Commission Regulation (EC) No 708/2003 of 23 April 2003 imposing a provisional countervailing duty on imports of certain electronic microcircuits known as DRAMs (dynamic random access memories) originating in the Republic of Korea
Date: 2003-04-23
Institutions: European Commission
Subjects: South Korea, countervailing charge, customs duties, import, microelectronics, originating product

24.4.2003

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Official Journal of the European Union

L 102/7

COMMISSION REGULATION (EC) No 708/2003

of 23 April 2003

imposing a provisional countervailing duty on imports of certain electronic microcircuits known
as DRAMs (dynamic random access memories) originating in the Republic of Korea

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community,

Having regard to Council Regulation (EC) No 2026/97 of 6
October 1997 on protection against subsidised imports from
the European Community (1), as
countries not members of
amended by Regulation (EC) No 1973/2002 (2), and in parti-
cular Article 12 thereof,

(5)

(6)

After consulting the Advisory Committee,

Whereas:

The Commission sent questionnaires
to all parties
known to be concerned and received replies from the
GOK and a number of Korean banks as well as from a
number of companies in the Community.

The Commission sought and verified all the information
it deemed necessary for the purpose of a preliminary
determination of
and Community
interest. In this regard, the Commission carried out veri-
fication visits at the premises of the GOK in Seoul and
the following companies:

subsidy,

injury

(a) Exporting producers in Korea

— Hynix Semiconductor Inc., Seoul, Korea,

— Samsung Electronics Co. Ltd, Seoul, Korea;

A. PROCEDURE

(b) Banks in Korea

(1)

(2)

(3)

(4)

In July 2002, the Commission announced, by notice
published in the Official Journal of the European Commu-
nities (3), the initiation of an anti-subsidy proceeding with
regard to imports into the Community of certain elec-
tronic microcircuits known as DRAMs (dynamic random
access memories) originating in the Republic of Korea
(Korea) and commenced an investigation.

The proceeding was initiated as a result of a complaint
lodged in June 2002 by Infineon Technologies AG (the
complainant) representing a major proportion of the
total Community production of DRAMs. The complaint
contained evidence of
the product
injury resulting therefrom,
concerned and of material
which was considered sufficient to justify the initiation
of a proceeding. The Complaint was supported by
Micron Europe Ltd, the only other Community producer
of DRAMs.

subsidisation of

The Commission officially advised the Government of
Korea (GOK), the complainant, the other Community
producer, the exporting producers, the importers and
users known to be concerned of the initiation of the
proceeding. Interested parties were given the opportu-
nity to make their views known in writing and to
request a hearing within the time limit set in the notice
of initiation.

The Government of Korea, the exporting producers, the
complainant, as well as the other Community producer,
importers and users, made their views known in writing.
All parties who so requested within the above time limit
and indicated that there were particular reasons why
they should be heard were granted a hearing.

(1) OJ L 288, 21.10.1997, p. 1.
(2) OJ L 305, 7.11.2002, p. 4.
(3) OJ C 177, 25.7.2002, p. 2.

— Korea Development Bank (KDB), Seoul Korea,

— Korea Exchange Bank (KEB), Seoul, Korea,

— Chohung Bank, Seoul, Korea,

— Woori Bank (WB), Seoul, Korea;

(c) Other institutions in Korea

— Financial Supervisory Service (FSS), Seoul, Korea,

— Financial Supervisory Commission (FSC), Seoul,

Korea,

— Korea Export
Seoul, Korea,

— Korea Deposit
Seoul, Korea;

Insurance Corporation (KEIC),

Insurance Corporation (KDIC),

(d) Producers in the Community

— Infineon Technologies AG, Munich, Germany,

— Micron Europe

Ltd,

East Kilbride, United

Kingdom;

(e) Importers in the Community related to Korean exporting

producers

— Hynix Semiconductor UK Limited, Weybridge,

United Kingdom,

— Hynix Semiconductor Deutschland GmbH, Raun-

heim, Germany.

(7)

The investigation of subsidisation covered the period
from 1 January 2001 to 31 December 2001 (investiga-
tion period or IP). The examination of trends relevant
for the assessment of injury covered the period from 1
January 1998 to the end of the investigation period
(period considered).

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Official Journal of the European Union

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B. PRODUCT UNDER CONSIDERATION AND LIKE

PRODUCT

allegedly involved the granting of subsidies, were investi-
gated:

1. Product under consideration

1. tax benefits in the form of tax reserves, tax exemp-

tion and tax credit;

(8)

(9)

The product under investigation (product concerned) is
certain electronic microcircuits known as dynamic
random access memories (DRAMs), of all types, densities
and variations, whether assembled, in processed wafer or
chips (dies), manufactured using variations of metal
oxide-semiconductors
technology,
(MOS)
including complementary MOS types (CMOS), of all
densities
irrespective of
access speed, configuration, package or frame etc. This
also includes DRAMs presented in (non-customised)
memory modules or (non-customised) memory boards,
or in some other kind of aggregate form, provided the
main purpose of which is to provide memory.

(including future densities),

process

The product concerned is currently classifiable within
CN codes 8542 21 11 (until 31.12.2001 within CN code
8542 13 11), 8542 21 13 (until 31.12.2001 within CN
code 8542 13 13), 8542 21 15 (until 31.12.2001 within
CN code 8542 13 15), 8542 21 17 (until 31.12.2001
within CN code 8542 13 17), 8542 21 01 (until
31.12.2001 within CN code 8542 13 01), 8542 21 05
(until 31.12.2001 within CN code 8542 13 05),
8548 90 10, ex 8473 30 10 and ex 8473 50 10.

2. syndicated loan of KRW 800 billion (1);

3. Korea Export Insurance Corporation (KEIC) guarantee
for export credits in the amount of USD 600 million;

4. Seoul Guarantee

Insurance Corporation (SGICO)
guarantee for bonds to be purchased by investment
trusts;

5. bond purchase by creditor banks in the amount of

KRW one trillion;

6. first roll-over of debt in May 2001;

7. Korea

Development

Bank

(KDB)

Debenture

Programme;

8. the October 2001 rescue package, consisting of debt

to equity swap and the second roll-over of debt;

2. Like product

9.

loan of KRW 658 billion.

(10)

The investigation showed that DRAMs produced and
sold on the domestic market of Korea have similar basic
physical and technical characteristics and uses compared
with that exported from this country to the Community.
Similarly, DRAMs manufactured by the complainant and
the other Community producer and sold on the
Community market have similar basic physical and tech-
nical characteristics and uses when compared to those
exported to the Community from the country in ques-
tion.

(13) As regards the tax reserves,

the legal basis for the
reserves for export losses, overseas market development,
overseas investment losses and technology development
is
the Tax Exemption and Reduction Control Law
(TERCL). This law was replaced by the Special Tax Treat-
ment Control Law (STTCL) on 1 January 1999. STTCL is
the legal basis for the tax exemption, tax credit, the
reserve for research and human resources development
and the reserve for losses on the disposal of treasury
stock.

(11)

Consequently, DRAMs sold on the domestic market of
Korea and exported to the Community as well as
DRAMs produced and sold in the Community are
considered as a like product within the meaning of
Article 1(5) of Regulation (EC) No 2026/97 (basic Regu-
lation).

C. SUBSIDIES

1. Introduction

(12) On the basis of

the information contained in the
complaint and the replies to the Commission's question-
the following measures and schemes, which
naires,

(14)

The legal basis for the KDB Debenture Programme is
Article 18(4) of
the Korea Development Bank Act
(KDBA). The programme was announced in December
2000 by GOK with the purpose of supporting the bond
market. The programme lasted only for the year 2001
and the selection of participating companies was carried
out in January 2001. Under the programme, KDB was
refinancing maturing bonds of companies which were
selected to participate in the programme.

(15) Measures 2, 5, 6 and 9 listed above are ad hoc measures
taken by the creditor banks of Hynix Semiconductor Inc.
(Hynix). In addition to the creditor banks, other creditor
financial institutions were also involved in measure 8.

(1) The exchange rate as of 31.12.2001: USD 1 = Korean won 1 326.

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Official Journal of the European Union

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(16) According to Article 2 of the basic Regulation, a subsidy
is deemed to exist when there is a financial contribution by
a government conferring a benefit to the recipient. Further-
more, only specific subsidies can be countervailed in
accordance with Article 3 of the basic Regulation. In
many of the schemes examined, the issue of whether the
financial contribution has been made by the government
is disputed. Therefore,
the
Commission will generally examine the issue of benefit
first; only if a benefit is found will the question be
considered whether there is a financial contribution by
the government and specificity.

for reasons of economy,

2. Tax reserves, tax exemption and tax credit

(a) Tax reserves under TERCL

(17)

TERCL was enacted in 1964 and expired on 31
December 1998. The following tax reserves investigated
had TERCL as a legal basis: reserve for export losses
(Article 16), overseas market development (Article 17),
overseas investment losses (Article 23) and technology
development (Article 8). These provisions provided two
to three years grace periods for the reserves concerned
before they were to be added back to the taxable
income.

9 provides for a three-year grace period for the reserve
concerned, whereas Article 104(3) provides for up to
five years grace period before the reserve in question is
to be added back to the taxable income.

(21)

The reserves constitute a tax deferral system as under
the TERCL. The tax exemption and tax credit confer a
benefit in the form of forgone or not collected govern-
ment revenue that is otherwise due.

(22) As regards Hynix, it was confirmed during the investiga-
tion that
there were no reserves with outstanding
balances left at the end of 2001 and no tax exemption
or credit. Consequently, no benefit provided under
STTCL was found.

(23) As regards Samsung Electronics Co. Ltd (Samsung),

investigation that

confirmed during

it
was
the
the
company received a tax exemption for income from
technology transfer, a tax credit for research and human
resources development expenses, and benefits under the
reserves for research and human resources development
and loss on disposal of treasury stock.

(18)

The reserves enable the beneficiaries to defer taxes and
thus confer a benefit to the extent that interest is not
collected during the grace period.

(c) Calculation of the amount of subsidy for Samsung

(19) During the investigation, the status and historical move-
ments of the reserves in the tax returns of the exporting
producers were examined.
It was confirmed that the
reserves under TERCL were exhausted before the IP and
that there were no outstanding balances left at the end
of 2001. Consequently, no benefit provided by these
reserves was found.

(b) Tax reserves, tax exemption and tax credit under STTCL

(20)

STTCL entered into force on 1 January 1999 replacing
TERCL. The following tax exemption, tax credit and tax
reserves investigated have STTCL as a legal basis: tax
exemption for income from technology transfer (Article
12), tax credit for research and human resources devel-
opment expenses (Article 10), reserve for research and
human resources development (Article 9) and reserve for
loss on disposal of treasury stock (Article 104(3)). Article

(24) As for the tax exemption and tax credit received during
the IP, the amount of subsidy was the amount of tax
forgone or not collected. As for the tax reserves, they
function as tax deferral systems and such tax deferrals
are to be regarded as interest-free loans. The amount of
subsidy with regard to the tax reserves concerned was
therefore calculated as the amount of
that
Samsung would have to pay on a comparable commer-
cial
loan during the IP, i.e. on a loan for an amount
equivalent to the amount of tax deferred. The interest
the subsidy was the
rate used in the calculation of
average commercial interest rate in Korea during the IP.
The amounts of taxes deferred in tax years prior to that
falling within the IP were included in the amount of
such loans to the extent that they have not been fully
repaid. The full subsidy amount was allocated over total
turnover.

interest

(25) However, since this benefit amounted to only 0,92 % ad
valorem and no other subsidy is alleged for Samsung,
the amount would in any event be de minimis. Conse-
quently, it is not necessary to examine whether a coun-
tervailable subsidy is involved.

