Memory chips, overwhelming South Korea

Affected by the continued sluggish terminal demand last year, the South Korean economy, which relies heavily on chip exports, has recently "collapsed".

Chips are slow-selling, South Korea's chip inventory hit a 26-year high, exports continued to decline, and exports plummeted 41.5% in February, of which semiconductor exports to China fell 24.2%, which is the ninth consecutive month of decline, to know that China is South Korea's largest chip exporter, accounting for half of South Korea's chip exports at its peak.

South Korea's finance minister expressed concern about the outlook, and if the semiconductor industry does not recover, South Korea will not be able to get out of the current downturn in the short term.

Memory chips are South Korea's pillar semiconductor industry (non-memory chips account for only 5%), this year South Korea's memory chip exports continue to slash, not only that, the price of memory chips continues to plummet, falling infallible, dragging down South Korea's export trade.

South Korea's continued sluggish exports have sounded the alarm of the global economy and even semiconductor downturn, why is the performance of memory chips so tragic? Looking back at each stage of the semiconductor market, why are memory chips always the worst?

01

Profits plummeted, layoffs cut costs

What the storage market has fallen

The performance of DRAM and NAND manufacturers, the two main products of memory chips, is vividly reflected in the oligopolies with a high market share.

DRAM is currently monopolized by Samsung, Hynix and Micron, accounting for about 96%, and two Korean companies, Samsung Electronics and SK Hynix, account for 41.8% and 18.5% respectively. NAND also shows a high degree of concentration, with Samsung, Kioxia and SK Hynix accounting for 65% together.

DRAM and NAND flash memory (50% and 30% of the market), which are considered to be the two troikas driving Samsung Electronics' growth, have failed to perform badly recently.

Recently, the media reported that Samsung's storage business may lose 4 trillion won (about 3.1 billion US dollars) in Q1 this year, and sources pointed out that although Samsung's wafer foundry business is profitable, it is still small and not enough to make up for the huge loss of memory. Samsung's semiconductor business performance in Q4 last year was already ugly, and profit in Q4 chip division plunged 96.9% to 270 billion won ($220 million) last year as customers continued to handle large inventories.

Samsung's inventory growth hit a record high, with 29.1 trillion won (about $22.3 billion) of last year's Q4 52.2 trillion won (about $39.9 billion) of inventory coming from the DS business unit where the memory, IC and foundry businesses are located, up 76% year-on-year.

SK Hynix, the second oldest of South Korea, began to turn from profit to loss in Q4 last year, with an operating loss of about 1.7 trillion won and a net loss of about 3.5 trillion won, which is the first quarterly operating loss of SK Hynix since Q3 2012. According to DART, SK Hynix's inventory increased to 15.7 trillion won, an annual growth rate of 75%. In addition, SK Hynix said that the investment amount in 2023 will be more than halved from 19 trillion won in 2022.

Across the ocean, Micron's fiscal 2023 first-quarter revenue was $4.09 billion, down 38.4% sequentially and 46.8% year-over-year. Micron expects profit for the third quarter of 2023 (the current quarter) to be lower than estimated. At the end of 2022, Micron's series of cost-reduction measures continued to brush the screen, including cutting 10% of employees, suspending share buybacks, cutting executive salaries, and not paying bonuses. By this year, Micron once again said that it had not cut enough and would step up its efforts to cut 15% of its workforce.

In the face of dismal operating conditions, Kioxia said it would continue to reduce production, and its revenue in the third fiscal quarter of fiscal 2022 was 278.2 billion yen (about US$1.964 billion), down 28.9% month-on-month and 30.9% year-on-year. Merger talks between Kioxia and Western Digital have resumed, and the two storage giants are trying to huddle together.

The performance of monopoly oligopolies has declined significantly, and other manufacturers are also difficult to escape in the context of dismal. Winbond's consolidated revenue in January 2023 decreased by 24.58% from the previous month and 43.78% from the same period of the previous year; Nanya's revenue in January was 2.251 billion yuan, down 6.20% from the previous month and 66.76% from the same period of the previous year; Wanghong's consolidated revenue in January was 2.212 billion yuan, down 14.34% monthly and 40.51% year-on-year, a nearly 45-month low since May 2019.

With such ugly results, what has the storage market fallen into?

In terms of prices, according to the latest data from TrendForce, the price of DRAM plummeted by 34.4% in Q4 2022, which is more excessive than the previous quarter. Although NAND's performance was slightly better, it also set the worst price decline since 2006 in Q3 and Q4 of 2022. The storage of this round of decline has been more than 18 months, and it is almost impossible to fall.

Some industry insiders said: "Now the price is basically in the end, and it has been upside down for too long." In the past, a single order of goods was at least a few million dollars, but now it is not so much, five discounts are a common phenomenon, and even more, four discounts can also get the goods. ”

The price cannot be sold, and the demand is not there, and it can be said that storage is currently in a state of volume and price decline.

A few days ago, DrameExchange released the data of the global DRAM market and NAND market in Q4 2022, simply put, the entire memory market has fallen by half in the last half year...

Source: Semiconductor Comprehensive Research

Source: Semiconductor Comprehensive Research

This round of price declines was mainly affected by the weakening of special demand for the new crown and global inflation.

