Samsung Micron SK Hynix adjusts production strategy

Recently, the US market research company IC Insights reported that the price of dynamic random access memory (DRAM), which has risen strongly this year, is expected to fall by 0.5% in the fourth quarter of 2021.

The average selling price of DRAM soared 41% in the first eight months of 2021, from $3.37 in January to $4.77 in August. In October, the transaction price of general-purpose PC DRAM products was only US$3.71. TrendForce, an industry research organization, predicts that its price will fall by 15% in 2022.

According to data from multiple industry forecasting agencies, next year's semiconductor industry's memory chip business may be hit by oversupply, which will continue to drive down prices. This may mean that memory chip manufacturer such as Samsung Electronics, Micron Technology, and SK Hynix will see a decline in revenue.

 The transaction price in October was US$3.71, which was 36% lower than the highest point

DRAM is the most common memory chip and plays a vital role in electronic products. They are used to store information in PCs and servers, and can temporarily store information used by the system processor. Another major category of memory chips is NAND, which can be used to store data in smartphones and computers. Memory chips are also a commodity, and the market is susceptible to slight fluctuations in the balance of supply and demand.

The IC Insights report shows that due to the impact of the new crown epidemic, in the first three quarters of this year, PC and processor manufacturers expanded production and purchased a large number of memory chips to help alleviate potential manufacturing and transportation delays under the impact of the epidemic, making storage The price of chips has risen.

The report shows that the average selling price of DRAM has risen sharply in the first eight months of 2021, while the average selling price of DRAM in September has fallen by 3% to US$4.62. The transaction price of DRAM in October was only US$3.71, which is the highest point this year. Compared to USD 5.3 at the end of March, it is down 36%.

The IC Insights report shows that as the new crown epidemic begins to ease and the economies of some countries and regions begin to recover, PC and server manufacturers have sufficient memory chip inventories. It is expected that they will reduce DRAM purchases in the fourth quarter of 2021 to consume existing in stock.

The latest survey by TrendForce, an industry research organization, shows that the total supply of DRAM next year is expected to increase by 18.6% year on year, but the global DRAM market will turn to an oversupply.

This shift is mainly due to the fact that not only do most manufacturers now have relatively high DRAM inventories but DRAM demand in 2022 is also expected to grow only 17.1% year-on-year, which is lower than the growth in supply. In terms of price, due to the oligopolistic nature of the DRAM industry, this situation will lead to a decline in the average selling price of DRAM in 2022, but will not lead to a significant decline in annual DRAM revenue. DRAM revenue is expected to reach US$91.54 billion in 2022, a slight increase of 0.3% year on year.

TrendForce also stated that even a small difference in supply and demand is enough to drive down prices.

Lee Seung-Woo, an analyst at Eugene Investment & Securities, an investment and securities firm, said: "In our view, the increase in the supply of memory chips should guarantee prices and profit margins higher than market trends."

Especially for DRAM memory, Seung-Woo said that its price will continue to weaken at present, but it is approaching the lowest value, and it should begin to show some signs of recovery after the first quarter of next year.

Seung-Woo said: “Due to the negative impact of the shortage of chip components, the PC supply chain is weak, and memory module manufacturers continue to express further downside risks. The first quarter is usually also a low season. Of course, spot prices can easily rebound.”

Bernstein analyst Mark Li holds a negative view of memory chip giants Samsung Electronics and Micron Technology. He predicts that by the end of 2022, falling prices and supply shortages will cast a shadow on the memory chip market.

Q3 earnings are strong, Q4 demand uncertainty is strong

TrendForce's survey report shows that in the third quarter of 2021, Samsung Electronics' market share reached 44%, which is far ahead of other manufacturers. SK Hynix has a market share of 27.2%, and Micron Technology has a market share of 44%. The occupation rate is 22.9%. The above-mentioned three giants have a total market share of more than 94%.

Samsung Electronics: Server chips are strong, PC chips slow

Samsung Electronics is the world's largest manufacturer of two types of memory chips, DRAM and NAND. Although Samsung is known for smartphones outside of Korea, its profits are mainly driven by its memory chip business, and semiconductors usually account for the largest proportion of its revenue.

Samsung Electronics’ revenue for the third quarter of the fiscal year 2021 as of September 30 was US$63.2 billion, a year-on-year increase of 10.48%. Net profit was US$13 billion, a year-on-year increase of 28.04%. The operating profit of the semiconductor division was US$8.5 billion, a year-on-year increase of 82%. . Accounted for 64% of total profit.

