(i) Pricing Trends in the DRAM Industry

1.409 Korea's basic allegation is that the DOC erred when it concluded that the DRAM market experienced a significant downturn in 1996 that might continue well into 1997. Korea maintains that the record in the underlying administrative proceeding established that: (i) by the end of 1996, the DRAM market was firmly on the road to recovery; (ii) the DOC focused on price trends in the spot market and ignored data on Respondents' contract prices to original equipment manufacturers ("OEMs"); (iii) the DOC did not even "acknowledge" that DRAM costs constantly decline; and (iv) DRAM prices were not falling faster (or for a more sustained period) than DRAM costs.

1.410 In point of fact, when the administrative record closed to new factual information on 2 May 1997, the road to recovery for the DRAM industry was, at best, bumpy. First of all, the enormity of the 1996 downturn cannot be over-stated. It was the first year of negative growth for the DRAM industry since the downturn in 1985.²⁹³ As put by Kenneth Flamm, Hyundai's economic consultant, "[n]o forecaster predicted the exceptional magnitude of the enormous decline in DRAM prices that took place in the 2nd quarter of 1996."²⁹⁴

1.411 Secondly, the only reason anyone in the industry was talking about a recovery in 1997 is because the Korean producers announced production cutbacks toward the end of February, 1997,²⁹⁵ and not because the systemic problems which plague this industry (e.g., excess production capacity, excess supply, accumulated inventory) had corrected themselves.²⁹⁶ Therefore, while the announcement had a positive impact on the market,²⁹⁷ it was, at best, a temporary measure which could easily reverse itself.²⁹⁸ According to a February, 1997 report prepared by De Dios & Associates, and cited by Korea:

1.412 In its rebuttal submission, Korea will undoubtedly argue that one of the ways the market could have "changed" at this time was for the better. It will cite passages in the administrative record where various investment bankers and industry experts predict higher prices and better times for the DRAM industry in 1997.³⁰⁰ What it will ignore, is roughly the same number of experts who were not sure which way the market was headed and who openly expressed concerns about its future.³⁰¹ This evidence, which was put on the record as late as 2 May 1997 (more than six weeks after the DOC's preliminary results), established that numerous forces threatened to reverse the market's brief turnaround, including:

• the temptation on the part of Korean vendors to "ship more of their accumulated inventory";³⁰²
• excessive customer inventories due to "slow PC end-use demand";³⁰³
• the tendency of some Japanese producers to "weigh additional profit margin against strategic customer relationships";³⁰⁴
• global oversupply and excess production capacity;³⁰⁵ and,
• the pricing strategies of European and US DRAM suppliers.³⁰⁶

1.413 Moreover, the uncertainty surrounding the direction of the market had not resolved itself by the time the DOC issued its final results on 24 July 1997. For example, after initially rising on news of the Korean "production cutbacks," spot market prices for the 1Mx16 EDO DRAM decreased from the $7.45 to $8.09 range on 13 June 1997 to the $6.30 to $6.85 range on 27 June 1997.³⁰⁷

1.414 This evidence, when measured with the entire record, led the DOC to conclude:

1.415 Far from being a "tepid conclusion" which states the obvious, this finding by the DOC accurately described the volatile state of the DRAM market in the late spring and early summer of 1997. As the DOC emphasized in later sections of its notice:

1.416 In short, Korea's claim that the DRAM market was firmly on the road to recovery by the end of 1996 is without merit.³¹⁰ The DOC reasonably determined based upon facts properly established that US market conditions in the DRAM industry remained volatile during the first part of 1997.

1.417 Equally infirm is Korea's contention that the DOC ignored or disregarded: (i) Respondents' contract prices to OEMs, (ii) the constant decline in DRAM costs, and (iii) the absence of any evidence on the record which indicated that DRAM prices were falling faster (or for a more sustained period) than DRAM costs. On the contrary, the administrative record is replete with evidence that the DOC gave careful consideration to each of these matters before making its final determination.

