The memory chip market may face a reshuffle

The deterioration of the semiconductor memory market continues. The semiconductor division of Samsung Electronics, which controls 39% of the global market share, suffered an operating loss for the first time in 14 years. In the past, the growth in demand for smartphones and data centers has led to the recovery of the semiconductor memory market, but currently there is no locomotive to lead the recovery. Major memory manufacturers have all fallen into losses, which may lead to the recurrence of the "downturn restructuring" that has been going on before.

The market for semiconductor memory, which is widely used in various digital products, is prone to skyrocketing prices. In the past market downturn, with the emergence of new demand parties such as personal computers, feature phones, smartphones, and data centers, the worst period continued to emerge.

However, no such locomotive can be found in this downturn. The continued growth of pure electric vehicles (EVs) in the market is difficult to drive memory demand. The conversational artificial intelligence (AI) "ChatGPT" has not promoted the growth of IT giants' data center investment, and the data capacity of smartphones has also stagnated. The current view that demand will wane as digital products mature is deeply entrenched.

In order to push up sales prices, Samsung announced its production reduction policy on April 7. In this regard, Lee Seung-woo, head of the research center of Korea Youjin Investment Securities, analyzed that "the memory market will bottom out as early as April." It is believed that memory prices will gradually rise due to the effect of Samsung's production cuts, but the turnaround of Samsung's semiconductor division "will be postponed to October to December."

The memory industry has a history of tail-end companies being eliminated during downturns and constantly inducing restructuring.

In the second half of the 1990s, Motorola, Texas Instruments (TI), and Fujitsu withdrew from the DRAM business, and NEC and Hitachi merged the DRAM business to form Elpida Memory. In 2009 after the financial crisis, Germany's Qimonda AG went bankrupt. Elpida went bankrupt in 2012 and was later merged into Micron Technology.

As the number of memory manufacturers decreases, excessive competition is alleviated, and the performance of surviving manufacturers increases rapidly. In the past 10 years, with the explosive growth of data demand, the "longest spring" (executives of large manufacturers) of various manufacturers enjoying high profits has continued.

However, Samsung, which holds the top share, has also fallen into a downturn of losses, which will once again trigger the wind of industry restructuring. The ones that have become the focus are Kioxia Holdings and Western Digital, the professional manufacturers of "NAND memory cards."

In the memory industry, where the ability to sustain huge investments is directly related to competitiveness, the amount of working capital (cash) will determine the outcome. On Western Digital's balance sheet, "cash and cash equivalents" are approximately 247 billion yen as of the end of 2022. The data released by Kioxia Holdings as of the end of June 2020 to promote the initial public offering (IPO) shows that the cash held is 264 billion yen.

This is dwarfed by Samsung, Micron (1.3 trillion yen), and SK Hynix (500 billion yen), which have 5 trillion yen. Both Kioxia Holdings and Western Digital will suffer final losses from October to December 2022. If the losses continue, their financial foundation will weaken and they may fall behind in the competition.

In addition, shareholder movements cannot be ignored. The main shareholder of Kioxia Holdings is the American investment fund Bain Capital. The merger and acquisition of Toshiba Memory (now Kioxia Holdings) led by Bain Capital is about to be five years old, ushering in a period of exploring exit strategies as a fund.

On the other hand, Western Digital is facing pressure from activist shareholders. U.S. fund Elliott Management proposed splitting off its memory business to Western Digital, and there are increasing views that this will lead to changes in the current competitive landscape.

However, the semiconductor industry will also face the new variable of international politics. In the context of semiconductors being positioned as strategic materials for economic security and becoming one of the focuses of confrontation between China and the United States, governments of various countries are paying close attention to the outflow of semiconductor technology. There is also a view that due to the strong government support, bankruptcies and restructurings are unlikely to occur as in past downturns.

In addition to the lack of demand-pushing factors, it is unclear whether the cooperation of manufacturers can bring about tight supply and demand. This memory downturn faces complex variables, and the situation is different from the past. At present, various manufacturers may continue to be in a stalemate.

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