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Official Journal of the European Union

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(26)

(27)

3. Syndicated loan of KRW 800 billion

(a) Description of the measure

In the second half of 2000, the financial advisor of
Hynix, Salomon Smith Barney Inc. (SSB), worked out a
financing plan to resolve the problem of a mismatch
between Hynix's cash flow and the extent of debt obliga-
tions that matured and had to be repaid in 2001. SSB's
financing plan was supposed to address what at the time
were called ‘short-term liquidity problems’ due to the
fact that most of Hynix loans were scheduled due and
payable during 2001. One of the measures proposed
under the financing plan was a syndicated loan. Hynix
appointed Citibank as lead manager of the syndicated
loan and during December 2000 Citibank held meetings
with domestic banks to present its plan.

Ten banks participated in the loan, which amounted to
KRW 800 billion. These banks were Korea Development
Bank, Hanvit Bank, Chohung Bank, Korea Exchange
Bank, Korea First Bank, Kookmin Bank, Citibank,
Shinhan Bank, Hana Bank and KorAm Bank. The loan
was released in two tranches. The interest rate of the
tranches was set at that of unsecured three-year corpo-
rate bonds for BBB- rated companies plus an additional
margin to reflect
this financing
bearing in mind the high debt ratio of Hynix. One of the
conditions of the loan was the separation of Hynix from
the Hyundai group. According to the loan agreement,
the loan amount was
to be used exclusively for
redeeming the previously issued corporate bonds, refi-
nancing the existing debt or securing liquidity.

the risky nature of

(b) Findings of the investigation

considering the terms of the loan granted as explained
above under recital 27, the information in the possession
of the Commission does not allow it to conclude that
the interest rate of the loan and the maturity periods
were not in conformity with market conditions.

(31)

For these reasons, it is concluded that there is no benefit,
and the granting of the syndicated loan of KRW 800
billion is not considered to constitute a subsidy in the
meaning of Article 2 of the basic Regulation.

4. KEIC guarantee for export credits in the amount

of USD 600 million

(a) Description of the measure

(32)

Korea Export Insurance Corporation (KEIC) is the official
export credit agency of Korea, established in 1992 under
Article 37 of the Export Insurance Act. KEIC provides
export insurance and guarantees to manage the risks
associated with overseas transactions. KEIC is a specia-
lised non-profit corporation that operates under the
authority of the Ministry of Commerce,
Industry and
Energy. The National Assembly determines total limits
for business underwritten and contributions
to the
Export Insurance Fund, which is the basis of the KEIC
operations. According to the bylaws of the KEIC, it shall
transfer all its profits to reserves which are used to cover
its deficits. In case of shortage of reserves, the Govern-
ment shall provide the funding to cover the losses.

(28)

The first question to be examined is whether the loan
provided to Hynix conferred to it a benefit compared
with what would have been available to it in the market
at the time of the granting of the loan.

(33)

(29) According to the information in the possession of the
the banks made their assessment on
Commission,
whether to participate in the loan on the basis of the
SSB report and their own evaluation of the market situa-
tion and the situation of Hynix. The assessments were
done in December 2000, when the demand and prices
for DRAMs were still good and the industry outlook was
positive. It was acknowledged that Hynix had a great
debt burden since its debts almost doubled following its
merger with LG Semiconductor in 1999, but since the
price trend was expected to remain stable and Hynix had
essentially been able to serve its debts during the ‘good
year of 2000’, the documents in the possession of the
Commission indicates that it was not unreasonable for
the banks to expect to recover the loan under those
circumstances.

(30)

It was verified that the credit rating of Hynix at the time
of the granting of the loan was BBB- (1). Consequently,

(1) Standard & Poor's.

In January 2001, 14 Hynix creditor banks increased the
ceiling of the export credit facility for D/As (documents
against acceptance) provided to Hynix from USD 800
million to USD 1,4 billion, an increase of USD 600
million. KEIC granted the short-term export credit insur-
ance for the extended D/A limit as regards the transac-
tions between Hynix and its overseas subsidiaries. The
exports are financed by D/As of 90 days maturity. Hynix
collects the foreseen payment for the export transaction
from the banks concerned, which hold the D/A docu-
ment. The importer in the country of destination then
makes the payment for the goods concerned directly to
the banks against the D/A. Hynix pays a premium to
KEIC for
to the banks
concerned for the D/A amounts withdrawn until the
importer makes the final payment. In the case under
investigation, KEIC insurance covers the amounts due to
the banks which cannot be collected due to bankruptcy
of either the exporter or the importer.

the insurance and interest

(34)

KEIC grants short-term export insurance upon applica-
tion after assessing the details of the export transaction
concerned, credits status of the exporter and importer
and the sovereign risk of the importing country. If KEIC
decides to provide the insurance, the premium is set
accordingly pursuant to the premium tables of KEIC.

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Official Journal of the European Union

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(b) Findings of the investigation

(35)

The first question to be examined is whether the insur-
ance in question was provided in more favourable terms
than what was available in the market and whether it
therefore provided a benefit to Hynix.

(36) During the investigation it was confirmed that

the
premiums paid to KEIC were in line with the general
premium tables of KEIC and reflected the sovereign risks
of the importing countries (mainly OECD countries with
a low risk factor) and the credit rating of Hynix at the
time of providing the insurance. It was also confirmed
that Hynix had actually paid the premium with regard to
each transaction for which the D/A facility was used. For
these reasons it is confirmed that Hynix was treated in
accordance with the general
terms and conditions
regarding KEIC short-term export credit insurance. The
Commission has no indication that the general terms
and conditions provided by KEIC for short-term export
credit insurance would significantly deviate from those
available in the market.

between themselves. The financial advisor SSB prepared,
in April 2001, a recapitalisation plan for Hynix,
in
which it recommended measures involving: (a) an injec-
tion of fresh capital into Hynix through the offering of
KRW 1,3 trillion worth of global depository receipts
(GDR), (b) an extension of the maturities of both short
and long-term debts and a further purchase of conver-
tible bonds (CB) worth KRW one trillion by the creditor
banks.
the creditor banks agreed to
support this financial restructuring on the condition that
the GDR offering in the international capital markets
would be successful. If not, the roll-over of maturities
would be cancelled and the CBs repurchased by Hynix.
In addition, the funds received from the CB issuance had
to be maintained in an escrow account and could only
be used for the repayment of corporate bonds maturing
in the first half of 2002.

In May 2001,

(41)

In mid-June, Hynix raised USD 1,25 billion by GDR issu-
ance and on 20 June 2001 the creditor banks purchased
CBs in proportion of their total exposure to Hynix as of
30 November 2000. The maturities of the short-term
debts were prolonged until June 2002/2003 and those
of long term debts until 2004/2005.

(37) As regards the level of

the premium charged,

the
Commission has no indication allowing it to conclude
that the premiums charged by KEIC for the short term
export credit insurance would not be sufficient to cover
the long-term operating costs and losses of such insur-
ance programmes provided by KEIC.

(38)

For these reasons, it is concluded that there is no benefit,
and therefore the export insurance granted for KEIC for
the additional D/A facility of USD 600 million provided
by the banks is not considered to constitute a subsidy
within the meaning of Article 2 of the basic Regulation.

(b) Findings of the investigation

(42)

The first question to be examined is whether
the
measures carried out by the banks in favour of Hynix
were compatible with the behaviour of a market investor
in the same situation.

5. SGICO guarantee for bonds to be purchased by

(43)

investment trusts

(39) During the investigation it was confirmed that

the
planned bond issuance, contrary to what had been
alleged in the complaint, actually never took place and
consequently no guarantee was provided.

6. Bond purchase by creditor banks in the amount
of KRW one trillion and the first roll-over of
debt in May 2001

(a) Description of the measures

(40)

In March 2001, 17 Hynix creditor banks established a
‘Creditors' Financial Institution Council’ (CFIC) by signing
the ‘Creditors' Financial Institution Council Agreement’

It is noted that the DRAM prices started to decrease
from their very high levels throughout much of the year
2000 from September 2000 onwards. The prices stabi-
lised in January 2001 but they resumed their decrease in
February 2001. In March 2001 the prices started to rise
again. The SSB report was made at the time when there
was an increase in DRAM prices. The SSB report forecast
that
the DRAM market would recover in the third
quarter of 2001 so that the equity infusion and the
extension of maturities would be sufficient to help Hynix
to overcome its liquidity crisis. The credit rating of
Hynix at the time of the measures was set at BB+ by
Korean rating agencies (1) and at B- by international
ones (2). It is noted, however, that some analysts at the
same time were more cautious about the price recovery
and raised doubts about Hynix's ability to meet its debt
repayment obligations (3).

(1) Korea Information Service, Korea Management Consulting & Credit

Rating Corporation.

(2) Standard & Poor's.
(3) Deutsche Bank, ‘Hyundai Electronics Inc., Digging a Deeper Hole’,
23 February 2001; Morgan Stanley Dean Witter,
‘Hynix Semicon-
ductor, Huge Losses from Poor Balance Sheet Again’, 20 April
2001.

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Official Journal of the European Union

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(44)

(45)

the

information verified during

investigation
The
confirms that the banks made their participation in the
measures conditional upon the success of the GDR issu-
ance. Once the GDR issuance was carried out and the
USD 1,25 billion secured on 15 June 2001, the banks
executed the rest of the measures as proposed by SSB in
its recapitalisation plan. Under these circumstances, the
behaviour of the banks is considered to be equal to that
of the other market investors, who invested in Hynix
GDRs at the same time. However, there is some evidence
in the records that indicate that the investors' interest to
invest in Hynix GDRs at the time might have been influ-
enced by the belief that the GOK would ultimately make
sure that Hynix does not default on bonds and loans (1).
The Commission however has no indication that there
was an actual GOK guarantee granted for the bonds in
question.

(49)

to allow it

the Commission is not sufficient

In view of the above, the information in the possession
of
to
conclude that the measures of May 2001 conferred a
benefit to Hynix. Therefore, the bond purchase by cred-
itor banks in the amount of KRW one trillion and the
first roll-over of debt in May 2001 are not considered to
constitute a subsidy within the meaning of Article 2 of
the basic Regulation.

7. KDB Debenture Programme

(50)

(a) Legal basis and description of the facility

(46)

The KDB Debenture Programme is based on Article
18(4) of
the KDBA, which provides that KDB may
engage in the subscription, acceptance and investment
or guarantee of debentures issued to finance certain
major projects, or bonds issued by public organisations.

(47) According to the GOK, the programme was designed to
address the instability in the financial system that arose
from a large amount of bonds maturing simultaneously
and issued mainly by a few companies. The programme
was announced in December 2000 and it only lasted for
year 2001.

(48) Under the Debenture Programme, the KDB helps roll-
over maturing debt obligations and repackages the debt
for investors. A participating company repays on its
own 20 % of its corporate bonds falling due and KDB
assumes the remaining 80 %. KDB then sells 20 % of the
80 % to the creditor banks on a pro-rata basis in propor-
tion to their loans to the participating company. KDB
then repackages and transfers 70 % of the bonds it holds

to the primary ‘collateralised bond obligations’ (CBOs)
and/or ‘collateralised loan obligations’ (CLOs) guaranteed
by the Korea Credit Guarantee Fund (KCGF) and
continues to hold the remaining 10 %. The CBOs and
CLOs are asset-backed securities that are sold to invest-
to
ment
repurchase at least 3 % of any CBOs and 5 % of any
CLOs issued under the programme.

trusts. The participating

company has

(b) Eligibility

The nomination of a company to participate in the
programme is made by that company's principal creditor
bank. The lead creditor nominates the company and
then submits for approval by the Creditor Financial Insti-
tutions Council (CFIC) a credit risk evaluation, based on
the prospects of the company's future operations, the
financing plan, the redemption capability plan and the
restructuring plan. The inclusion of a company into the
programme is decided by the CFIC. CFIC consists of the
representatives of KCGF, KDB and 17 other creditor
banks.
the
company concerned approve the nomination, CFIC
considers that such decision is made in unanimity.