In 2020, the global new crown epidemic broke out, home demand soared, shipments of electronic devices such as PCs and mobile phones increased significantly, and the demand for storage also increased, and manufacturers began to expand production. However, supply exceeds demand, and the "core shortage tide" that began in 2021 has triggered many manufacturers to stock up and place orders over.

However, after 2022, the impact of the new crown has weakened, people have begun to return to normal life, and the demand for consumer electronics for working from home has begun to weaken. Coupled with the Russia-Ukraine conflict, inflation, economic recession, consumer willingness is not as good as before, demand continues to be sluggish, the previous inventory backlog is excessive, manufacturers that have expanded production can not stop, memory chips have become much more in supply than demand. As a result, the tall building collapsed.

02

Memory chips

Why is it always so miserable?

We all know that the semiconductor industry has its own unique "silicon cycle", that is, every 3-4 years or so, there will be a boom and bust alternately. It is currently in the downward stage of the semiconductor industry, but manufacturers whose main business is storage are more ugly than other semiconductor manufacturers. And this kind of phenomenon is not unique to this year.

Because the DRAM market is more concentrated and has higher profit margins, the storage cycle is generally tracked at the price of DRAM.

Source: Xueqiu Finance @Jack Research

From TrendForce's data, DRAM basically follows the characteristics of a 4-year cycle. The "same crash" in 2022 occurred around 2012, 2016 and 2020. Previously, when prices bottomed, they fell more than 40% year-on-year, and the current decline is close to the record of previous years.

Why is storage especially miserable when everyone is having a bad time?

First of all, because the storage market has obvious buyer's market characteristics, the industry situation is mainly affected by the downstream demand side. From the current downstream demand distribution of memory, the mobile phone, server and PC markets constitute nearly 90% of the demand of the storage industry.

This round of semiconductor market decline, the first to change is smartphones and PCs. Affected by global inflation and other factors, final consumption has cooled, and the serious decline in downstream demand of about 60% has also greatly affected the storage market.

Secondly, memory chips have the characteristics of commodities, and the mismatch between supply and demand in the short term leads to obvious cyclical fluctuations in their prices. The technical standardization of memory chips is high, and there is a high degree of substitution between similar products of various manufacturers. It is difficult for memory chip manufacturers to form customer stickiness through differentiation to obtain more premiums. Therefore, the price of storage is generally the result of "maneuvering" between buyers and sellers, and basically, the supply and demand of the market determines the level of price.

In addition, due to the highly concentrated storage market, the actions of oligarchs can have a significant impact on the market. The capacity adjustment of a large factory will quickly cause other manufacturers to "follow the trend", aggravate the overcapacity or insufficient capacity of the storage market, which also leads to strong cyclical fluctuations in the storage market.

Storage faucets are both the main influencers of the storage cycle and the co-bearers of cycle changes. The memory chip also presents a "big opening and closing" situation because of its strong periodicity and high concentration.

03

No matter how miserable it is, it will roll technology

Although the market is still very bleak, the storage manufacturers have not stopped the pace of "involution".

In the field of NAND Flash, if you want to continue to dominate the market, you must continue to expand storage density and reduce costs. About every two years, the NAND Flash industry is able to dramatically increase storage density. For NAND, the more layers, the higher the capacity. After 3D NAND technology entered the market, the "involution" of the number of layers began. At the end of 2022, the boss Samsung Electronics has announced mass production of the 8th generation V-NAND with 236 layers. Micron also announced mass production of 232-layer NAND flash memory chips last year.

In the DRAM field, EUV is indisputable to enter below the 10nm process. At present, Samsung Electronics' 1z-nm DRAM based on extreme ultraviolet (EUV) lithography technology has completed mass production in February last year, and Samsung said that it will continue to add EUV steps in the next generation of DRAM. EUV is now only available to ASML, with limited capacity per year, and it is said that the queue has been in line for several years.

However, even with EUV, there is no guarantee that the required bit density improvements will be met over the next decade. With traditional DRAM architectures facing performance and process limits, DRAM manufacturers are considering monolithic 3D DRAM (similar to 3D NAND) as a potential solution for long-term expansion.

The Korean factory officially opened the book in 2021, and in 2021, Samsung established a next-generation process development team and began substantive engineering research on 3D DRAM. However, Micron is more efficient, and has obtained more than 30 3D DRAM patent technologies, which has obvious advantages over Korean manufacturers. Of course, memory chips are also within the scope of Moore's Law, and in order to keep up with the needs of the times, the pace of "involution" cannot be stopped.

Recently, ChatGPT and other artificial intelligence began to explode, domestic and foreign manufacturers have entered the game, fierce competition will also drive the demand for high-performance and large-capacity storage semiconductors to increase, plus storage manufacturers have lowered production capacity plans, some institutions pointed out that storage prices are expected to gradually approach the bottom of the downward cycle, and optimistic that the storage sector will stop falling in the second half of 2023.

Will the heat of artificial intelligence dispel the cold winter of the storage industry?

Resources:

[1] Industry data|Don't dare to blow the cold breath anymore, the memory market is about to fall..., semiconductor comprehensive research

[2] Storage giants, what to fight? , Semiconductor Industry Watch

[3] Overseas Observation Series 10: Investment Opportunities in the Storage Industry from Micron's Net Break, Soochow Securities