This time was supposed to be different. The memorychip sector, famous for its boom-and-bust cycles, had changed its ways. A combination of more disciplined management and new markets for its products — including 5G technology and cloud services — would ensure that companies delivered more predictable earnings.
Yet, less than a year after memory companies made such pronouncements, the US$160 billion industry is suffering one of its worst routs ever. There is a glut of the chips sitting in warehouses, customers are cutting orders and product prices have plunged.
“The chip industry thought that suppliers were going to have better control,” said Avril Wu (吳雅婷), senior research vice president at TrendForce Corp (集邦科技). “This downturn has proved everybody was wrong.”
Photo: Reuters
The unprecedented crisis is not just wiping out cash at industry leaders such as SK Hynix Inc and Micron Technology Inc, but also destabilizing their suppliers, denting Asian economies that rely on tech exports and forcing the few remaining memory players to form alliances or even consider mergers.
It has been a swift descent from the industry’s COVID-19 pandemic sales surge, which was fueled by shoppers outfitting home offices and snapping up computers, tablets and smartphones. Now consumers and businesses are holding off on big purchases as they cope with inflation and rising interest rates.
Makers of those devices, the main buyers of memory chips, are suddenly stuck with stockpiles of components and have no need for more.
Already, Samsung Electronics Co and its rivals are losing money on every chip they produce. Their collective operating losses are projected to hit a record US$5 billion this year. Inventories have more than tripled to record levels, reaching three to four months’ worth of supply.
Samsung is the only firm that is expected to escape relatively unscathed, thanks to its heft and diversified business, but even the South Korean giant’s semiconductor division is headed toward losses.
“Chip equipment companies’ sales are plunging by around 30 percent to 50 percent. This is not a normal situation,” HMC Investment & Securities Co technology research head Greg Roh said.
The industry is suffering from a unique combination of circumstances — a pandemic hangover, the war in Ukraine, historic inflation and supply chain disruptions — that have made the slump much worse than a regular cyclical downturn.
Micron, the last remaining US memorychip maker, has responded aggressively to plummeting demand.
The company late last month said that it would cut its budget for new plants and equipment in addition to reducing output.
In South Korea, Hynix has also slashed investments and scaled back output. The company’s inventory glut is partly the result of its acquisition of Intel Corp’s flash memory business — a deal struck before the industry’s decline.
All eyes are now on Samsung, which has thus far said little about the industry’s near-term prospects.
The world’s largest maker of chips, smartphones and display panels is set to report fourth-quarter earnings today, followed by a call during which analysts are likely to question its capacity management plans after chip-manufacturing equipment maker Lam Research Corp last week said that it is seeing an unprecedented reduction in orders as memory customers cut and postpone spending.
It has always been difficult for memory makers to handle spikes and troughs in demand. Bringing new factories online takes years and billions of dollars, so it is hard to get the timing right.
The risks have prompted companies in the industry to become more conservative. They are more focused on profitability than trying to grow quickly and gain market share.
That is especially true for DRAM chips, where the three dominant suppliers — Samsung, Hynix and Micron — are reducing supply, Midas International Asset Management Ltd co-chief executive officer Shin Jinho said.
The other major part of the memory market, NAND chips, is more fragmented and is expected to go through a more severe battle as the many contenders fight for survival, he said.
“The NAND market is experiencing fierce competition and the recovery will follow one quarter after the DRAM market recovery,” Shin said. “If the situation gets longer, eventually, we are going to see consolidation in the NAND market.”
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