If banks holding 75 % of

the loans of

In order to be admitted to participate in the programme,
the following eligibility
the company needs to fulfil
criteria: 1. the company must be able to redeem at least
20 % of its maturing bonds on its own; 2. the company
should be likely to be able to normalise its business
operations by a credible restructuring plan, but its credit
rating is below A and it has difficulties in refinancing its
bonds. However, the credit rating of the company must
than BB (2); 3. any company under
remain higher
workout programs, court
insolvency
receivership or
proceedings is excluded from participation.

(51)

The participating company also needs to enter into a
special agreement with its creditor banks entitling the
banks to demand the disposal of equity interests held by
its majority shareholders
replacement of
management in case of insolvency.

and the

(c) Practical implementation

(52)

Seven companies applied for the programme and six of
including Hynix,
them were admitted. Four of them,
belonged to the Hyundai group. Hynix was admitted on
4 January 2001. At the time Hynix credit rating was
BBB- (3).

(1) Hynix GDS Offering Memorandum, June 2001; ‘Korea's Hynix Says
Hikes GDR Issue to $ 1.25 bln’, Reuters English News Service, 13
June 2001.

(2) Standard & Poor's.
(3) Standard & Poor's.

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Official Journal of the European Union

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(53)

(54)

(55)

(56)

the

total

The total amount originally foreseen for Hynix bonds
was KRW 2,9 trillion out of
foreseen
programme budget of KRW 6,2 trillion. However, the
total amount used under the programme was KRW 2,9
trillion, of which KRW 1,2 trillion was used for
purchasing Hynix bonds. Although Hynix stopped parti-
cipating in the programme in August 2001, the amount
used for purchasing Hynix bonds amounted to 41 % of
the total expenditure. It is noted that the amount used
by the other three Hyundai companies amounted to
38 % of the total expenditure.

(d) Findings of the investigation

(i ) Ex i ste nce of th e subsi dy

(59)

it

Considering the above, it can be concluded that not only
is KDB 100 % owned by the GOK, but
is also
entrusted with a specific public policy role which obliges
it to carry out policies normally followed by the Govern-
ment. The GOK provides its funding, can inject capital
to it and covers its losses. On this basis KDB can be
considered as a ‘public body’ carrying out specific public
policy tasks as defined in the KDB Act. For these
reasons, financing provided by KDB, i.e. the purchase of
corporate bonds, is considered a financial contribution
by a Government, involving a direct transfer of funds,
within the meaning of Article 2(1)(a)(i) of
the basic
Regulation.

(60)

The next question is to examine, whether the funding
provided by KDB conferred a benefit upon Hynix.

In case of the KDB Debenture Programme, the funds
were provided by KDB. In the particular case of exam-
ining this programme, the first question would be to
examine whether the financing provided by KDB consti-
tutes a ‘financial contribution by a government’.

(61)

KDB was founded in 1954 under the Korea Develop-
ment Bank Act as a special purpose bank to supply
long-term credit for industries to stabilise the economy
and promote industrial rehabilitation. The major busi-
nesses of KDB consist of: 1. loans with longer than one-
year maturity; 2. investment in the form of underwriting
of bonds and stocks; and 3. payment guarantees to help
finance industrial projects.

KDB is owned 100 % by the GOK. According to Article
18 of the KDB Act, KDB must undertake business ‘neces-
sary to realise the objectives and goals stipulated in
Article 1.’ Article 1 of the KDB Act provides that, ‘The
purpose of the Korea Development Bank is to supply
and manage key industrial capital to facilitate the devel-
opment of businesses as well as the national economy’.

the time of

Both the conditions of the programme and the informa-
tion provided in the replies to the Commission's ques-
tionnaires indicate that
the programme was created
exclusively for certain companies, among which Hynix,
which were not able to refinance their bonds via finan-
cial markets. The GOK itself states in its reply to
the
Commission questionnaires that at
measures there was a ‘fight of quality’
in the Korean
financial markets which meant that only companies with
very strong credit ratings could issue bonds and compa-
nies with moderate grade rating were not able to do so.
Hynix at the time had already a weak rating and accord-
ingly would have been unable to make such a financial
operation through the markets. Therefore, the financing
provided via the KDB Debenture Programme conferred a
benefit upon Hynix which was not available to it under
market conditions at the time of the financing. For these
reasons
the financing provided by KDB Debenture
Programme is considered a subsidy in the meaning of
Article 2 of the basic Regulation.

(57) According to Article 44 of the KDB Act, annual net
losses are compensated by the GOK, if the reserve funds
are insufficient. KDB also regularly receives capital injec-
tions from the GOK. The capital injected by GOK 1998
to 1999 was KRW 5,7 trillion.
the GOK
injected 3 trillion KRW into KDB.

In 2001,

(58)

Furthermore, KDB itself recognises that it has a special
relationship with the GOK and that it has a special
public policy role in the Korean economy. The KDB
website states that, ‘In addition to its public policy role
as the Government's flagship financial institution, KDB
funding vehicle for
also acts as
external borrowing. The Government has stated its
intention to use KDB as the primary vehicle for raising
funds in the international markets’ (1).

the Government's

(1) KDB website http://www.kdb.co.kr/.

( i i ) Cou n te r v a i l a b i li ty

(62) According to Article 3 of the basic Regulation, only
specific subsidies are countervailable. The first question
to be addressed is whether the subsidy is specific in law
under Article 3(2)(a). On the face of it, there was no
restriction on which companies could apply for the
programme. There is, however,
some circumstantial
evidence that the scheme was aimed at particular enter-
prises. The information provided in the replies to the
Commission's
the
programme was targeted to specific companies which
had a large amount of maturing bonds which they could
not refinance through the financial market. This implies
the programme was to provide
that

the purpose of

questionnaires

indicates

that

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24.4.2003

financial assistance to the companies concerned, above
all Hynix, which was foreseen from the onset to be the
major beneficiary of the programme. Nevertheless, there
is insufficient evidence to support the argument that the
legislation creating the programme explicitly limited its
access to certain enterprises.

KDB, that KDB was highly unlikely ever to recuperate its
funds. Therefore, KDB's assumption of Hynixs bonds is
considered to be pure debt forgiveness, which is the
equivalent of a grant. This measure is therefore consid-
ered as subsidy in accordance with Section E (a) of the
Guidelines for the Calculation of the Amount of Subsidy
in Countervailing Duty Investigation (2) (the Guidelines).

(63) Article 3(2)(c) of the basic Regulation stipulates that if
notwithstanding any appearance of non-specificity there
are reasons to believe that the subsidy may in fact be
specific, other factors may be considered. Such factors
can be the use of the subsidy programme by a limited
number of certain enterprises, predominant use by
certain enterprises or the granting of disproportionately
large amounts of subsidy to certain enterprises.

(67)

(64)

(65)

(66)

It is noted that the Debenture Programme was used by
only six enterprises, despite involving KRW 2,9 trillion
of expenditure. In addition, it was predominantly used
by enterprises who at the time of the granting of the
measures were members of the Hyundai group. These
enterprises used 79 % of the total expenditure under the
programme. However, and more importantly, Hynix
received a disproportionately large amount of the total
expenditure of the programme, namely 41 %. Under the
original set up of the debenture programme, Hynix was
allocated to receive an even greater amount, namely
47 % of the total expenditure. For these reasons, the
financing received by Hynix under the KDB Debenture
Programme is considered a specific subsidy in the
meaning of the Article 3(2)(c) of the basic Regulation
and therefore countervailable.

(i i i ) Ca lc u la ti on of t h e su b si dy a mou nt

The amount of Hynix bonds financed by KDB was KRW
1,2 trillion. Hynix paid back KRW 280,4 billion
according to the conditions of the programme (1). The
amount to be taken as the basis of the calculation of the
subsidy is the amount received by Hynix under the
programme during the IP, i.e. KRW 919,6 billion.

the amount of

The Commission considered whether it would be appro-
priate to compare this amount to a ‘market benchmark’
(i.e.
finance that would have been
provided by commercial operators in similar circum-
stances), and to use the difference between the two
figures as the amount of subsidy. However, the evidence
on the record,
including the statements of the GOK
itself, shows that the credit rating of Hynix at the time
of the measures render impossible for it to issue bonds
due to the tightened standards existing on the financial
therefore, no commercial entity would
markets and,
have undertaken this sort of operation. Also,
it was
evident at the time of the assumption of Hynix debt by

(1) This amount consists of the 3 % and 5 % payments of the CBOs/
CLOs issued and an advance repayment of the total amount of these
bonds.

the

This
subsidy confers a large, non-recurring benefit.
According to Article 7(4) of the basic Regulation, such a
subsidy should in principle be attributed to the IP, unless
special circumstances justify attribution over a different
period. In the present case, however, since the subsidy is
of such nature that it is benefiting the company over a
period of time longer than only the IP, it is considered
that
allocation method used in Article 7(3),
according to which the amount of subsidy is spread over
is considered appropriate under these circum-
time,
stances. Indeed, the DRAM industry is an industry in
which the main costs are occasioned by the requirement
to have state of art machinery and equipment, which
constitute its main assets needed for operations. There-
fore, the most appropriate allocation period in this case
is the useful
life of the assets (machinery and equip-
ment), which is considered to be five years in accordance
with the financial accounts of the company and the
usual practice in the industry concerned. The amount of
subsidy so allocated was expressed as a percentage of
the total sales of Hynix in 2001. With interest, using the
average commercial interest rate applicable in Korea for
the investigation period, the subsidy amounts to 4,9 %.

8. The October 2001 rescue package, consisting of
debt to equity swap, the second roll-over of debt
and the provision of a new loan of KRW 658
billion

(a) Description of the measures

(68)

The second Hynix CFIC was set up on 4 October 2001
in accordance with the provisions of
the Corporate
Restructuring Promotion Act (CRPA). CRPA was enacted
in August 2001 and its purpose was to facilitate corpo-
rate restructuring, which before was based on agree-
ments between creditor banks and the companies
concerned. The CFIC consisted of 110 financial institu-
tions
trust
including 17 banks and 15 investment
companies. The decisions of the CFIC were taken by
75 % majority. The votes were allocated in proportion of
each institution's exposure of the total loans to Hynix.
Any financial institution exercising its dissenter's rights
by disagreeing with a CFIC resolution would be excluded
from the CFIC permanently.

(2) OJ C 394, 17.12.1998, p. 6.

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L 102/15

(69)

In its second meeting held on 31 October 2001, CFIC
decided on the so-called ‘second restructuring package’
for Hynix. The following measures were proposed:

such behaviour and the resulting
examine whether
benefit can be attributed to the Government involvement
in the banks concerned.

— provision of new loan of KRW 1 trillion to Hynix

with an interest rate of 7 %,

— debt to equity swap by provision of bonds conver-

tible into shares,

— extending the maturities of existing loans until 31
December 2004, converting the maturing corporate
bonds
into corporate bonds with a three year
maturity and an interest rate of 6,5 % and adjusting
the interest rate of the remaining loans in Korean
currency to 6 %.

