Memory-chip sector suffering one of its worst routs ever

This time was to be different.

The memory chip sector, famous for its boom and bust cycles, has changed its ways. A combination of more disciplined management and new markets for its products – including 5G technology and cloud services – would ensure companies would deliver more predictable earnings.

And yet, less than a year after memory companies made such statements, the $160 billion industry is suffering one of its worst failures ever. There is a lot of chips sitting in warehouses, customers are cutting orders, and product prices have plunged.

“The chip industry thought suppliers would have better control,” said Avril Wu, senior research vice president at TrendForce. “This downturn proved everyone wrong.”

The unprecedented crisis is not only wiping out cash at industry leaders SK Hynix Inc. and Micron Technology Inc., but also destabilizes their suppliers, hurts Asian economies that depend on tech exports, and forces the few remaining memory players to form alliances or even. consider mergers.

It was a quick descent from the industry’s pandemic sales volume, which was fueled by buyers furnishing home offices and acquiring computers, tablets and smartphones. Now consumers and businesses are holding back 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 don’t need more.

Already Samsung Electronics Co. and its rivals lose money on every chip they produce. Their collective operating losses are expected to hit a record $5 billion this year. Inventories – a critical indicator of demand for memory chips – more than tripled to record levels, reaching three to four months of supply.

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Samsung seems to be the only one that will escape relatively unscathed, thanks to its strength and diversified business, but even the South Korean giant of the semiconductor division is headed for losses. Investors will feel the damage this week when the company reports quarterly earnings.

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 far worse than a regular cyclical downturn.

Micron, the last remaining US memory chip maker, has responded aggressively to falling demand. The company said late last month that it would cut its budget for new plants and equipment in addition to reducing production. The speed at which the industry rights itself will depend on how quickly the company’s counterparts make similar moves, CEO Sanjay Mehrotra said.

“We have to get through this cycle,” he said. “I believe the trend of transcyclical growth and profitability is still there.”

In South Korea, Hynix also reduced investments and reduced production. The company’s inventory is partly the result of its acquisition of Intel Corp.’s flash memory business. – an agreement struck before the decline of the industry.

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 largest maker of chips, smartphones and display panels is set to report fourth-quarter earnings on Tuesday, followed by a call during which analysts are likely to question its capacity plans.

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The Korean tech giant has typically kept spending during downturns, hoping to ride them out with higher output and higher profits when demand picks up. This time, the market is betting that the company will tighten 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 reduction in orders as memory customers cut back and delay spending. Executives at the company, which counts Samsung, SK Hynix and Micron as its top customers, declined to predict when such actions could help the memory market rebound.

“We’ve seen extraordinary measures within the memory market,” Lam CEO Tim Archer said on a call with investors. “It’s at levels we haven’t seen in 25 years.”

It has always been difficult for memory makers to handle spikes and troughs required. Bringing new factories online takes years and billions of dollars, so it’s 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’s especially true for so-called DRAM chips, where the three dominant suppliers — Samsung, Hynix and Micron — are reducing supply, said Shin Jinho, co-chief executive of Midas International Asset Management. The other major part of the memory market, NAND chips, is more fragmented and is poised to go through a tougher battle as the many contenders fight for survival, he said.

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“The NAND market is experiencing fierce competition and the recovery will follow one quarter after the recovery of the DRAM market,” Shin said. “If the situation drags on, eventually, we will see a consolidation in the NAND market.”

The memory industry has had mergers during previous downturns, and this one may be no exception. NAND makers Western Digital Corp. and Kioxia Holdings Corp. are making progress in their negotiations, people familiar with the matter said this month. However, the companies already manufacture together and so a merger will not necessarily lead to reduced production.

The longer-term question is when customer demand will rebound. China’s recent exit from Covid-related restrictions could be one catalyst to help the industry, as device makers will be able to return factories to a normal pace, said Greg Roh, head of technology research at HMC Investment & Securities.

“There will also be suppressed demand for appliances,” Roh said. “Our view is that memory will recover in the second half.”

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