According to Masahiro Wakasugi, senior industry analyst at Bloomberg Intelligence, Samsung Electronics’ September DRAM exports were US$3.78 billion, a year-on-year increase of 29%, the highest level since November 2018.

Macro risks such as soaring commodity prices and poor US employment data may prompt customers to reduce orders. "Considering the risks of economic slowdown in China and the United States and the decline in memory chip prices, Samsung's earnings growth may slow to the first half of next year." SK Securities analyst Kim Young-woo said.

Samsung also said that its demand for servers and PC memory chips in 2022 is uncertain.

The company predicts that due to the expansion of investment in data centers, DRAM and NAND memory chips required for servers will remain strong in the fourth quarter, while personal computer production growth is expected to be consistent with the previous quarter. But in an industry where technological progress has led to unstoppable supply inflation, zero growth represents a decline in its market.

Samsung Electronics will announce its outlook for the memory business during the third-quarter earnings conference call but has not released relevant content this year.

Regarding the view that the memory industry will enter a down cycle, Samsung Electronics’ memory strategy marketing department head and vice president Han Zhenwan said: “We and our customers have different views on the status quo of the industry, which makes price negotiations more difficult.” This also means that the current market conditions are unfavorable.

Micron Technology: PC sales are slowing down, memory chip profits are tight

The slowdown in demand from PC manufacturers is having an impact on the memory chip market. The memory chip industry is known for its dramatic boom and bust cycles, which also makes earnings unpredictable.

But Micron CEO Sanjay Mehrotra believes that the sharp fluctuations between shortages and surpluses have eased because more types of devices now use the company's chips.

Part of the reason investors are worried about the memory chip boom is that customers panic about buying products and hoard inventory. But Mehrotra previously stated that its customers have good inventory levels.

In the fourth fiscal quarter ended September 2, Micron reported revenue of US$8.27 billion, an increase of 36% year-on-year, and a net income of US$2.72 billion. Net profit was US$2.72 billion, a year-on-year increase of 175.3%.

DRAM revenue was US$6.091 billion, a year-on-year increase of 39%, accounting for 74% of total revenue; NAND revenue was US$1.971 billion, a year-on-year increase of 28.8%.

In addition, higher pre-audit fees and labor costs may have a negative impact on Micron’s fourth-quarter results. In the second-quarter earnings conference call, the company has already pointed out that due to the increase in pre-audit fees and labor costs, it is expected that operating expenses will increase in the second half of fiscal 2021.

Mehrotra said in a conference call after the earnings report that the proportion of NAND products with lower profit margins has risen, and the manufacturing cost of the chip is difficult to reduce, which is expected to tighten profit margins.

Secondly, the surge in PC sales caused by the outbreak of the new crown epidemic is also slowing down, which also affects Micron's sales and profit forecasts.

SK Hynix: The demand for memory chips is unknown, and the supply forecast is optimistic

During the outbreak of the new crown epidemic, PC sales surged, but as the epidemic slowed down, SK Hynix and other chip manufacturers were also hit by the slowdown in PC sales.

Reuters reported that SK Hynix, the world's second-largest memory chip supplier, is optimistic about the forecast of memory chip prices. SK Hynix said that the supply bottleneck has caused the demand for PC chips to be suppressed, but this may boost PC sales next year.

SK Hynix’s financial results for the third quarter ended September 30, 2021, ushered in the highest quarterly operating profit in the past three years. The third-quarter consolidated revenue was 11.805 trillion won (approximately US$10.14 billion), a year-on-year increase of 45%. DRAM Revenue was 7.225 billion US dollars, accounting for about 73% of total revenue.

Operating profit in the third quarter reached 4.172 trillion won (approximately US$3.6 billion), an increase of 220% year-on-year. This was the highest quarterly profit since the fourth quarter of 2018 and higher than the 4.1 trillion won predicted by the financial research institution Refinitiv Smartestimate.

It is worth mentioning that SK Hynix's NAND Flash business finally turned into a surplus in the third quarter. Analysts pointed out that this is the first time that SK Hynix's memory chip business has achieved profitability since the fourth quarter of 2018.

SK Hynix believes that corporate needs and the ever-changing mixed working environment will also support the demand for memory chips. The company is second only to Samsung Electronics in terms of DRAM chips used for the temporary storage of PCs, servers, and mobile devices.