(70)

The financial
institutions were given three options by
CFIC in the 31 October meeting. The first option was to
agree with the proposals by extending new credit and
participating in a debt-to-equity swap. Secondly,
the
banks which did not want to participate in the new loan
were, under the conditions of
the second CFIC (see
recital 68), obliged to swap 28,5 % of their loans into
equity and waive the rest of the Hynix debt. Thirdly, the
CFIC also decided that those banks which objected to
the measures and used their dissenter's rights would
have their loans purchased back at the liquidation value
as established by Arthur Andersen, who was commis-
sioned to conduct a study on the financial situation of
Hynix at the time.

(71) Nevertheless, only six banks agreed to extend new credit,
which amounted to KRW 658 billion instead of the
planned KRW 1 trillion. These banks swapped a consid-
erable amount of their loans into equity. Eight banks
refused to extend new loans, so they swapped approxi-
mately one-third of their loans into equity and wrote off
the rest of them as a loss. The remaining banks objected
the restructuring and were to receive the liquidation
value of their loans, and had to write the remaining debt
off as a loss. The loans remaining with the banks of the
first category were subject to maturity extensions and
interest rate cuts as explained under recital 69.

(73) Almost immediately after the successful GDR issuance of
June 2001 it became clear that the DRAM market would
not recover in the foreseeable future. On the contrary,
the situation was set to become much worse. Indeed, the
DRAM prices continued to fall. From June 2001 to
August 2001 128 Mbit DRAM prices fell on average by
68 %. The prices continued to fall by a further 52 % by
November 2001. The prices for 64 Mbit fell by 62 %
from August 2001 to September 2001. Analysts agreed
that the DRAM market was at its lowest point ever (1).

(74) Hynix stock price collapsed almost immediately after the
15 June GDR issuance. Only five days after, on 20 June
2001, SSB announced that it would not exercise its
over-allotment option to buy more GDRs since they
were traded for less than the issue price. On 3 August
2001, SSB issued a report on Hynix in which it admitted
that its earlier more optimistic projections on the situa-
tion were wrong. SSB's new Hynix projections cut its
revenue forecast in half and reduced both gross and
operating profit to a substantial loss. By 6 September
2001, the price of GDRs had fallen by 72 %, resulting in
great losses for the purchasers.

(75)

This development was recognised also by the Hynix
creditor banks. The information in the possession of the
Commission shows that
the banks downgraded the
credit rating of Hynix and also their industry ratings for
the semiconductor industry in general during summer
2001. Standard and Poor's classified Hynix's outlook
‘negative’ in August 2001 and downgraded it to CC on 9
September 2001 and to SD (selective default) in October
2001. It is noted that Hynix, due to its negative financial
outlook, had to stop participating in the KDB Debenture
Programme in August 2001. The information in the
possession of the Commission indicates that this was
due to the fact that the banks refused to buy Hynix
bonds and KCGF refused to guarantee all the foreseen
CBOs/CLOs.

(b) Findings of the investigation

(72)

the
The first question to be examined is whether
measures carried out by the banks in favour of Hynix
were compatible with the behaviour of a market investor
or a market creditor in the same situation. If it were
established that the banks' behaviour did not correspond
to that of a private investor or creditor, thereby confer-
the next step would be to
ring a benefit

to Hynix,

(76)

In October 2001, Hynix financial situation had deterio-
rated again. It again faced liquidity problems and it did
not have sufficient cash-flow to meet its obligations, its
It was
debts being six times greater than its equity.
virtually bankrupt, which was also acknowledged by its
creditor banks. Raising capital in the financial markets
was no longer possible.

(1) SSB, September 2001, CFO Asia, December 2001, In-Stat MDR, July

2002.

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(77) As regards the October 2001 measures carried out by
the creditor financial
it is noted that the
institutions,
banks which opted for the first option to extend new
loans to Hynix,
i.e. to carry out an extensive debt to
equity swap and to extend the maturity and cut the
interest rates of the existing loans, were the following:
KEB, Woori Bank, Chohung Bank, KDB (1), NACF (2) and
Citibank. The banks who waived most of their debts but
had to swap part of it into equity were Shinhan Bank,
Kookmin Bank, Housing and Commercial Bank, KorAm
Bank, Hana Bank, Seoul Bank, Industrial Bank of Korea
and Pusan Bank. Korea First Bank used its dissenter's
rights (3). According to information in the possession of
the Commission, the banks participating in the second
and third option, wrote off their Hynix debts as a loss
and sold their Hynix bonds resulting from the debt to
equity swap, so that by 2002 they had eliminated all
their Hynix loans. The behaviour of the six banks of the
first category, on the other hand, was significantly
different. These banks actually extended even more loans
to Hynix, extended the maturities of the existing loans
and held a great amount of Hynix shares (4). Also, as
regards the interest rate of the new loans granted to
Hynix, it is noted that the interest rate was set at 7 %,
which was the rate for financially sound companies, but
was not available to risk capital operation, let alone a
company in the situation Hynix was in at the time (5).

return for their further financing. Therefore, continuing
financing Hynix in October 2001 conferred a benefit
upon Hynix that was not available to it under market
conditions. The next question is therefore to examine,
whether this apparently non-commercial behaviour is
due to the involvement of GOK in the banks concerned.

(79)

It is noted that of the nine banks which stopped finan-
cing Hynix in October 2001, seven were private banks.
Of the six banks involved in the continuous financing of
Hynix on the other hand, the four largest creditors are
either totally or by a large majority owned by the GOK.
One of them is a special bank with a public policy role
and three others are under GOK control due to the fact
that they are themselves under restructuring, have agree-
ments with the GOK regulating their business operations
and are subject to capital injections by GOK. Three of
the four major creditor banks of Hynix are briefly
described below. A description of KDB, and the
reasoning for it being considered as a ‘public body’, is
provided above in recitals 55 to 59.

institutions' choice of

(78) Accordingly, considering the above described circum-
stances, it appears evident that no market investor would
have invested in Hynix in October 2001. This was also
reflected by the Creditor
the
measures to be taken: there was no proposal to issue
GDRs or other similar instruments to the markets to
raise cash, which would have been the most logical way
to proceed in a normal situation.
it
appears that the banks which objected the measures or
which wrote off their debts as a loss at this stage only
receiving the liquidation value, acted in a way any
normal market investor would have done in this situa-
tion. They eliminated their exposure to Hynix for good
and wrote off their losses resulting from this decision.
the banks who
the rationale of
On the contrary,
continued financing Hynix in that situation cannot be
reconciled with any commercial considerations, and
indeed it appears that each of them did not expect any

In view of this,

(1) KDB did not participate in the new loan of 658 billion, but other-

wise went on with option 1.

(2) National Agricultural Cooperative Federation.
(3) Kwangju Bank and Kyongnam Bank objected the refinancing

proposal already in the 4 October 2001 meeting.

(4) It is noted that following the conversion of the CBs into Hynix

shares in June 2002, the banks own 66,84 % of Hynix shares.

(5) It is noted that in January 2001 when Hynix credit rating was BBB-
the loan granted to it by the same banks had a considerably higher
interest rate than 7 %. As by October 2001 the rating had deterio-
rated to ‘selective default’ (see recital 75), the interest rate would
have been much higher had the loan been granted on commercial
terms.

Woori Bank (WB)

(80) Hanvit Bank (currently Woori Bank) is under restruc-
turing following the Korean financial crisis. From
October 1998 onwards, Korea Deposit
Insurance
Corporation (6)
shareholder of
(KDIC) was a major
Hanvit Bank and at the end of 2000, KDIC became the
100 % shareholder. In March 2001 KDIC set up Woori
Financial Holdings Company (WFH) as its fully owned
subsidiary and transferred the shares of Hanvit Bank into
WFH. Hanvit bank was renamed Woori Bank which
remains 100 % owned by GOK via KDIC.

(81)

KDIC injected KRW 3,2 trillion into Woori Bank (Hanvit
at that time) in 1998. In December 2000, Woori Bank
and KDIC entered into an agreement for the implemen-
tation of the management improvement plan for the
bank (Memorandum of Understanding or MOU). Woori
Bank was assessed not to be viable by the Financial
Supervisory Commission, and its
share capital was
reduced to zero. Pursuant to the MOU, KDIC injected
KRW 2,724 trillion in December 2000 as an investment
in the common stock, representing the entire share

(6) The main task of KDIC is to pay off insured depositors in case of an
insolvency of a financial institution. It is a special legal entity estab-
lished in 1996 in order to operate the deposit insurance system in
accordance with the Depositor Protection Act. KDIC was also the
main vehicle used by GOK in recapitalising financial
institutions
during and after the financial crisis. As a result of KDIC equity parti-
cipation and capital
institutions, it became
injections to financial
their shareholder. KDIC represents GOK in the exercise of share-
holder rights in these institutions. KDIC is considered a public body,
and GOK in its replies to the Commission questionnaire equals
KDIC shareholding in the banks concerned to that of the GOK.

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Official Journal of the European Union

L 102/17

capital. A further capital injection of KRW 1,878 trillion
was provided in September 2001. According to the
MOU, in case of failure of Woori Bank to implement it,
KDIC may order Woori Bank to increase or decrease its
capital, pursue a merger, assign contracts such as loans
and deposits or close or sell part of its business opera-
tions.

(85) Due to KEB continued financial difficulties the Financial
a management
Supervisory
improvement
In
2000, KEB submitted its management improvement plan
which received in 2001 ‘conditional approval’, subject to
certain conditions.

Service had
imposed
recommendation on KEB in 1998.

(82)

In July 2001, Woori Bank and WFH entered into an
MOU. Woori Bank shall,
inter alia, consult WFH on
material business decisions before execution and prepare
and implement a detailed business plan in accordance
with the business strategy of WFH. If Woori Bank fails
to implement the business plan, WFH may order Woori
Bank to limit sales of the specific financial items and/or
investments, or to close or merge its operations.

(83)

(84)

Chohung Bank

Chohung Bank was the first Korean financial institution
set up in 1897. It started international banking business
in 1963. In 1999, KDIC injected KRW 2,7 trillion into
Chohung Bank and became its largest shareholder with
80 % of shares. In 2001, the two largest shareholders
were KDIC with 80 % and Hyundai Group with 3,4 %.
KDIC and Chohung Bank entered into MOU in
November 1999 which was amended in May 2000 and
which gave KDIC a decisive influence over Chohung
Bank's business decisions (1).

Korea Exchange Bank (KEB)

KEB was established as a government-owned bank in
1967, when it was separated from the Bank of Korea to
specialise in the foreign exchange and trade business. In
1977 KEB moved into commercial banking. KEB was hit
by financial difficulties in the wake of the Korean finan-
cial crisis. Commerzbank AG of Germany acquired 30 %
of KEB shares in 1998 and KEXIM (2) injected KRW 336
billion into KEB in 1999 and KRW 400 billion in 2000.
In 2000, the bank implemented a two-to-one capital
reduction on all shares for the purpose of disposition of
accumulated deficit. The largest shareholders of KEB in
2001 are GOK by 43,17 % (32,50 % KEXIM and
10,67 % Bank of Korea) and Commerzbank AG by
32,55 %.

(1) It is noted that a new MOU between Chohung Bank and KDIC was

entered into in January 2002.

(2) The Export-Import Bank of Korea. KEXIM was established in 1976
pursuant to the Export-Import Bank of Korea Act. According to the
Act KEXIM aims to promote growth and development of the Korean
economy and to facilitate trade with foreign countries. KEXIM is
owned by GOK (54,8 %), Bank of Korea (39 %) and Korea Develop-
ment Bank (6,2 %). In its replies to the Commission's questionnaires,
GOK equals KEXIM shareholding to that of the GOK. For these
reasons, KEXIM is considered a public body.