1.418 For example, the DOC determined, based upon company-specific cost and price data provided by Respondents (and verified by the DOC), that as the market downturn in 1996 worsened after the close of the third review, Respondents were forced to price a "substantial" portion of all home market sales below their declining cost of production.³¹¹ In addition, the DOC verified, as Respondents had alleged, that their sales were based primarily on contract prices to OEMs (such as Compaq), as opposed to "spot market" prices, and that contract prices tended to lag behind market prices in a declining market.³¹² However, the DOC also determined, based upon record evidence, that: (i) contract prices to OEM customers follow the direction of prices on the spot market; and (ii) when Respondents restricted the supply of DRAMs to distributors and brokers in February of 1997 in order to stabilize spot market prices, their contract prices fell below the spot market.³¹³ According to some industry observers, contract prices for DRAMs fell by as much as $4 below the spot market.³¹⁴ In summarizing its conclusions on these points, the DOC stated, in part:

1.419 Finally, the DOC determined, based upon record evidence, that contract and spot prices were rapidly trending below Respondents' reported costs of production throughout the period that immediately followed the third administrative review.³¹⁶ Indeed, part of the DOC's basis for this determination was price data for the first quarter of 1997 provided by some of Respondents' OEM customers and company-specific cost projections for the second quarter of 1997 contained in the Flamm Study.³¹⁷

(ii) Inventory Levels

1.420 In the Final Results Third Review, the DOC stated:

1.421 Korea contends that it "should have been obvious to the DOC that, in this commodity market, if prices were to rise and demand did not, then production and inventory would have been cut."³¹⁹ According to Korea, "[t]here is no credible evidence on the record that production did not decrease just as Respondents stated."

1.422 On the contrary, a careful reading of the administrative record casts a large shadow of doubt over the "production cutbacks" announced by the Korean producers. First, record evidence indicates that the Respondents never actually "reduced" production. At most, they simply held back on previously announced increases in production.³²⁰ Secondly, the administrative record is awash in evidence that the Respondents orchestrated a very "clever" tightening of the spot market in February of 1997 by cutting back on shipments to distributors and brokers (who have a big influence on the spot price), while maintaining shipments to their "premium," OEM customers.³²¹ The record also establishes that the Respondents were able to affect this change in the "market's psychology," as one observer put it, by accumulating inventory.³²² Goldman Sachs, for example, informed clients as late as 14 April 1997 that the Korean producers never instituted any type of production cutbacks. Instead, they simply built up inventories "that will be unleashed on the market later."³²³

(iii) Petitioner's Allegation that LG Semicon and Hyundai Were Dumping in 1996

1.423 Korea argues that the DOC based its determination not to revoke the anti-dumping order on DRAMs from Korea, in part, on certain data reported by Respondents which showed that their home market sales made below cost increased at a rapid pace in May and June of 1996 as the downturn in the DRAM market worsened. Korea contends that because the DOC conceded that this information was "irrelevant" to its analysis of dumping, the DOC should not have relied on these data to inform its revocation decision. However, Korea misstates what the DOC actually did.

1.424 To begin with, the DOC did not disregard any home market sales on the basis that they were below cost when it calculated normal value in the final results of the third administrative review.³²⁴ Thus, any arguments based upon the requirements of the below-cost test under United States law are of no consequence.³²⁵

1.425 Secondly, the DOC did not equate sales made below cost during a two-month period with dumping. As the agency clearly stated in its final results:

1.426 Instead, the DOC weighed all of the record evidence and arguments made by the parties before it decided that the requirements set forth in 19 C.F.R. � 353.25 (1997) had not been met. As the DOC explained in the final results of the challenged determination, Respondents' dramatic increase in below-cost sales immediately after the period of review was only one factor that influenced its decision:

(iv) Whether Korean DRAM Producers Can Remain Competitive in the US Market without Dumping

1.427 Korea asserts that the Respondents had no incentive to dump in the United States because they were either establishing production facilities in the United States, had limited sales to the United States, or because demand in other parts of the world was so great they could afford not to dump in the United States.

1.428 With respect to Korea's assertion that LG Semicon's share of the US market was too small to justify dumping, the record actually demonstrates that the company's share of the US market, both in relative and absolute terms, was far from insignificant.³²⁸

1.429 As for Korea's claim that both Respondents focus more on Southeast Asia and/or Europe, and less on the United States, the record confirms that the United States is home to the world's largest consumers of DRAMs, including important customers of both LG Semicon and Hyundai.³²⁹ Moreover, data obtained from Dataquest shows the Americas to be close to twice the size of other regional markets for DRAMs. In 1996, for example, the Americas accounted for a reported $10,107 million in DRAM consumption, compared with $5,895 million for Asia/Pacific (excluding Japan), $5,166 million for Japan, and $4,759 million for Europe.³³⁰ In addressing these issues in the Final Results Third Review, the DOC stated, in part:

1.430 Finally, Korea's claim that Hyundai had no incentive to dump because it is building a DRAM factory in the United States cannot be sustained. First of all, what little information is on the record regarding this issue indicates that the plant had not been completed, let alone begun commercial operations, at the time the DOC issued the Final Results Third Review.³³² Secondly, there is nothing on the record of the underlying administrative proceeding which demonstrates that Hyundai would not continue to import DRAMs into the United States once the plant was completed.

