This time must be different.
The memory-chip sector, notorious for its boom-and-bust cycles, is changing its ways. The combination of more disciplined management and new markets for its products – including 5G technology and cloud services – will ensure that companies can deliver more predictable profits.
And yet, less than a year after memory companies made such statements, the $160 billion industry is suffering one of its worst downturns ever. There are a lot of chips sitting in warehouses, customers are cutting orders, and product prices are falling.
“The chip industry thinks that suppliers have better control,” said Avril Wu, senior research vice president at TrendForce. “This decline proves everyone wrong.”
The unprecedented crisis is not only a drain on the money of the industry leaders The SK Hynix Inc. and Micron Technology Inc., but also destabilized their suppliers, harming Asian economies dependent on tech exports, and forcing the few remaining memory players to form alliances or even consider mergers.
It’s a sharp descent from the industry’s pandemic surge in sales, fueled by shoppers flocking to home offices and snapping up computers, tablets and smartphones. Today consumers and businesses are holding back on big purchases as they deal with inflation and rising interest rates. The makers of those devices, the main buyers of the memory chips, were suddenly stuck with stockpiles of components and didn’t need any more.
already, Samsung Electronics Co. and its rivals lose money on every chip they make. Their collective operating losses are expected to hit a record $5 billion this year. Inventories — a critical indicator of demand for memory chips — have more than tripled record levels, amounting to three to four months’ worth of supply.
Samsung looks to be the only one to escape relatively unscathed, thanks to its size and diverse business, but even the South Korean giant’s semiconductor division is headed for losses. Investors will get a sense of the damage this week when the company reports quarterly earnings.
The industry suffered from an unusual combination of circumstances – a pandemic hangover, the war in Ukraine, historic inflation and supply chain disruptions – which made the collapse worse than a regular one. which is cyclical downturn.
Micron, the last remaining US memory chipmaker, has responded aggressively to declining demand. The company said late last month that it would cut its budget for new plants and equipment in addition to reducing output. The rate at which the industry rights itself will depend on how quickly the company’s counterparts take similar steps, Chief Executive Officer Sanjay Mehrotra said.
“We have to go through this cycle,” he said. “I believe the trend of cross-cycle growth and profitability is still in place.”
In South Korea, Hynix also reduced investments and reduced output. The company’s inventory surge is partly the result of its acquisition of Intel Corp.’s flash memory business. — an agreement made 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 future. The world’s largest maker of chips, smartphones and display panels is set to report fourth-quarter earnings on Tuesday, followed by a call where analysts are likely to question its capacity management plans.
The Korean tech giant often continues to spend during downturns, hoping to emerge from them with higher production and higher profits when demand picks up. This time, the market is betting on the company to tighten its chip supply, which has boosted the stock price in recent weeks.
Manufacturer of chip manufacturing equipment Lam Research corp. SAYS last week it saw an unprecedented drop in orders as memory customers cut back and postpone spending. Company executives, including Samsung, SK Hynix and Micron as its top customers, declined to predict when such actions would help the memory market rebound.
“We’re seeing incredible strides within the memory market,” Lam CEO Tim Archer said on a call with investors. “It’s at a level we haven’t seen in 25 years.”
It is often difficult for memory manufacturers to manage spikes and troughs in demand. Bringing new factories online takes years and billions of dollars, so it’s hard to get the timing right.
The risks are prompting companies in the industry to be more conservative. They are more focused on profit than trying to grow quickly and gain market share.
That is especially true of the so-called DRAM chips, where the three dominant suppliers – Samsung, Hynix and Micron – are reducing supply, said Shin Jinho, co-CEO of Midas International Asset Management. The other major segment of the memory market, NAND chips, is increasingly fragmented and is set to go through a tougher battle as more contenders fight for survival, he said.
“The NAND market is experiencing fierce competition and the recovery follows a quarter after the recovery in the DRAM market,” Shin said. “If the situation persists, eventually, we will see consolidation in the NAND market.”
The memory industry has had its share of previous developments, and this may not be an exception. NAND manufacturers Western Digital corp. and Kioxia Holdings Corp. developing their deal talks, people familiar with the matter said this month. However, firms are already merging in production and so a merger does not necessarily lead to a reduction in output.
The longer term question is when customer demand will pick up. China’s recent exit from Covid-related restrictions could be a factor to help the industry, as gadget makers can return production plants to a normal rhythm, Greg said. Roh, head of technology research at HMC Investment & Securities.
“There is pent-up demand for gadgets as well,” Roh said. “Our view is that the memory will be recovered in the second half.”
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