National Agricultural Cooperative Federation (NACF)

(86) NACF was formed on 1 July 2000 when the former
National Agricultural Cooperative Federation, National
Livestock Cooperative Federation and National Gingseng
Cooperative Federation were merged further to the 1999
Agricultural Cooperative Law. According to the NACF
its objective is to improve the economic, social
itself,
and cultural status and quality of life of farmers.
In
pursuing that objective, NACF performs diversified busi-
ness activities
including credit and banking service,
which accounted for 31,7 % of its revenues and 75,7 %
of
its operating income in 2001. The number of
member cooperatives was 1 383 in 2001. According to
the information provided to the Commission, none of
the members holds a stake of 1 % or more of NACF. It is
noted that KDIC took KRW 96,2 billion equity participa-
tion in NACF in 2001. It is also noted that the GOK
intervened a number of times either directly or indirectly
in order to assist NAFC financially.

Citibank Seoul

(87)

Citibank Seoul is 100 % owned by Citigroup, a United
the first
States financial group. Citibank was one of
foreign banks authorised to operate in Korea in 1967,
and characterises itself as a ‘committed partner of both
Korean government and industry’ (3). Citibank and its
subsidiary SSB were the financial advisors of Hynix in
2000 to 2001.

(i ) G ove r nme nt i nv olv e me nt i n banks

(88) As regards WB, the records show that the bank was very
well aware of the rather gloomy financial situation of
the documents received during the
Hynix. However,
investigation show that WB approved the measures on
the basis of public interest considerations, referring to
the impact on the national economy of Hynix going
bankrupt. It is noted that such considerations are not
commercial and not used by commercial banks when
assessing whether
financing to a
company in serious
financial difficulties. On the
contrary, such public interest considerations are typically

to grant

further

(3) ‘Citibank in Korea’, www.Citibank.com/korea.

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Official Journal of the European Union

24.4.2003

used by governments when pursuing measures of
supporting national economy, employment or other
public policy goals. Such considerations in the WB loan
decisions can therefore only be understood as reflecting
the fact
the
company is using its influence in directing the business
decisions of the bank, as any major shareholder would.

that GOK as the 100 % shareholder of

(89) As regards Chohung Bank, similar evidence is in the
records. The internal rating of Hynix by the bank does
not support the decision to grant further loans, and
Hynix bonds, according to the bank, were being rated
‘inappropriate for investment’ by credit rating agencies.
Chohung Bank also did immediately raise its
loss
reserves after participating in the measures to cover
80 % of the Hynix debt and it accounted the whole
debt-to equity conversion as
loss. Nevertheless,
according to the documents received during the investi-
gation, Chohung Bank approved the measures by refer-
ring to its need to comply with its MOU with the GOK.
This illustrates that the banks under restructuring are
restricted in their business decisions to comply with the
conditions set for them by GOK. In such situation, the
fact
that GOK was also the majority shareholder of
Chohung Bank with 80 % of the shares, reinforces the
conclusion that GOK used its influence in directing the
business decisions of the bank, as any major shareholder
would.

a

(90) As regards KEB, the situation is similar to the WB and
Chohung Bank. The bank was very well aware of the
risks involved, having given Hynix a rating at the time
of the October financing measures that did not support
granting further credit. Yet it nevertheless continued to
provide financing to Hynix. It is important to note that
the bank was under restructuring itself at the time of the
granting of the October financing measures, and was
therefore supposed to be extremely prudent in its credit
decisions and in particular to avoid ‘bad debts’. Regard-
it nevertheless provided the financing to
less of this,
Hynix. The resulting dangerous commercial situation
was acknowledged by the 2001 Annual Report by inde-
pendent accountants who stated that the actual
losses
resulting from outstanding loans to Hynix and the
Hyundai group of companies may exceed the allowances
made by the bank for such losses and that the ultimate
effects of these significant uncertainties on the financial
position of the bank cannot be determined.

(91)

It is noted that KEB used to be a specialised government
bank and GOK has been a major shareholder of the
bank until 1998 when Commerzbank acquired its shares
in the bank. The bank therefore has a past and culture
of GOK influence in its business decisions that cannot
be ignored. It is considered unlikely that this has signifi-

the

acquisition of

shares by
cantly altered since
Commerzbank in 1998,
in particular considering that
the GOK still remains the largest shareholder of KEB
with 43 % of
the shares. Furthermore, despite being
under restructuring, the KEB continued to make a large
amount of funds available to Hynix on manifestly non-
commercial and very risky terms. As explained in recital
77, the October 2001 loans were made at a rate avail-
able in the market for financially sound companies, but
not for risk capital, let alone a company in a situation
such as Hynix. Indeed, considering the risk involved in
the loans to Hynix, which was rated selective default at
the time, no market loans would have been available in
any event. Given the extent of government involvement,
past and present, in KEB, the totality of the facts on the
record of the investigation indicates that GOK must have
used its influence as the largest shareholder of KEB as
regards the decision to participate in the October 2001
measures,
from which there can be no commercial
benefit for KEB. In support of this conclusion, we note
that there is no other rational explanation than that of
GOK interference for the decision of KEB to continue to
finance Hynix.

(92)

The two remaining financial institutions involved in the
continuous financing of Hynix are NACF and Citibank.
It is noted that these banks were not among the major
creditor banks of Hynix and their shares of the total
Hynix loans in October 2001 were between 1 % and
2 % (1). Citibank refused to cooperate with the Commis-
sion investigation, so the Commission must base its
assessment on the involvement of Citibank on the facts
available in accordance with Article 28 of the basic
Regulation.

(93) Given that Citibank did not cooperate with the Commis-
sion investigation,
the Commission was not able to
verify its motives in participating in the October 2001
measures. On the basis of the information available, the
Commission notes that Citibank Seoul has had a very
close and special relationship with the GOK since 1967.

(94)

In this respect,
it is noted that Citibank has had an
unusually close and symbiotic relationship with GOK
since 1967, when it was authorised to operate in Korea.
This close relationship between GOK and Citibank is
witnessed in the role played by Citibank in assisting
GOK to extricate itself from the Korean financial crisis
of 1997. Citibank led and successfully completed Korea's
bank debt restructuring for a total of USD 21,75 billion
in 1998. Moreover, Citibank helped GOK and govern-
ment related institutions to access capital markets during
the Korean financial crisis by successfully sponsoring a
USD 4 billion global bond offering. On the basis of

(1) NACF around 1,9 % and Citibank around 1,3 %.

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these facts it appears that Citibank indeed have had very
close relationship with GOK. Considering this, and the
fact that Citibank's own rating of Hynix at the time of
the October financing measures does not support a deci-
sion to grant further financing, it appears that the deci-
in the measures
sion of Citibank to participate
concerned may not have been coherent with commercial
considerations.

(98)

The totality of the facts therefore indicates that NACF
carries out its activities,
including its banking business
by pursuing public policy goals and is underwritten by
GOK for these activities. NACF appears therefore not to
carry out its activities according to purely commercial
considerations but under the direction and influence of
GOK, and in any event, there is no other rationale expla-
nation for the continued support of Hynix.

(95)

In the absence of cooperation by Citibank, and thus
failing any other explanation, it cannot be excluded on
the facts available that Citibank Seoul had participated in
the measures on the basis of non-commercial considera-
tions and that in doing so it has been directed to partici-
pate in them by the GOK.

(96) As regards NACF, it is noted that KDIC injected in 2001
KRW 87 billion into NACF to compensate for the accu-
mulated deficit in the former National Livestock Coop-
eratives Federation that NACF took over in 2000. KDIC
also provided NACF KRW 96,2 billion in equity partici-
pation in 2001. In 2000, NACF was exempted of its
long-term borrowings of KRW 275 billion from the
Livestock Development Fund by the Ministry of Agricul-
ture and Forestry. In 2001, NACF also borrowed KRW
38 billion from the GOK with no interest. These
measures demonstrate that NACF is not carrying out its
business according to purely commercial considerations
and principles but appears to be systematically under-
written by GOK, which in 2001 also took a considerable
equity participation in NACF.

(97)

It is also noted that the purpose of NACF is to improve
the economic, social and cultural status and quality of
life of farmers, which is a typical purpose of a coopera-
tive, but also an economic policy objective.
In this
purpose, NACF was made to merge with other coopera-
tives in 1999 by GOK, a decision which was not based
on a commercial considerations of NACF, but decided
upon and imposed on it by the GOK in striving for the
abovementioned policy goals. This fact, and the evidence
the continuous
provided in the preceding recital of
financial support provided by GOK indicates that NACF,
even if being a cooperative, appears to be a body which
carries out an economic policy of supporting the agricul-
tural sector and being underwritten by the GOK for the
losses resulting from its activities. It is also noted that
the rating given by NACF to Hynix at the time of the
October measures did not justify extending a further
loan and participating in the October 2001 measures
under commercial considerations, and the interest rate
of the loan was below market rate (see recital 77).

( i i ) Conc lu si on on c o u nte r v a i l a ble su b si dy

(99)

The measures taken in October 2001 can be attributed
to the GOK, either as acting as a public body in the
meaning of Article 1(3) of the basic Regulation, or as
directing the banks to provide the financing in the
meaning of Article 2(1)(a)(iv) of the basic Regulation.
The measures are considered as subsidies because:

(100) The provision of the loan of KRW 658 billion is a finan-
the basic
cial contribution under Article 2(1)(a)(i) of
to Hynix since the
Regulation and confers a benefit
company was rated selective default at
the time the
benefit was granted and therefore no financing was
available to it on the commercial markets.

(101) The ‘debt to equity swap’ of KRW 2,994 trillion can be
seen in two ways. Firstly, the GOK gave up source of
revenue by waiving debt and relieved Hynix of
its
existing obligation to repay the loan, thus conferring a
benefit. Secondly, the GOK invested in a non credit-
worthy company, something no market investor would
have done. In this way, the government actions (invol-
ving financial contributions under Articles 2(1)(a)(ii) and
2(1)(a)(i) of the basic Regulation) put Hynix in a better
financial position that it would have enjoyed absent this
action and that it could have obtained from the commer-
cial market.

(102) The extension of maturities and the rate cuts of existing
loans are also inconsistent with commercial considera-
tions, since they relieved Hynix of existing obligations,
and are financial contributions under Article 2(1)(a)(ii)
and Article 2(1)(a)(iv) of the basic Regulation.

(103) According to Article 3 of the basic Regulation, only
specific subsidies are countervailable. The measures of
October 2001 were ad hoc measures providing finan-
cing only to a specific enterprise, Hynix. For this reason
the subsidies provided in October 2001 are considered
as specific and thereby countervailable.

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(i i i ) Ca lcu la ti on of t h e a mou nt of su bsi dy

(104) The Commission considered whether it would be appro-
priate to compare the amounts granted to a ‘market
benchmark’ (i.e. the amount of finance that would have
been provided by commercial market investors in similar
circumstances), and to use the difference between the
two figures as the amount of subsidy. However, the
evidence on the record shows that at the time of the
measures no market investor would have invested in
Hynix and no normal financial institution acting under
commercial considerations would have provided finan-
cing to it.
the
measures provided to it were not available to it in the
market and that no market operator would have under-
taken these kind of measures (1).

