Historical failure for memory chips threatens to wipe out earnings

(Bloomberg) — This time should be different.

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The memory chip sector, known for its boom and bust cycles, has changed its course. The combination of more disciplined management and new markets for their products — including 5G technology and cloud services — will ensure that companies deliver more predictable earnings.

However, less than a year after memory companies made such statements, the $160 billion industry is suffering one of its worst recessions ever. There were a lot of french fries in stock, customers cut back on orders, and product prices plummeted.

“The chip industry thinks suppliers will have better control,” said Avril Wu, senior vice president of research at TrendForce. “This downturn has proven everyone wrong.”

The unprecedented crisis has not only sucked out the cash of industry leaders such as SK Hynix Inc. and Micron Technology Inc., but also destabilize their suppliers, dent Asian economies that rely on technology exports and force the few remaining memory companies to form alliances or even consider merging.

It was a rapid drop from the industry’s surge in pandemic-led sales, fueled by shoppers outfitting their home offices and buying computers, tablets and smartphones. . Now, consumers and businesses are delaying big purchases as they deal with rising inflation and interest rates. The manufacturers of those devices, who bought the main memory chips, were suddenly stuck with stockpiles of components and had no need to buy more.

Currently, Samsung Electronics Co. and its rivals are losing money on every chip they make. Their collective operating losses are predicted to hit a record $5 billion this year. Inventories — a key indicator of demand for memory chips — have more than tripled to a record, reaching three to four months of supply.

Samsung looks to be the only company that will emerge from relative peace given its diversified and robust business, but even the South Korean giant’s semiconductor division is headed for a loss. Investors will feel the damage this week when the company reports quarterly earnings.

“Sales of chip equipment companies are down about 30% to 50%. This is not a normal situation,” said Greg Roh, head of technology research at HMC Investment & Securities.

Shares of Samsung fell as much as 2.3% Monday morning, the biggest single-day drop in 12 days. SK Hynix fell 1.6%.

The industry is suffering from a unique combination of circumstances — hangover pandemic, war in Ukraine, historic inflation and supply chain disruptions — that have made the downturn much worse. compared with a typical cyclical recession.

Micron, the last remaining U.S. memory chip maker, reacted strongly to the sharp drop in demand. The company said late last month that it would cut budgets for new plants and equipment in addition to reducing output. CEO Sanjay Mehrotra said the speed at which the rights in the industry themselves will depend on the speed with which the company’s partners make similar moves.

“We have to get through this cycle,” he said. “I believe the trend of cross-cycle growth and profitability remains.”

In South Korea, Hynix has also cut investment and scaled back production. The company’s inventory surplus is in part the result of Intel Corp’s acquisition of the flash memory business. – a deal made before the industry downturn.

All eyes are now on memory chip king Samsung, which has so far not said much about the short-term outlook for the industry. The world’s largest chip, smartphone and display maker will report fourth-quarter earnings on Tuesday, followed by a call during which analysts may question management plans. their capacity.

The South Korean tech giants typically keep spending during recessions, hoping to exit them with superior production and higher profits as demand picks up. Around this time, the market was betting that the company would tighten its chip supply, lifting the stock price in recent weeks.

Last week, chip-making equipment maker Lam Research Corp. said it was seeing an unprecedented drop in orders as memory customers cut back and delayed spending. The company’s executives, which count Samsung, SK Hynix and Micron as their top customers, declined to predict when such actions might help the memory market recover.

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

Memory manufacturers have always had a hard time handling spikes and dips in demand. Getting new factories online takes years and billions of dollars, so it’s hard to pick the right time.

The risks have made industry players more cautious. They focus on profits rather than trying to grow quickly and gain market share.

That’s especially true for so-called DRAM chips, where three major suppliers – Samsung, Hynix and Micron – are reducing supply, said Shin Jinho, co-CEO of Midas International Asset Management. The other key part of the memory market, NAND chips, is more fragmented, he said, and will experience a fiercer battle as multiple competitors jostle for survival.

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

The memory industry has had mergers during recessions before, and this one may be no exception. NAND makers Western Digital Corp. and Kioxia Holdings Corp. progress in their deal negotiations, people familiar with the matter said this month. However, the companies already produce together and so the merger will not necessarily lead to a reduction in output.

The long-term question is when will customer demand recover. HMC Investment’s Roh said China’s recent exit from Covid-related restrictions could be a catalyst for the industry, as equipment makers will be able to bring production plants back up. normal rhythm.

“There will be pent-up demand for utilities,” he said. “Our view is that the memory will recover in the second half.”

(Updated with stock price reaction, analyst comment from eighth paragraph)

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