Kevin Noh, the chief financial officer of SK Hynix, said on the earnings call: "There have been many uncertainties recently, but I think the supply level and predictability of the memory business are still very good compared to other semiconductors."

SK Hynix said that the slowdown in customer demand will have an impact on existing memory chip inventories and continued supply chain uncertainty, and possible inventory adjustments will continue to put pressure on demand.

But the continued expansion of data centers and cloud computing providers make the company optimistic.

The three major memory chip giants make strategic adjustments

The increase in memory chip prices in the third quarter of fiscal 2021 brought strong earnings to Samsung, Micron, and SK Hynix, but their prices were weak in the fourth quarter. In the face of oversupply in the memory chip market, memory chip manufacturers are adjusting Inventory, and quickly reorganizing the product portfolio according to industry changes, reducing costs to increase revenue.

Samsung Electronics: focusing on technology upgrades, launching DDR5 memory chips

In order to cope with the possible market weakness of DRAM and NAND memory chips next year, Samsung is betting on more advanced chip manufacturing processes as a growth driver. The company is preparing to carry out a major technological upgrade to a higher specification DDR5 memory chip, which is faster than the previous generation product and can improve energy efficiency.

Young-woo said that Samsung’s 14-nanometer DDR5 products are highly competitive and will become an opportunity for the company. But he believes that the long-term supply delay of new server processors using DDR5 may affect demand.

Micron Technology: Datacenter market expansion, demand for storage chips remains strong

Memory chip prices have fallen and demand has slowed. Memory chip manufacturers will have to make strategic adjustments, such as redirecting production to dedicated chips used in smartphones or cars. However, if the rest of the supply chain cannot keep up, the equipment that requires memory chips cannot keep up with the production of memory chips, nor can it solve the dilemma that memory chips may face.

Mehrotra pointed out in the third quarter 2021 earnings conference call that the growth trend of memory and storage content is still strong, especially electric vehicles have significantly higher requirements for memory and storage containers, and it is necessary to continue to increase the production of DRAM and NAND.

Second, as the epidemic eases and the economies of some countries and regions recover, Mehrotra predicts that the demand for data centers and cloud computing will be strong in the second half of 2021, and the shipments and revenues of this type of storage chips will continue to grow.

SK Hynix: Increase memory chip output and restructure product portfolio

Analysts said that SK Hynix has increased its production of 128-layer NAND flash memory chips that serve the data storage market, which will boost its shipments.

Hynix added that it is expected that the equipment replacement cycle purchased by data centers in 2017-2018 will increase the demand for server chips. Secondly, the market demand for semiconductor memory will continue to grow, and SK Hynix will flexibly respond to changes in market conditions and focus on ensuring profitability.

At the same time, SK Hynix expects to complete the acquisition of Intel's NAND and SSD businesses before the end of this year to enhance the competitiveness of the NAND Flash business that has recently turned into a surplus.

"After the completion of the acquisition, SK hynix will build a complementary product portfolio, maximize the advantages of the two companies, and seek to achieve economies of scale." Noh said, "In the future, SK hynix will expand its R&D foothold and develop Become a global semiconductor memory leader."

The price of memory chips has fallen, and the market is expected to return to normal

The outbreak of the new crown epidemic has brought many emergencies to market changes. The price of memory chips has increased rapidly in the first half of 2021. However, as the epidemic eases, its market growth rate has fallen and will return to normal. At present, demand for memory chips from PC and server manufacturers is declining, and semiconductor companies may have a backlog of inventories. In response to changes in the memory chip market, the world’s top three DRAM suppliers Samsung Electronics, Micron Technology, and SK Hynix’s comprehensive production capacity will be flat or only slightly increased in 2022. They will focus on process technology transformation instead of installation. New equipment and facilities to expand production capacity.

However, the oversupply of memory chips cannot help other semiconductors that are still in short supply. These companies cannot use the capacity of their multi-billion-dollar factories to produce semiconductors that are still in short supply. This is because the memory chip sector, which is valued at US$161 billion and accounts for 29% of the global chip market, is highly specialized in the production of processors and sensors, and the equipment used to manufacture such chips cannot be easily converted to produce other types of chips. .

The shortage of data chips is in sharp contrast to the oversupply of memory chips. While one part of the chip industry tries to keep up, another part tries to slow down.

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