It can therefore be concluded that

to recover the loan at

(105) As regards the loan of KRW 658 billion, the information
on the records indicates that the providers of the loan
did not expect
the time of
granting it. Hynix had not repaid any principle of its
KRW 800 billion syndicated loan granted to it in January
2001 and had even defaulted on the interest payments.
As regards loans granted before 2001 which formed the
major part of the debt-to-equity swap, these had not
been paid back either during 2001. Indeed, the total
amount of loans and liabilities had only increased during
2001 regardless of the May 2001 measures which were
to be used only for paying off existing debt. In addition,
Hynix rating at the time of the October 2001 loan was
‘SD’ and it was therefore not able to raise money from
the financial markets. For
the total
amount of the loan of KRW 658 billion is considered as
subsidy in accordance with section E(b)(v) of the Guide-
lines. As regards the debt to equity swap of KRW 2,994
trillion, the same principles apply. No market investor
would have invested in Hynix shares at the time of the
measure. In addition, the GOK had also forgiven the
same amount of outstanding debt to Hynix. For the sake
the forgiveness of KRW 2,994 trillion is
of clarity,
considered as subsidy.

these reasons,

(106) As regards the benefit conferred by the roll-over of debt,
the 2001 financial accounts of Hynix indicate that the
value of extension of maturities and reductions of
interest rates was KRW 1,586 trillion. This is effectively
debt forgiveness, as reflected in the financial accounts of
the company and considering that this is the audited
evaluation of
is taken as the
amount of benefit.

the company itself,

it

is considered that

different period. In the present case, however, since the
subsidies are of such nature that they are benefiting the
company over a period of time longer than only the IP,
it
the allocation method used in
Article 7(3), according to which the amount of subsidy
is spread over time, provides an appropriate basis for
attribution under these circumstances. Indeed the DRAM
industry is an industry in which the main costs are occa-
sioned by the requirement
to have state-of-the-art
machinery and equipment, which constitute its main
assets needed for operations. Therefore, the most appro-
priate allocation period in this case is the useful life of
the assets (machinery and equipment), which is consid-
ered to be five years in accordance with the financial
accounts of the company and the usual practice in the
industry concerned. The amount of subsidy so allocated
was expressed as a percentage of the total sales of Hynix
in 2001. With interest, using the average commercial
interest rates applicable in Korea for the investigation
period, the subsidy amounts to 28,1 %.

9. Amount of countervailable subsidies

(109) The provisional amount of countervailable subsidies in
accordance with the provisions of the basic Regulation,
the investigated exporting
expressed ad valorem,
producer Hynix Semiconductor Inc. is 33 %. The subsidy
for Samsung Electronics Co. Ltd is de minimis. There is
no other exporting producer of the product concerned
in Korea.

for

Type of
subsidy

KDB debenture
programme

October 2001
measures

4,9 %

28,1 %

Total

33 %

D. DEFINITION OF THE COMMUNITY INDUSTRY

1. Community production

(110) During the IP the product concerned was manufactured
in the Community by two Community producers that
fully cooperated with the proceeding. One of
these
companies was the complainant. The other company
supported the proceeding.

(107) Consequently, the total amount of the benefit provided

by the October 2001 measures is KRW 5,238 trillion.

2. Definition of the Community industry

(108) These subsidies confer

large, non-recurring benefits.
According to Article 7(4) of the basic Regulation, such a
subsidy should,
in principle, be attributed to the IP,
unless special circumstances justify attribution over a

(1) See, in particular, recital 76.

(111) The product concerned produced by the two coop-
erating Community producers represented 100 % of the
total Community production of the product concerned
during the IP. The two cooperating companies, therefore,
constitute the Community industry within the meaning
of Article 9(1) of the basic Regulation. They are referred
to as the ‘Community industry’ hereafter.

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E. INJURY

1. Preliminary remarks

(112)

It is noted that the DRAM market is characterised by a high degree of technological innovation
which has led to considerable developments in DRAM density and configuration over the recent
years. The DRAM density is expressed in Mbit, which is the statistical parameter commonly used in
the DRAM industry to measure trade flows. The assessment of volume effects is therefore based on
the number of Mbits and not on the number of units. An assessment on the basis of units would be
less accurate as the industry considers both a DRAM component and a DRAM module (which
contains several DRAM components) each as being a single unit.

(113) Eurostat data were not used in the evaluation of volume and price trends as the Eurostat volume
and price data are not considered reliable for the purpose of establishing accurate trends in the
DRAM industry. Eurostat volume data are expressed in kilograms whilst statistical data used and
presented by the DRAM industry are expressed in Mbit. The essential features of the product
concerned rely on technical characteristics such as density, memory and speed. DRAMs with
completely different features and architecture may have the same weight. Therefore, the product
concerned cannot be reasonably compared on the basis of kilograms. In addition, Eurostat figures
may register the origin of the product concerned on the basis of the country of assembly and not
on the basis of the actual country of origin (i.e. country where the wafer is produced). Therefore,
information derived from Eurostat cannot be reasonably used for the purposes of the investigation.

(114)

In considering the situation of the Community industry one should note that Micron Technology
only started production in the Community in October 1998 after acquiring the Texas Instruments
production plant in Italy. Therefore, the 1998 data on Community production, capacity, sales
volume, market share, profitability, employment and productivity reflect this start-up situation. It is
also noted that Infineon, a former division of Siemens, became an independent company in 1999.

(115) Where necessary, for reasons of confidentiality, indices are used to show the evolution of trends.
Given that for one exporting producer (Samsung) the subsidy provisionally established is de minimis,
certain injury indicators have been analysed with regard to the other exporting producer only
(Hynix). As far as imports from Korea are concerned, the injury and causal link analysis focused on
those from Hynix. This is due to the fact that there are only two Korean exporters, i.e. Hynix and
Samsung, with more or less similar export shares and that only Hynix's exports were heavily subsi-
dised.

2. Community consumption

(116) Apparent consumption of the product concerned in the Community was established on the basis of
publicly available external sources. The total figure for Community consumption of the product
concerned has been calculated on the basis of total
imports plus all sales in the Community
produced by the Community industry.

(117) As shown in the table below, Community consumption of the product concerned increased by
416 % over the period considered. As shown, the volume of DRAM consumption has risen each
year as a result of growing demand for products using DRAM and because of an increase in Mbit
per product. However, the growth rate slowed throughout the period from 70 % at the beginning to
around 50 % during the IP.

Consumption
in '000 Mbits

1998

1999

2000

2001
(IP)

16 593 400

28 961 100

45 873 600

68 967 600

100

175

276

416

DRAMs

Index

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3. Imports of the product concerned into the Community

(a) Volume of imports from Korea

(118) The volume of imports from Korea increased by 431 % during the period considered. Imports from

Hynix increased a little faster, i.e. by 461 % during the period.

Imports

Index Korea

Index Hynix

1998

100

100

1999

141

194

2000

251

372

2001
(IP)

431

461

(b) Prices of imports from Korea and Hynix

(119) The average import price of the product concerned from Korea remained stable from 1998 to
2000. It dropped dramatically by 76 % during the IP. The prices in the IP were at substantial loss-
making levels for the Korean exporters. The drop in the prices of Hynix was slightly higher but this
was probably due to the fact that it was selling more of the lower density 64 Mbit DRAMs which
were at the low end of the market and hence more subject to price pressure.

Average import price

Index Korea

Index Hynix

1998

100

100

1999

105

91

2000

99

77

2001
(IP)

23

20

(120) For the determination of price undercutting, the Commission analysed price data in the IP. The rele-
vant sales prices of the Community industry are prices to the first unrelated customer after deduc-
tion of discounts and rebates, i.e. net prices. During the IP, all sales of Korean imports were made
via related companies. Therefore, the relevant sales prices compared are net resale prices to the first
independent customer in the Community after deduction of discounts and rebates.

(121) Different product families of the product concerned could be defined for comparison purposes based
on the following criteria: product type (i.e. dies, components, modules), density, quality, DRAM type,
performance (speed) and packaging.

(122) The Community industry's sales prices and the resale prices of Korean imports of the like product
were compared at the same level of trade, namely independent users within the Community market,
and for the same time period on the basis of weighted average prices per product family. On this
basis, it was found that price undercutting on an overall weighted average basis was not taking
place. However, price undercutting was found to be taking place on a substantial proportion of
transactions, namely 41 % of the transactions representing 32 % of the value of Hynix sales. This
price undercutting, expressed as a percentage of the Community industry's prices, averaged 16,2 %.

(123)

It was also found in the case of Hynix that this undercutting was predominantly taking place on
sales of the higher density DRAMs (the 128 Mbit and 256 Mbit DRAMs). These are the technologi-
cally more advanced DRAMs the comparatively higher sales returns of which are used to finance the
next generation products.

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(c) Market share of imports from Korea

(124) Korea increased its market share over the period considered. There was a significant drop in the
Korean market share between 1998 and 1999, but the market share was more than recovered by
the end of the IP, when the Korean market share was almost 7 % more than the 1998 level. In the
case of Hynix, its market share rose faster, i.e. by 20 % over the period. It is also reasonable to
assume that the Hynix market share, in terms of Mbit, was somewhat constrained by its relative
delay in moving from production of 64 Mbit to the 128 Mbit DRAMs.

Market shares

Index Korea

Index Hynix

1998

100

100

1999

80

111

2000

91

136

4. Situation of the Community industry

(a) Production, capacity and capacity utilisation

1998

1999

2000

2001
(IP)

107

120

2001
(IP)

Capacity (Mbits)

Index

Production (Mbits)

Index

Capacity utilisation

Index

100

100

100

179

175

97

631

1 213

446

891

70

73

(125) The production capacity of the Community industry showed a 12-fold increase over the period
considered. This is due to important investments in buildings, machinery and equipment, which
were made particularly in 2000 and 2001 and were largely driven by the need to invest in new
higher density DRAMs. These higher density DRAMs inevitably lead to a much higher capacity in
terms of Mbits, particularly towards the end of the period considered when 64 Mbit capacity had
largely been replaced by 128 Mbit capacity.

(126) As a consequence of the steady expansion of Community consumption, the Community industry's
production, of the product concerned, increased continuously over the period considered. Capacity
utilisation followed a decreasing trend up to 2000 and increased slightly during the IP.

(b) Sales volume, sales price, market share and growth

Sales in the Community
Mbits

Index
Volume

Index
Average sales price

Index
Market share

1998

100

100

100

1999

451

98

134

2000

1 384

93

166

2001
(IP)

2 491

21

193

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(127) Based on the favourable evolution of Community consumption, the volume of sales of the Commu-
nity industry in the Community in terms of Mbits significantly expanded over the period considered.
The Community industry's sales volume showed a higher growth than the growth of Community
consumption. This higher growth can be explained as Community production of the higher density
128 Mbit DRAMs moved slightly ahead of consumption thus showing an increased market share.

(128) Whilst the average sales prices of the Community industry showed relatively small falls from 1998

to 2000, it fell dramatically by 77 % during the IP.

(129) The Community industry almost doubled its market share over the period considered. In this
respect, it should be noted that half this increase can be accounted for the fact that Micron Tech-
nology, after having acquired the Texas Instruments production plant in Italy in October 1998,
replaced its earlier imports into the Community by Community production. In addition, some of the
remaining increase results from the fact that the Community industrys move to higher density
DRAMs was faster than that of the Korean exporters concerned. This move inevitably results in a
considerable leap in capacity, and in effect also of sales which are measured in Mbits, given that each
unit produced and sold is twice the previous size in terms of Mbits.

(c) Stocks

(130) The Community industry's year-end stock levels as a percentage of production in Mbits varied over
the period considered though it fell in the latter part of the period. The higher levels in the early part
of the period examined were due to exceptional circumstances such as the start-up phase of one
Community producer.

