirements for ESD protection in clamshell phones, and the rapid development and acceptance of camera modules. Discussions about Amotech’s rapid growth also centered on their market execution in Korea, Taiwan, China and Japan, which is being considered a model by other passive component suppliers as the proper way to penetrate the rapidly growing Asian market.

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