To continue with Rebuttal Arguments Made by Korea

²⁹³ LG Semicon Case Br., Ex. B (VLSI Research) (Ex. USA-15); Case Brief of Hyundai, Ex. 2 at 5 and Fig. 3 ("Flamm Study") (Ex. USA-12).

²⁹⁴ Id., Ex. 2 at 22 (emphasis added by the United States).

²⁹⁵ Micron Rebuttal Br., Ex. 1 (Goldman Sachs) (Ex. USA-26); Case Brief of Hyundai, Ex. 7-11 (Ex. USA 12).

²⁹⁶ See, e.g., Case Brief of Hyundai, Ex. 10 (Morgan Stanley) ("the global oversupply problem still remains") (Ex. USA-12). For a fuller discussion of the economic forces that were pulling on the DRAM industry during the very volatile period before and after the DOC's preliminary results in this case, see Id., Ex. 5 (De Dios & Associates: "The DRAM Market Advisor") (Ex. USA-12).

²⁹⁷ Indeed, spot market prices for 16 Meg DRAMs reportedly rose by approximately twenty percent on mere rumors of the announcement. Id., Ex. 7 (Electronic News) (Ex. USA-12).

²⁹⁸ Id., Ex. 5 (De Dios & Associates) (Ex. USA-12).

²⁹⁹ Id. (emphasis added by the United States).

³⁰⁰ See, e.g., Id., Ex. 10 (Morgan Stanley) and Ex. 15 (Merrill Lynch) (Ex. USA-12); LG Semicon Case Br., Ex. B (VLSI Research) (Ex. USA-15).

³⁰¹ See, e.g., Case Brief of Hyundai, Ex. 5 (De Dios & Associates: "The momentum and market psychology can still shift back in the opposite direction.") and Ex. 7 (Electronic News: "... others are left wondering if the market can absorb the combined capacity coming from Korea, Japan and elsewhere ...") (Ex. USA-12). See also Letter from Hale and Dorr to Secretary of Commerce, 2 May 1997, at Ex. 1 (Electronic Buyers' News (28 Apr. 1997): "The mainstay 16-Mbit market last week continued to be highly unstable. Analysts and independent distributors all agreed that average selling prices slipped about 10 percent in the spot market.") (Ex. USA-33).

³⁰² Case Brief of Hyundai, Ex. 5 (De Dios & Associates) (Ex. USA-12).

³⁰³ Id.

³⁰⁴ Id.

³⁰⁵ Id. See also Id., Ex. 10 (Morgan Stanley) (Ex. USA-12).

³⁰⁶ Id. As if to underscore this point, Compaq Computer Corporation ("Compaq"), one of Respondents' "premium" OEM customers in the United States, stated in a letter to the DOC on 15 July 1997 that "[t]here is only one, worldwide DRAM market. What is done in Europe affects the market in the United States." Letter from Vinson & Elkins (on behalf of Compaq, et al.) to Secretary of Commerce, 15 July 1997, at 4 (hereinafter "Compaq Ltr.") (Ex. USA-34).

³⁰⁷ Final Results Third Review, 62 Fed. Reg. at 39817, citing Dataquest ("The Semiconductor DQ MONDAY Report," Issue 24, 23 June 1997, and Issue 25, 30 June 1997) (Ex. USA-1).

³⁰⁸ Id.

³⁰⁹ Final Results Third Review, 62 Fed. Reg. at 39818 (emphasis added by the United States) (Ex. USA-1).

³¹⁰ Also without merit is Korea's claim that the DOC based its determination solely "on events during calendar year 1996 ; and it did so despite acknowledging that market conditions in the DRAM industry had recovered in 1997." The DOC based its final determination upon properly established facts covering 1996 and 1997.

³¹¹ Analysis Memorandum from Program Manager to Deputy Assistant Secretary for Import Administration, 16 July 1997, bates no. 41-45 (hereinafter "Final Analysis") (Ex. USA-35).