Stocks

Index

1998

100

1999

156

2000

75

2001
(IP)

56

(d) Profitability

(131) The profitability of the Community industry expressed in terms of return on net sales improved
significantly from 1998 to 2000. However, after becoming profitable in 2000 the Community
industry made heavy losses in the IP.

Profitability

Index

1998

– 100

1999

– 3

(e) Investments, return on investment, cash flow and the ability to raise capital

1998

100

1999

100

2000

29

2000

157

2001
(IP)

– 79

2001
(IP)

193

Investments

Return on investments

Cash flow

Index

Index

Index

– 100

– 11

93

– 85

Not available

Not available

100

– 27

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(132)

Investments of the Community industry over the period considered almost doubled. This is due to
the peculiarities of the DRAM sector where production facilities must continuously be upgraded in
order to lower costs of production. Maintaining reasonable investment levels is crucial for the
Community industry in order for it to be able to maintain ‘state-of-the-art’ facilities and to remain
competitive. However, the growth rate of investments slowed down during the IP as the dramatic
decline of sales prices affected cash flow levels, which the Community industry relies on to sustain
its investment levels.

(133) The evolution of the Community industry's return on investment showed a clear deterioration of the

financial situation of the Community industry.

(134) Data on the Community industry's cash flow for 1998 and 1999 could not be obtained in an accu-
rate manner as no comparable data was available for the years concerned. The cash flow figures
obtained for 2000 and the IP reflect internal calculations for the business group within the Commu-
nity industry to which the product concerned belongs. The evolution of the Community industry's
cash flow as shown in the table above clearly confirms the deterioration of the financial situation of
the Community industry during the IP as costs like depreciation, value adjustments and other provi-
sions could no longer be supported. The continuation of the very significant investments that are
vital for the Community industry to remain competitive and viable could therefore not be sustained
at appropriate levels.

(135) The Community industry's ability to raise capital was hindered by a negative cash flow and a
gloomy outlook concerning the market price evolution of the product concerned. Moreover, funds
from the capital markets could only be obtained at high cost given the recognition that the projected
returns on investments would remain weak.

(f) Employment and productivity

Employment

Productivity

Index

Index

1998

100

1999

121

2000

146

2001
(IP)

176

100

144

307

507

(136) Employment for the product concerned and productivity per employee increased considerably over

the period considered.

(g) Magnitude of the subsidy amount

(137) Given the volume and the price of the subsidised imports, the impact of the subsidies on the
Community industry must be considered to be substantial. The volume of the subsidised imports
amounted to almost 50 % of the Community industry's sales volume. The sheer scale of the subsidy
must have had a negative effect on the prices, which dropped as dramatically by 77 % between
2000 and the IP.

(h) Effects from past subsidisation or dumping

(138) The question of whether the Community industry was in a state of recovery from past subsidisation
or dumping was examined, but it was found not to be relevant in this case, as there was no evidence
indicating past subsidies or dumping.

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5. Conclusion on injury

during the period because of the growing market for
DRAMs, this was more than offset by the very substan-
tial injury caused by the drastic drop in sales prices and
the consequent heavy losses suffered by the producers.

(139) Due to technological developments

in the DRAM
industry, demand in Mbit terms, has risen each year as
the user industry changed over to higher density DRAMs
to increase system performance. This growth of demand
in Mbit terms explains why, during the period consid-
ered the Community industry benefited from the favour-
able evolution of the Community consumption of the
product concerned in terms of sales volume and market
share.
share.
However, almost half the increase was the result of one
Community producer replacing its share of imports from
the United States, prior to 1998, with actual Community
production thereafter.

increased its market

In addition,

it

(140)

In addition, the apparently higher increase of the market
share of the Community industry can be explained to a
certain extent by the fact that the sales volume measured
in Mbits reflects the generally more advanced technolo-
gical stage of the Community industry as compared with
the Community
that of Korean exporters. That
industry moved more swiftly from production of 64
Mbit DRAMs to production of 128 Mbit DRAMs than at
least one of the their Korean counterparts. This results in
a considerable leap in capacity, and thereafter sales
(which are measured in Mbits), given that each unit
produced and sold is twice the previous size in terms of
Mbits.

is,

(141) The sales prices of the Community industry, however,
fell dramatically between the year 2000 and the IP, i.e.
by 77 % and this fall had immediate and very serious
consequences for the Community industry. The impact
of the massive fall in prices during the IP was quickly
reflected in negative effects on cash flow, profitability
and return on investment of the Community industry
and hence the ability to raise capital. The effect on prof-
itability was huge since during the IP, every unit was
sold with heavy losses which on average amounted to
96 %. Although investments of the Community industry
as well as productivity and employment grew in absolute
terms during the period considered, the levels fell well
short of what is normal for this industry to remain
competitive, to maintain the state of art facilities, to
continue with a high level of investments on research
and development and to keep abreast with leading-edge
technology.

(142) Taking into account all the factors mentioned above, it
is provisionally concluded that the Community industry
has suffered material
injury within the meaning of
Article 8 of the basic Regulation. Though the position of
the Community industry improved in certain respects

F. CAUSATION OF INJURY

1. Introduction

(143)

the Commission examined whether

In accordance with Article 8(6) and (7) of the basic
Regulation,
the
subsidised imports of the product concerned originating
in Korea have caused injury to the Community industry
to a degree that enables it to be classified as material.
Known factors other than the subsidised imports, which
could at
the same time be injuring the Community
industry, were also examined to ensure that possible
injury caused by these other factors was not attributed
to the subsidised imports.

2. Effect of the subsidised imports

(144) Community consumption of

the product concerned
increased four-fold over the period considered. Produc-
tion by the Community industry increased nine-fold over
the same period whereas subsidised imports originating
in Korea only increased at a slightly higher pace than
the Community consumption. Over the same period, the
development of market shares followed the same trend.
The evolutions of market share and production of the
Community industry during the period considered were
influenced by the fact
the Community industry
that
replaced its share of imports from the United States
prior to 1998 with actual Community production there-
after. Furthermore, the Community industry increased its
market share also by absorbing market shares from Japa-
nese producers. Moreover, the faster investments made
by the Community industry (from 64 Mbit DRAMs to
128 and 256 Mbit DRAMs) as compared to their Korean
inevitably
counterparts, has meant
increased their production and market shares in terms of
Mbits.

they have

that

(145) The investigation found that the average import prices
of Hynix over the period considered fell very sharply, i.e.
by 80 % and that the prices of the Community industry
fell by a similar rate. In fact, it was found that during the
IP, the Korean import prices and those of the Commu-
nity industry were, on average, largely at the same level.
This can be explained by the fact that the DRAM market
is fully price transparent and price moves by one
immediately followed by other
producer are almost
producers so that it is difficult to establish a price leader.

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(146) This fall in prices can, to a limited extent, be explained
by the slowdown in market growth but it is reasonable
to assume that other reasons may have been responsible
for the sheer magnitude and suddenness of this drop.
During the IP, the Community prices suddenly dropped
by 77 %, to levels where massive losses of 96 % were
being sustained by the Community industry.

continuously adapt their prices downwards. Moreover,
these low-priced subsidised imports had a significant
negative impact on the situation of
the Community
industry.

for

(147) By the middle of year 2001 it was becoming increasingly
clear that the first bail-out of Hynix would not be suffi-
the company to survive. This perception
cient
confirmed the market's fears that
the existing world
overcapacity (approximately 20 %) would continue for
the foreseeable future (1).
that
government intervention was a distinct possibility and
these events coincided with a very sharp and sudden fall
in prices both in the Community and worldwide.

It also became clear

in prices of

(148) Moreover, a closer examination of prices showed that
Hynix's import prices were undercutting the prices of
the Community industry on a substantial proportion of
its transactions (i.e. 41 % by number of transactions and
32 % by value) and can thus be said to have contributed
significantly to the fall
the Community
producers during the IP. The most damaging aspect of
this undercutting was that it was focussed mainly on the
higher density DRAMs the higher returns from which
the Community industry would under normal circum-
stances use to finance the next generation DRAMs. This
industry can only remain competitive if sufficient invest-
ments are made in the development of DRAMs tech-
nology. It is considered likely that but for the subsidies
received, Hynix could not have been able to survive in
the market and sell at these aggressively below cost
prices. Moreover, various market analysts have recog-
nised that Hynix's precarious financial situation meant
that selling was absolutely essential
irrespective of the
price. This was in order to generate cash flow to serve
its considerable debts and to be able to maintain the
high level of capacity utilisation to keep its unit costs
down (2). Accordingly, during the IP, Hynix had all
incentive to sell at whatever price in the Community,
thereby contributing to the injury.

3. Impact of other factors

(a) General economic downturn during the IP

(150) Despite the general economic downturn of the PC and
telecommunication markets in 2001, consumption of
the product concerned continued its upward trend
though at levels below those applicable before the down-
turn. The increased consumption in terms of Mbits
stemmed to a large degree from the introduction of
Microsoft XP, which has much higher Mbit requirements
than previous systems, and increased sales of ‘upgrade’
products generated by the low prices. Whilst
the
economic downturn may have had some downward
effect on prices, it can be assumed that, with consump-
tion rising, this effect was not substantial.

(b) Imports of the product concerned from other countries than

Korea

(151) The imports of the product concerned from other coun-
tries (e.g. United States of America, Japan, Taiwan) in
market share terms dropped from 41 % to 20 % during
the period considered. This drop of market share reflects
the fact that some producers closed down their opera-
tions. The lost market share of third countries was to a
large extent
taken over by the Community industry,
though as indicated above the move in market share is
somewhat exaggerated both by the Mbit measurement
and the faster move to more sophisticated technology by
the Community industry. There is no evidence that
imports from countries, other than Korea, contributed in
any significant way to the injury suffered by the
Community industry.

(149)

It is therefore concluded that the subsidisation has led in
a very substantial way to the very low price levels on the
Community market. Without the subsidies in question it
is reasonable to assume that prices would have been
higher and that Hynix would not have been able to
charge the very low prices that they practised in the IP,
and which as a result forced the Community industry to

(1) Hynix counted for 17 % of world production during the IP.
(2) International analysts share this view. See J.P. Morgan, September

2002, Morgan Stanley, September 2002.

(c) Export activity of the Community industry

(152) The evolution of export volume and prices of

the
Community industry during the period considered is in
line with the evolution of its sales in the Community
over the same period. However, given the lower volume
of exports in relation to the volume of sales in the
Community during the IP, the injury suffered by the
Community industry cannot be attributed to its exports.

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(d) Overcapacity

(153) The worldwide DRAM market still suffers from struc-
tural over-capacity resulting from the expectations of the
late 1990s that the market would continue its rapid
growth. This over-capacity can be said to have contrib-
uted to the severity of the current downturn from which
this industry is suffering. As is the case with all down-
turns, it is reasonable to assume that this one had down-
ward effect on prices. However, it is also reasonable to
assume, that had the Korean government not intervened
with the subsidies, the situation in both Community and
worldwide as regards overcapacity would not have been
so pronounced. It should be noted that during the IP,
Hynix was the third biggest DRAM producer in the
world (around 17 % of world production) after Samsung
and Micron. Furthermore,
the over-capacity existed,
albeit to varying degrees, throughout the period consid-
ered, but only during the IP did prices suddenly drop
very sharply. Hence, it is considered that the overcapa-
city as such did not significantly contribute to injury.

levels.

