Hynix sees semiconductor profits plummet

South Korean chip manufacturer Hynix Semiconductor on Thursday blamed a 31 percent drop in profits on a strong Korean won and a decline in average chip prices.

Hynix recorded an operating profit of 360 billion won ($3.8 million) in the first quarter of 2006, compared with the previous quarter's 522 billion won profits.

The company attributed the sharp tumble to the "worsened profitability of NAND flash due to severe price erosion," as well as the growing strength of Korean won against the U.S. dollar.

Hynix's two major products are DRAM and NAND flash memory chips, which the company said had experienced a decline in seasonal demand. Demand for NAND flash chips, used in many portable devices, including flash-based MP3 players, boomed in the final quarter of 2005.

NAND chip prices have slumped since January as demand has fallen off, while supply hasn't. As a result Hynix's weighted average selling price for NAND flash was down by 29 percent "due to slow demand," the company said.

Samsung Semiconductor, Hynix's main competitor, also has reported a sharp drop in profits for the first quarter of this year. The No. 1 NAND flash chip manufacturer recorded declines in both sales and operating income last week, and again attributed falling NAND flash memory prices to the drop.

"Profit levels declined in the past quarter because of market challenges such as the exchange rate. Excluding the exchange rate variable, the financial results were on the whole reasonable," Woosik Chu, senior vice president and head of the investor relations team at Samsung Electronics, said in a statement.

Samsung remained positive that semiconductor demand would increase in the second quarter of 2006 as 8GB NAND chip production processes bring down prices and demand for chips in mobile devices increases.

"Demand is expected to pick up with the first quarter decline of NAND flash memory prices, (because) the start of 8GB NAND flash memory and 60-nanometer process technology production will bring cost advantages," Chu said.

Analyst firm Gartner also predicted an increase in profitability in the semiconductor market in 2006, forecasting that the worldwide semiconductor capital equipment market would total $38.8 billion in 2006, a 14.3 percent increase from 2005.

Tom Espiner of ZDNet UK reported from London.