³¹² Final Analysis, bates no. 52. See also LG Semicon Case Br., at 31-34 (Ex. USA-15). The DOC did not verify, and the record does not support, Korea's suggestion that contract prices were set over a "long-term." In a volatile market such as the one that prevailed throughout 1996, DRAM customers, such as Compaq, insist upon renegotiating their purchase prices at least every quarter. Final Results Third Review, 62 Fed. Reg. at 39819 (Ex. USA-1).

³¹³ See, e.g., Case Brief of Hyundai, Ex. 5 at 12 (De Dios & Associates) (Ex. USA-12), Ex. 9 (Computer Reseller News) (Ex. USA-12), and Ex. 11 (Electronic Buyers News) (Ex. USA-12). According to Morgan Stanley, "[t]he Korean firms executed the change skillfully. For example, they used a clever tactic when they cut their shipments to discount brokers, who have a big influence on the spot price." Id., Ex. 10 (Morgan Stanley) (Ex. USA-12).

³¹⁴ Id., Ex. 9 (Computer Reseller News) (Ex. USA-12).

³¹⁵ Final Results Third Review, 62 Fed. Reg. at 39817-18 (Ex. USA-1). Later in the notice, the DOC revisited the relationship between spot and contract prices during the first several quarters of 1997: "In fact, even into 1997, prices to OEM customers remained depressed, and below spot market prices, even as the spot market prices began to show some increase." Id. at 39819.

³¹⁶ Final Analysis, bates no. 52-57, and 59 (Ex. USA-35).

³¹⁷ Id. bates no. 59. While it is true that the DOC considered many aspects of the study prepared by Dr. Flamm to be unduly optimistic, see Final Results Third Review, 62 Fed. Reg. at 39818, Korea's repeated assertion that the DOC "ignored" or "summarily rejected" the study rings hollow. The DOC not only scrutinized every inch of the study, see, e.g., Final Analysis, bates no. 58 (Ex. USA-35), but actually compared some of Dr. Flamm's optimistic projections of future costs with prices reported by several US customers of Respondents.

³¹⁸ 62 Fed. Reg. at 39817 (Ex. USA-1).

³¹⁹ Whether "obvious" or not, Korea claims, without support or citation, that "[i]nventory levels naturally decreased and prices rose in response to these production and inventory decreases."

³²⁰ Case Brief of Hyundai, Ex. 10 at 1 (Morgan Stanley: "hold down increases in 16m DRAM production . . . The recent announcement by the Koreans is that they will hold capacity expansion 30 percent below originally projected levels.") (Ex. USA-12) and Ex. 11 (Electronic Buyer's News: "scale back a planned 16-Mbit production expansion by 30 percent") (Ex. USA-12).

³²¹ Id., Ex. 10 at 2 (Morgan Stanley) (Ex. USA-12).

³²² See, e.g., Case Brief of Hyundai, Ex. 5 at 2-3 & 6 (De Dios & Associates) (Ex. USA-12).

³²³ Micron Rebuttal Br., Ex. 1 (Goldman Sachs) (Ex. USA-26).

³²⁴ Final Results Third Review, 62 Fed. Reg. at 39817 (Ex. USA-1).

³²⁵ Under section 773(b) of the Act, home market sales that are below cost may be disregarded in the calculation of normal value if they are made "within an extended period of time." 19 U.S.C. � 1677b(b)(1) (1997) (Ex. USA-19). "As in the [AD] Agreement, the term 'extended period of time' is defined in new section 773(b)(2)(B) as being normally one year, but not less than six months." Statement of Administrative Action (URAA), H.R.Doc. 103-316, vol. 1, at 831-32 (1994) (Ex. USA-36). Since Respondents' prices did not begin to fall below their costs in substantial quantities until the end of the period covered by the third administrative review (i.e., 1 May 1995 to 30 April 1996), none of these sales were excluded from the DOC's calculation of normal value. Final Results Third Review, 62 Fed. Reg. at 39817 (Ex. USA-1).

³²⁶ Id. at 39817.

³²⁷ Id.

³²⁸ Final Analysis, bates no. 50 (Ex. USA-35).

³²⁹ Id.

³³⁰ Id.

³³¹ 62 Fed. Reg. at 39819 (Ex. USA-1).

³³² Case Brief of Hyundai, at 26 (Ex. USA-12).