Memory market collapses, TSMC will become the leader in semiconductor sales

In a report released last month, IC Insights lowered its global IC market growth forecast for 2022 from 11% to 7%. This year's downward revision is almost entirely due to the collapse of the memory market in the second half of 2022. As described below, it's as if someone started "twitching" the memory market to the off position in June!

The few memory companies that have made statements on recent developments in the memory market attribute the rapid decline to the massive inventory adjustments currently being made by their customers. Additionally, most expect the inventory adjustment period to extend to at least early 2023.

The following statements and data from some memory vendors provide insight into how quickly the market has changed over the past few months.

When Micron's fiscal third quarter ended in May, the company issued an early warning of trouble brewing in the memory market. While the company reported solid sales in its fiscal third quarter, sales guidance for the fourth quarter (ended in August) is -17%. In addition, Micron revised this figure to a sales decline of at least 21% in the quarter ended in August.

During its Q2 conference call, major NAND flash supplier Western Digital commented that the inventory adjustments currently underway were "certainly very, very sharp in the quarter that we were in (Q3'22)." Western Digital's outlook is for company-wide sales to decline 18% in the quarter. With hard disk drives (HDDs) accounting for about half of the company's sales and only a small decline expected in the third quarter, IC Insights believes its NAND flash memory business may decline by at least 20% this quarter.

•In early September, Samsung co-CEO and semiconductor division head Kyung Kye-hyun said, "The second half of this year looks bad, and so far, next year doesn't really seem to be showing significant momentum. There's a lot of progress."

Taiwan-based Nanya is a relatively small player in the global DRAM market, but its monthly sales data provide some insight into how quickly the DRAM market can turn from boom to bust. As shown in Figure 1, the company's DRAM sales (shown in US dollars) in August 2022 were 39% of August 2021, a 53% drop from March sales 5 months ago!

figure 1

With the memory market currently in free fall, IC Insights expects foundry giant TSMC to surpass Samsung in 3Q22 and take the top spot in the semiconductor company sales rankings (Figure 2).

As shown, Intel is expected to move into third place, with its 3Q22 sales 26% lower than TSMC. Illustrating the rapid rise of TSMC, TSMC was ranked as the world's third largest semiconductor supplier in 2021, with sales 31% lower than Samsung.

The sheer size of TSMC's semiconductor sales becomes even more concerning when considering the company's "ultimate" sales.

The "final" sales of a pure-play foundry like TSMC are approximately 2x the foundry's total sales. The 2x multiplier estimates semiconductor sales to end customers (i.e., manufacturers of electronic systems). For example, fabless company AMD buys processors from TSMC, but AMD is not the ultimate end user of these devices. The price AMD resells these processors to electronic system manufacturers is much higher than the price it pays TSMC for these components. Therefore, a 2x multiplier assuming a 50% gross margin for a foundry customer (such as AMD) can be used to arrive at TSMC's "final" semiconductor market sales numbers.

figure 2

Using TSMC's "final" sales estimates, its semiconductor sales were $113.7 billion in 2021 and $40.4 billion in 3Q22! From the perspective of the company's "final" semiconductor sales in 2021, TSMC's "final" sales last year were $113.7 billion, accounting for an estimated 18.5% of the global semiconductor market. In addition, IC Insights believes that this percentage is likely to rise to 25% in the third quarter of 2022.

South Korea's Samsung Electronics Co. has warned that the semiconductor industry may be in trouble around 2022.

An executive at the world's largest memory chip maker said the outlook for the second half is bleak and Samsung has yet to see momentum for a recovery next year. Rival chipmakers such as SK Hynix Inc. and Micron Technology Inc. have warned of slowing demand in recent weeks.

"The general view earlier this year was that the second half would be better than the first half, but the situation changed dramatically from April to May," said Kyung Kyehyun, head of the equipment solutions division in charge of Samsung's semiconductor business. "The world is changing so fast."

Kyung made the comments at a rare briefing on Wednesday at the company's new chip factory in Pyeongtaek. Kyung said at the event that Samsung's strategy is to respond more quickly to market changes rather than stick to pre-prepared investment plans. That said, the company will do its best to keep capital spending steady, he added.

Samsung has historically invested heavily in new chip plans and now includes a foundry business to better compete with TSMC for global customers. Samsung began mass production of 3-nanometer chips at its foundries in June, beating TSMC in the race to make the world's most advanced chips. Kyung said Samsung will focus on improving performance and reducing chip costs as it aims to manufacture next-generation 3-nanometer chips in 2024.

In addition to the downturn in the chip market, Samsung is also struggling with the conflict between China and the United States. While South Korea has historically been aligned with Washington, the tech giant relies on being able to sell chips, smartphones and other products into the massive Chinese market. Samsung has both customers and factories in China.

"It's hard for us to miss a market like this and there are many important customers," Kyung said. "We are working hard to find a win-win solution for everyone involved in this conflict."

The U.S. government is tightening technology flows to China, recently restricting sales of artificial intelligence chips and cutting-edge chip equipment to Chinese customers. It is also considering measures to limit U.S. investment in Chinese technology companies while providing billions of dollars in incentives to support domestic semiconductor production. Washington requires any chipmaker that receives partial federal funding not to make advanced chips in China for ten years. The South Korean government is seeking to negotiate with U.S. officials.

As the United States steps up efforts to consolidate its domestic chip supply chain, Samsung has announced plans to build a $17 billion advanced chip factory in Tyler, Texas, with construction scheduled to begin later this year.

Kyung said the new factory will attract new customers through closer partnerships, adding that the company will continue to invest in the United States. Samsung has also floated the idea of ​​a broad expansion of its semiconductor manufacturing facilities in Texas, raising the prospect of spending nearly $200 billion to build 11 factories in the state in a series of documents in July plan.

Seoul is holding working-level talks with the United States, Taiwan and Japan to explore ways to further curb China's ambitions to become the world leader in chip technology and reduce its dependence on the West.

Regarding Washington's initiative known as the chip 4 alliance, Kyung said he hoped South Korea would "first seek China's understanding and then negotiate with the United States." But he also said, "In the long run, it may be difficult for our fabs in China to invest in new equipment."