South Korean chip stagnation: Ren Zhengfei's prediction 2 years ago, fulfilled?

China's huge market demand will force chipmakers to find ways to break through the US blockade and supply China.

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Recently, data released by the Statistics Agency of South Korea showed that the chip inventory-to-sales ratio of South Korean chipmakers reached 265.7% in January, the highest value in 26 years.

Korean chips, slow to sell!

Two years ago, Huawei Ren Zhengfei predicted that when there is a surplus of chips in the world, someone will ask us to buy chips.

Is this moment coming?

Inventory ratio, which refers to the ratio of inventory to shipment of goods.

South Korea's chip inventory rate reached 265.7% in January, the highest value in 26 years.

A high inventory rate means that supply exceeds demand, and products cannot be sold.

Let's first look at the data for the whole year of 2022, according to the statistics of the Ministry of Science, Technology and Information and Communications of South Korea, South Korea's chip exports hit a record high of $130.8 billion in 2022, a year-on-year increase of 1.7%.

While it is also growing, it is a far cry from the 28.3% increase in 2021.

In fact, since the chip export volume reached 13.12 billion US dollars in March last year, South Korea's monthly exports have shown an overall downward trend.

In February this year, South Korea's semiconductor exports were $5.96 billion, down 42.5% year-on-year.

In February this year, South Korea's semiconductor exports fell 42.5% year-on-year Screenshot source: Yonhap News Agency reported

South Korean chip companies, life is not good.

In January-February this year, Samsung's chip business lost 3 trillion won (about 15.8 billion yuan), and the loss in the first quarter of this year is expected to reach 4 trillion won (about 21 billion yuan), which is the first loss in Samsung's chip division since its launch in the fourth quarter of 2008.

SK Hynix reported a loss of $1.4 billion between October and December last year, its first quarterly deficit in 10 years.

Chips, for China, cannot be sought.

Why is it still slow?

First, global demand is weak.

Consumer electronics are the largest users of chips, accounting for more than 60%.

Statistics show that in 2022, 1.21 billion smartphones will be shipped worldwide, down 11% year-on-year.

Total global PC shipments were 285.1 million units, down 16.4% year-on-year.

Global PC total shipment data

Poor demand has led to a surplus of global chip supply from the second half of 2022 and entered a downward cycle.

The second is the rise of competitors.

South Korea occupies an important position in the field of memory chips, Samsung and SK Hynix together account for 70% of the total global DRAM sales and more than 50% of the Nand flash memory market, is a well-deserved industry king.

However, Micron is closing the technology gap with South Korean companies, and Chinese chip makers such as China's Yangtze River Storage are expanding their market share in the Nand flash memory market.

The rise of competitors has squeezed the market share of South Korean chips.

The third is to choose a side and take sides.

In March 2022, the U.S. government proposed to establish a chip quadrilateral alliance (Chip 4) with South Korea, Japan and Taiwan to contain China's chip industry.

This spurred China to have to gradually reduce its dependence on South Korean chips, which led to a sharp reduction of 31.4% in the value of South Korean chip exports to China in 2022.

The fourth is counter-cyclical operation.

The so-called counter-cyclical operation refers to being relatively conservative during the period of prosperity of the industry, accumulating strength, expanding against the trend and strengthening large-scale advantages in the period of industry depression and recession.

Advantage in scale often means cost advantage.

It is precisely by relying on counter-cyclical operations again and again that South Korean chips have squeezed out their peers and risen rapidly.

However, unlike before, not only South Korea, but also the world's major chip giants are expanding against the trend.

The trend of 200mm wafer equivalent capacity in recent years

This time, South Korean companies not only did not crush their peers, but faced more fierce competition.

South Korea's slow-selling chips are not so easy to sell.

Chips are South Korea's largest exporter, accounting for 20% of overall exports.

South Korea's chip exports have fallen sharply, already dragging down trade exports.

South Korea recorded a trade deficit of $47.5 billion in 2022, the worst since the agency began statistics in 1956, and far more than the 1996 trade deficit ($20.6 billion), official data from the Korea Customs Service (Customs).

Chart of South Korea's trade deficit over the years

Due to the small domestic market, South Korea adopts a government-led export-oriented economic development strategy to "build a country on trade".

The decline in trade exports threatens to shake the very foundations of South Korea's economy.

Affected by this, the Bank of Korea has lowered South Korea's GDP growth forecast for the first half of the year from 1.3% to 1.1%, and the Korea Development Research Institute has also lowered its growth forecast from 1.4% to 1.1%.

South Korea's deputy economic prime minister and Minister of Planning and Finance Aki Kyung-ho believes that if the chip industry cannot recover, South Korea will not be able to get out of the export slump in a short period of time.

How to revive the chip industry?

It still depends on the overall environment.

Unfortunately, the global chip industry in 2023 is still not optimistic.

On the one hand, the global economy has entered a downward cycle, and it is difficult to boost demand; On the other hand, overcapacity, it takes time to digest inventory.

Based on the above two points, the World Semiconductor Trade Statistics Association (WSTS) estimates that the global chip market will shrink by a further 4.1% to $557 billion in 2023.

The actions of chip giants are even more pessimistic.

Sanjay Mehrotra, CEO of Micron Technology in the United States, said chip inventory levels are "well above our target level" and plans to cut about 10% of employees.

Lam Research Corp, one of the top three U.S. suppliers of chipmaking equipment, is cutting about 7 percent of its workforce in an effort to cut spending in a declining market.

Western Digital of the United States and Japan's Kioxia have also announced production reduction plans.

There are no eggs under the nest.

In a short period of time, if South Korean chips want to expand exports, there is only one way to reduce prices.

Price cuts are also not a panacea.

Price reduction does not mean free, someone always has to pay for it.

On February 9, 2021, in an interview with the media after the unveiling ceremony of the Taiyuan Intelligent Mine Innovation Lab, Ren Zhengfei predicted:

In the future, when there is a surplus of chips in the world, I think there will be people who will ask us to buy chips.

Screenshot source: Huawei Voice Community

Is the era of excess chips really coming?

It's hard to say yet.

However, global chips are now really slow-selling.

Oversupply, "demand" is more important.

China's huge market demand will force chipmakers to find ways to break through the US blockade and supply China.

This will buy time for China's independent chip research and development.

China must make good use of this window of time.