In view of

nity industry. These imports were found to be a substan-
tial cause of prices in the Community falling dramati-
cally to levels which generated huge losses. This situa-
tion had grave consequences on the profitability of the
Community industry and its ability to maintain the
the analysis,
necessary investment
which has properly distinguished and separated the
effects of all known factors on the situation of
the
Community industry from the injurious effects of the
subsidised imports,
is provisionally concluded that
these other factors are not such as to break the causal
link between subsidisation and injury. Accordingly, it is
provisionally concluded that these imports have caused
material
injury to the Community industry within the
meaning of Article 8(6) of the basic Regulation.

it

G. COMMUNITY INTEREST

1. Introduction

4. Conclusion on causation

(154) Factors other than the subsidised imports originating in
Korea, such as the general economic downturn,
the
export activity of the Community industry and the over-
capacity in the market, may well have contributed to the
injury which the Community industry was found to be
suffering from during the IP. However,
the general
economic downturn could not have had a significant
effect on the situation of the Community industry since
the Community consumption continued to increase.

(155) The reduced prices of the Community industry's export
sales may have also contributed to the injury. However,
given the lower volume of exports in relation to the
volume of sales in the Community during the IP, the
injury suffered by the Community industry cannot be
attributed to its exports.

(156) As far as over-capacity is concerned,

this wordwide
situation existed during a number of years including the
period considered. Therefore, this overcapacity cannot
be considered as the main cause of the very significant
sudden drop in prices which led to the injury suffered
by the Community industry.

(157) However, the investigation has shown that during the
period considered subsidised imports originating in
Korea were sold on the Community market at prices
which caused very considerable injury to the Commu-

(158) The Commission examined whether, despite the conclu-
sions on injurious
subsidisation, compelling reasons
existed that could lead to the conclusion that it is not in
the Community interest to adopt measures in this parti-
cular case. For this purpose, and pursuant to Article
31(1) of the basic Regulation, the impact of possible
measures on all interests concerned by this proceeding
and also the consequences of not taking measures were
considered on the basis of all evidence submitted.

(159)

In order to assess the likely impact of the imposition of
measures, information was requested from all interested
parties. The Commission sent questionnaires to unrelated
importers and users of the product concerned. In total,
eight questionnaires were sent to unrelated importers
and 37 to users.

(160) Questionnaire responses were received within the time
limits from five users (i.e. Dane-Elec Memory, France;
Dataram International ApS, Denmark; MMT Ltd, United
Kingdom; Olidata SpA., Italy and Time Group, United
Kingdom) and two distributors/unrelated importers (i.e.
Avnet BV, Netherlands and CHI, Austria).

(161) Two cooperating users (i.e. Dane-Elec Memory and MMT
Ltd) failed to provide a non-confidential version of their
questionnaire
cooperating unrelated
importer (i.e. Avnet BV) did not import the product
concerned during the IP. Therefore, their questionnaire
replies were not taken into account further in the inves-
tigation.

reply and one

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2. Interest of the Community industry

(162) The situation of the Community industry has deterio-
rated sharply due to the low-priced subsidised imports
of the product concerned from Korea which has led to
very low prices and huge losses. These,
in turn, are
adversely affecting the ability of the Community industry
both to remain profitable and to invest in order to
remain competitive.

(163) The Community industry is viable under normal market
conditions following substantial rationalisation over the
last decade. The number of producers has fallen from
seven to two in that period. The existing Community
producers have made great efforts to keep at the front
end of technological developments for this product and
they are now considered to be very competitive in world
terms.

financial

situation of

the precarious

(164) The DRAM industry is considered an important high-
technology industry. Unless countervailing measures are
imposed,
the
Community industry will deteriorate to a point where its
very existence could be at risk. Under normal economic
conditions producers cannot sustain the very heavy
losses which they are currently incurring for very long.
The disappearance of the two remaining Community
producers would adversely affect the level of competi-
tion because the Community supply for the product
concerned would become dependent on imports by only
a few producers operating outside the Community.
Furthermore, the negative impact on employment will
be significant if this technologically advanced industry
with more than 10 000 employees at the time being
would disappear. It is noted that the market entry costs
are high and re-entry by existing producers or even by
new ones would be highly unlikely.

(165)

It should be noted that the United States imposed provi-
sional countervailing measures on DRAMs originating in
Korea recently. Under the circumstances, these measures
would have led to significant diversion of trade from the
United States market to the Community if measures had
not been imposed by the Community.

(166) The adoption of countervailing measures would re-estab-
in the
lish fair competition in the DRAM market
Community by preventing further price depression
caused by unfairly subsidised Korean imports. The
Community industry could then renew and even
enhance its previous levels of investment and maintain
its competitiveness.

3. Interest of users and distributors

(167) As regards the users, only three of the 37 users coop-
erated with the investigation. These cooperating users
represent according to the information provided around

1 % of the Community consumption. The absence of
cooperation by the vast majority of users in this case
leads to the conclusion that should any measures be
imposed, they will not have any significant impact on
their situation.

(168) The available information indicates that even if

the
DRAMs prices in the Community would increase by the
full countervailing duty rate, the impact on the prices of
PCs will be limited to around 1 %. However, all coop-
erating parties
imposition of
measures will only have a limited impact on DRAM
prices at least in the short-term, mainly because of the
chronic overcapacity which exists worldwide. It is there-
fore expected that users and consumers would not be
significantly affected by the imposition of countervailing
measures.

recognised that

the

(169) The sole cooperating distributor stated that it is against
the imposition of countervailing measures as the limited
DRAMs availability of the Community industry, could
only result in an increased market share of third coun-
tries producers and in particular Taiwanese producers.

(170) The argument put forward by the cooperating distri-
butor is not persuasive. In fact, the Community industry
still has significant spare capacity available which can be
used if the market conditions allow fair competition.

(171) The Commission also notes that there is no indication
that the re-establishment of open and fair market condi-
tions would prevent producers in third countries from
competing in the Community market. The counter-
vailing measures would merely remove the distortion of
competition arising from subsidies and allow a faster
recovery from the current very heavy losses. In a stable
increasing productivity from non-subsidised
market,
technologically
suppliers
advanced DRAMs at very competitive prices.
Indeed,
where the level of the countervailing measures is equal
to the subsidy amount, but
lower than the amount
required to remove fully the injury, it is only the unfair
element of the exporters' price advantage which will be
eliminated. In such a situation, the exporters can fully
compete on the basis of their actual competitive advan-
tage.

should increase output of

(172) As already indicated above,

the non-imposition of
measures may lead to the disappearance of a high-skilled
technologically advanced industry which in turn would
reduce the level of competition and increase the depen-
dence of
and telecommunications
industry in the Community on supplies from third coun-
tries.

electronics

the

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(173) This indicates that neither users nor consumers would
be unduly affected by the imposition of measures.

4. Conclusion on Community interest

(174) On the basis of the above, it is concluded that the impo-
sition of provisional countervailing measures would not
be against the Community interest.

by the Community industry on the Community market.
The non-injurious price per model has been obtained by
adding the above mentioned profit margin of 15 % to
the cost of production per model. Any difference
resulting from this comparison was then expressed as a
percentage of the total cif import value. These differ-
ences were in all cases above the subsidy amount estab-
lished.

2. Provisional measures

H. PROVISIONAL COUNTERVAILING MEASURES

1. Injury elimination level

(180) As the injury elimination level is higher than the subsidy
amount established, the provisional measures should be
based on the latter. The rate of the provisional counter-
vailing duty should therefore be set at 33 %. No duty
should be imposed on Samsung Electronics Co., Ltd.

(175)

the conclusions reached with regard to
In view of
subsidy,
injury, causation and Community interest,
provisional measures should be taken in order to prevent
further injury being caused to the Community industry
by the subsidised imports.

(176) For the purpose of establishing the level of the provi-
sional measures, account has been taken of both the
subsidy amount
injury
sustained by the Community industry.

found and the amount of

the injurious subsidies,

(177) The provisional measures should be imposed at a level
sufficient to eliminate the injury caused by these imports
without exceeding the subsidy amount established.
When calculating the amount of duty necessary to
remove the effects of
it was
considered that any measures should allow the Commu-
nity industry to cover its costs and obtain overall a profit
before tax that could be reasonably achieved under
normal conditions of competition, i.e. in the absence of
subsidised imports, on the sales of the like product in
the Community. The pre-tax profit margin used for this
calculation was 15 % which is necessary for the industry
to maintain reasonable levels of investment.

(178)

It is noted that the product life of DRAMs is short and
that the industry needs substantial profits in order to
finance the necessary annual investments (at a range of
EUR billion) in order to simply remain competitive. It is
also noted that during the last profitable period the
Community industry realised much higher profits than
15 % on net turnover. Therefore, the 15 % is considered
a reasonable profit margin in this context. It could be
even argued that a higher profit level would have been
more appropriate. However,
it was not necessary to
address this issue in view of the findings set out in the
next recitals.

(179) The necessary price increase was then determined on the
basis of a comparison of the weighted average import
price, as established for the undercutting calculations,
with the non-injurious price of the different models sold

I. FINAL PROVISION

(181)

In the interests of sound administration, a period should
be fixed within which the interested parties which made
themselves known within the time limit specified in the
notice of initiation may make their views known in
writing and request a hearing. Furthermore, it should be
stated that the findings concerning the imposition of
duties made for the purposes of this Regulation are
provisional and may have to be reconsidered for the
purpose of any definitive duty,

HAS ADOPTED THIS REGULATION:

Article 1

1.
A provisional countervailing duty is hereby imposed on
imports of certain electronic microcircuits known as dynamic
random access memories (DRAMs), of all types, densities and
variations, whether assembled,
in processed wafer or chips
(dies), manufactured using variations of metal oxide-semicon-
ductors (MOS) process technology,
including complementary
MOS types (CMOS), of all densities (including future densities),
irrespective of access speed, configuration, package or frame
etc. This also includes DRAMs presented in (non-customised)
memory modules or (non-customised) memory boards, or in
some other kind of aggregate form, provided the main purpose
of which is to provide memory, currently classifiable within CN
codes 8542 21 11, 8542 21 13, 8542 21 15, 8542 21 17,
ex 8542 21 01 (TARIC code 8542 21 01 10), ex 8542 21 05
(TARIC code 8542 21 05 10), ex 8548 90 10 (TARIC code
8548 90 10 10), ex 8473 30 10 (TARIC code 8473 30 10 10)
and ex 8473 50 10 (TARIC code 8473 50 10 10), originating
in the Republic of Korea.

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The rate of the provisional duty applicable to the net
shall be as

2.
free-at-Community-frontier price, before duty,
follows:

Korean exporters

Rate of duty (%)

TARIC
additional code

Samsung Electronics Co., Ltd
24th Fl., Samsung Main Bldg
250, 2-Ga, Taepyeong-Ro,
Jung-Gu, Seoul

0 %

A437

All other companies

33 %

A999

Article 2

Without prejudice to Article 30 of Regulation (EC) No 2026/
97,
interested parties may request disclosure of the essential
facts and considerations on the basis of which this Regulation
was adopted, make their views known in writing and apply to
be heard orally by the Commission within 20 days of the date
of entry into force of this Regulation.

Pursuant to Article 31(4) of Regulation (EC) No 2026/97, the
parties concerned may comment on the application of this
Regulation within one month of the date of its entry into force.

Unless otherwise

3.
concerning customs duties shall apply.

specified,

the provisions

in force

Article 3

4.
The release for free circulation in the Community of the
product referred to in paragraph 1 shall be subject to the provi-
sion of a security, equivalent to the amount of the provisional
duty.

This Regulation shall enter into force on the day following that
of its publication in the Official Journal of the European Union.

Article 1 of this Regulation shall apply for a period of four
months.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 23 April 2003.

For the Commission

Pascal LAMY

Member of the Commission