The £1.2bn semi-conductor plant was being built by Korean electronics giant LG in Newport, South Wales.

Microchips are becoming cheaper

But now it has been forced to merge its semi-conductor operations with rival Hyundai, which was also building a new semi-conductor factory in Scotland. It is very unlikely that both plants will go into production.

Under the terms of the deal imposed by the Korean government, LG has agreed to hand over control of its entire semi-conductor business to Hyundai, creating the world's largest computer memory chip manufacturer.

The industry is facing substantial over-capacity and the price of memory chips has tumbled. Fujitsu and Siemens have also announced plant closures in the UK.

Bitter dispute

The merger plan is the centrepiece of the Korean government's hopes for reforming the economy.

It has been urging its biggest companies - which the Koreans refer to as the chaebols - to swap assets in order to to reduce their debts and consolidate their business interests.

The over-expansion of the chaebols, financed by overseas borrowing, was one of the main causes of the Korean economic crisis.

As part of the deal, Daewoo has taken over Samsung's fledging car business in return for acquiring some electronics plants.

But LG balked at the last minute at giving up its prestigious semi-conductor business, threatening to upset the whole process of reform. The government in turn, moved to block any further loans to LG Semicon.

On Wednesday, LG chairman Koo Bon-moo issued a statement conceding defeat after meeting with Korea's president Kim Dae-jung.

"LG decided that the issue of the semi-conductor merger should not pose as a stumbling block to the nation's corporate restructuring," it said.

Hopes for foreign investment

The new semi-conductor company would be capable of producing more than 3m DRAM chips a year, overtaking Korea's other chip maker, Samsung, which has 18% of the world market.

But it would also be saddled with $9.5bn (11 trillion won) in debts, including 4.5 trillon won from LG Semicon. The company said it was hoping to attract $1.5bn in foreign equity.

The company said there would be no mass layoffs, but one or two lines would be closed "if the market situation gets worse." The takeover would maximize resources for research on next generation micro-chips.