This time should have been different.
The memory-chip 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 — will ensure the companies deliver more predictable earnings.
And yet, less than a year after the memory companies made such an announcement, the $160 billion industry is facing one of its worst times ever. Warehouses are full of chips, customers are reducing orders and product prices have plummeted.
“The chip industry thought that suppliers would have better control,” said Avril Wu, senior research vice president at TrendForce. “This recession has proved everyone was wrong.”
The unprecedented crisis is not only wiping out cash on industry leaders SK Hynix Inc. and Micron Technology Inc., but also destabilizing their suppliers, denting Asian economies that depend on tech exports, and leaving few remaining memories Forcing or even forcing players to form alliances. Consider merging.
That’s a sharp decline from the industry’s post-pandemic sales growth, 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 face inflation and rising interest rates. The makers of those devices, the main purchasers of memory chips, are suddenly stuck with stockpiles of components and don’t need any more.
Already, Samsung Electronics Co. and its rivals are losing money on every chip they produce. Their collective operating losses are forecast to reach a record $5 billion this year. Inventories – a key indicator of demand for memory chips – have more than tripled to record levels, reaching three to four months’ supply.
Samsung appears to be the only one that will escape relatively unscathed, thanks to its massive and diversified business, but even the South Korean giant’s semiconductor division is staring at losses. Investors will get an idea of the loss when the company reports its quarterly results this week.
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 downturn much worse than a regular cyclical downturn.
Micron, the last remaining US memory chipmaker, has responded aggressively to declining demand. The company said last month that it would cut its budget for new plants and equipment, besides reducing production. Chief executive officer Sanjay Mehrotra said the rate at which the industry rights itself will depend on how quickly the company’s counterparts take similar steps.
He said that we have to get out of this cycle. “I believe the trend for cross-cycle growth and profitability remains intact.”
In South Korea, Hynix has also reduced investment and reduced production. 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 memory-chip king Samsung, which has so far said little about the industry’s near-term prospects. The world’s biggest maker of chips, smartphones and display panels is scheduled to report fourth-quarter earnings on Tuesday, followed by a call during which analysts are likely to question its capacity management plans.
The Korean tech giant has generally continued spending during the downturn, hoping to exit with better production and higher profitability when demand picks up. This time, the market is betting the company will strengthen its chip supply, driving up its share price in recent weeks.
Chip-manufacturing equipment maker Lam Research Corp said last week that it is seeing an unprecedented drop in orders as memory customers cut back and postponed spending. Executives at the company, which counts Samsung, SK Hynix and Micron among its top customers, declined to speculate on when such actions could help the memory market get back on track.
“We’ve seen extraordinary measures in the memory market,” Tim Archer, Lam’s CEO, said on a call with investors. “It’s at a level we haven’t seen in 25 years.”
It’s always been difficult for memory manufacturers to handle spikes and troughs in demand. It takes years and billions of dollars to bring new factories online, so timing is difficult.
The risks have prompted companies in the industry to be more conservative. They are more focused on profitability than trying to grow fast and capture market share.
That’s especially true for so-called DRAM chips, where the three major suppliers — Samsung, Hynix and Micron — are reducing supply, said Xin Jinho, co-CEO of Midas International Asset Management. The other major segment of the memory market, NAND chips, is more fragmented and looks set to undergo more severe fighting as multiple contenders fight for survival, he said.
“The NAND market is facing tough competition and the DRAM market recovery will be followed by a quarter of recovery,” Shin said. Eventually, we are going to see consolidation in the NAND market if the position goes long.
Mergers abounded during past recessions in the memory industry, and this one may be no exception. NAND makers Western Digital Corp and Kioxia Holdings Corp are moving forward in their deal talks, people familiar with the matter said this month. Nevertheless, the companies are already manufacturing jointly and thus the merger will not reduce production.
The longer-term question is when will customer demand return. Greg Roh, head of technology research at HMC Investments & Securities, said China’s recent exit from COVID-related restrictions could be a catalyst to help the industry, as gadget makers will be able to get manufacturing plants back to normal. .
“The demand for gadgets will also increase,” Roh said. “Our view is that the memory will recover in the second half.”
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