This time was supposed to be different.
The memory chip sector, notorious for boom-and-bust cycles, has changed ways. A combination of more disciplined management and new markets for its products – including 5G technology and cloud services – will ensure that the company generates predictable income.
However, less than a year after the memory company made the statement, the $160 billion industry is facing one of its worst road trips yet. There are too many chips in the warehouse, customers are reducing their orders, and the price of the product has dropped.
“The chip industry thought that suppliers would have more control,” said Avril Wu, senior vice president of research at TrendForce. “This setback proves everyone wrong.”
The unprecedented crisis has not only wiped out cash at industry leader SK Hynix Inc. and Micron Technology Inc., but it has also disrupted suppliers, weakened Asian economies that depend on technology exports, and forced the few remaining memory players to form alliances or even. consider a merger.
This is a quick derivative of the industry’s pandemic sales surge, fueled by shoppers stocking up on home offices and snapping up computers, tablets and smartphones. Now consumers and businesses are holding back on big purchases as they deal with inflation and rising interest rates. The device manufacturer, the main buyer of memory chips, was suddenly stuck with stockpiles of components and no longer needed.
Already, Samsung Electronics Co. and competitors are losing money on every chip they produce. Its collective operating loss is expected to hit a record $5 billion this year. Inventory – a critical indicator of demand for memory chips – has more than three to record levels, reaching three to four months worth of sources.
Samsung seems to be the only one that will escape relatively unscathed, thanks to its business heft and diversity, but even the South Korean giant’s semiconductor division is headed for losses. Investors will feel the damage this week when companies report quarterly earnings.
The industry is suffering from a unique combination of circumstances — pandemic hangovers, war in Ukraine, historic inflation and supply chain disruptions — that have made the downturn worse than a typical cyclical downturn.
Micron, the remaining US memory chip maker, has responded aggressively to reduced demand. The company said late last month it would cut its budget for new plants and equipment in addition to reducing output. The level of industrial rights itself will depend on how quickly the company’s partners make similar moves, Chief Executive Officer Sanjay Mehrotra said.
“We have to go through this cycle,” he said. “I believe the trend of cross-cyclical growth and profitability is still there.”
In South Korea, Hynix has also cut back on investment and reduced output. The company’s inventory glut is partly the result of its acquisition of Intel Corp.’s flash memory business. – a deal done before the industry went down.
All eyes are now on the memory-chip king Samsung, which has now said a little about the near-term prospects of the industry. The world’s largest maker of chips, smartphones and display panels will report fourth-quarter earnings on Tuesday, followed by a call when analysts will ask questions about capacity management plans.
Korean tech giants typically continue to spend during downturns, hoping to emerge with superior production and higher profits when demand hits them. This time, the market has bet the company will tighten the supply of chips, lifting the stock price in the past few weeks.
Chip factory equipment maker Lam Research Corp. last week said it saw an unprecedented reduction in orders as memory customers scaled back and delayed spending. Executives at the company, which counts Samsung, SK Hynix and Micron as its top customers, declined to predict when the move could help the memory market rebound.
“We’ve seen tremendous strides in the memory market,” Lam CEO Tim Archer said on a call with investors. “It is at a level that has not been seen in 25 years.”
It is always difficult for memory manufacturers to handle spikes and troughs in demand. Bringing a new factory online takes years and billions of dollars, so it’s hard to find the right time.
These risks have caused companies in the industry to become more conservative. They are more focused on profitability than trying to grow quickly and gain market share.
This is especially true for the so-called DRAM chips, where the three dominant suppliers – Samsung, Hynix and Micron – reduce supply, said Shin Jinho, co-CEO of Midas International Asset Management. Another major segment of the memory market, NAND chips, is more fragmented and will face a tougher battle as more competitors fight for survival, he said.
“The NAND market is experiencing fierce competition and the recovery will follow a quarter after the recovery of the DRAM market,” Shin said. “If the situation continues, eventually, we will see consolidation in the NAND market.”
The memory industry has experienced consolidation during previous downturns, and this one may be no exception. NAND maker Western Digital Corp. and Kioxia Holdings Corp. are moving forward in deal talks, people familiar with the matter said this month. However, these companies have created together and thus the merger does not always lead to a reduction in output.
The long-term question is when customer demand will rebound. China’s lifting of Covid-related restrictions could be one of the catalysts to help the industry, as gadget makers will be able to return manufacturing plants to a normal rhythm, said Greg Roh, head of technology research at HMC Investment & Securities.
“There is also demand for gadgets,” Roh said. “Our view is that memory will recover in the second half.”
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