Where will the DRAM market head under the Japan-Korea dispute?

In early July, cracks began to appear in the trade between Japan and South Korea. On July 1, the Ministry of Economy, Trade and Industry of Japan officially announced that from July 4, three materials including "fluorinated polyimide", "photoresist" and "high-purity hydrogen fluoride" would be restricted from export to South Korea. The release of this news shocked the Korean semiconductor industry. Subsequently, Lee Jae-yong, the actual head of Samsung Group, and Lee Seok-hee, CEO of SK Hynix, went to Japan to discuss material supply. One wave has not settled before another wave rises, and then Japan and South Korea kicked each other out of their trade "white list". When the market was speculating whether this move would escalate the conflict between Japan and South Korea, Japan announced that it would resume the supply of some materials to South Korea, but at this time, Samsung in South Korea had already found Belgium as its "next home".

The trade dispute between Japan and South Korea has undoubtedly pushed the semiconductor industry to the forefront again. According to the mid-year update forecast data of "McCleanReport 2018" recently released by IC Insights, the relationship between GDP growth and IC market growth is becoming closer and closer. IC Insights believes that the increasing number of M&A transactions has reduced the number of large IC manufacturers and suppliers. This is a major change in the supply side, which also shows that the maturity of the industry has led to an increasing correlation between global GDP growth and IC market growth. At the same time, in 2017, due to the surge in the DRAM and NAND flash memory markets, the "capacity/capital expenditure cycle model" greatly affected the growth of the IC industry.

As we all know, in 2017, it was the strength of storage products that made Korean semiconductors usher in a highlight moment, especially its storage products, which dominated the market. Among them, the market share of DRAM of Samsung and SK Hynix in South Korea reached more than 70%, which can be said to be an important part of Korean semiconductors. Now, two years later, while storage products are suffering from cyclical fluctuations and encountering disputes between Japan and South Korea, what changes have taken place in the DRAM market?

After the storage market boom in 2017, DRAM prices began to fall due to cyclical fluctuations. At that time, many research institutions believed that DRAM prices would ease in the second half of 2019. However, DRAM prices did not seem to develop according to this script.

According to EETimes, TrendForce's semiconductor research center (DRAMeXchange) pointed out in a report in June this year that due to the impact of trade frictions, individual sales bans may hinder the overall shipments of global smartphones and server products, and will impact the peak season demand and price bottoming time of DRAM products in the second half of the year. In this regard, TrendForce has officially lowered its third-quarter DRAM price outlook, with the decline widening from the original estimated 10% to 10~15%.

It can be seen that the DRAM market is not as optimistic as predicted. However, under such circumstances, Samsung, as the dominant player in the DRAM field, has also demonstrated amazing survival ability and further expanded the market share of its DRAM products.

According to Yonhap News Agency, according to data from global market research company DRAMeXchange, Samsung controlled 45.7% of the global DRAM market in the second quarter of 2019. Its market share rose 2.1 percentage points from the same period last year (43.6%) to the highest level since the fourth quarter of 2017 (46.0%), and its DRAM share in the global market hit a six-quarter high. At the same time, some analysts said that despite the unfavorable business environment, including the Japanese government's export restrictions and the weak global memory chip market, the electronics giant has strengthened its control over the market by abandoning Japanese and Chinese companies.

In July of this year, Samsung announced that it had begun mass production of the industry's first 12-gigabit (Gb) LPDDR5 mobile DRAM. It is reported that the DRAM has been optimized for 5G and AI features in future smartphones. At the same time, according to its official website, the company also plans to start mass production of 12GB LPDDR5 packages later in July, each package containing 8 12Gb chips to meet the needs of high-end smartphone manufacturers for higher smartphone performance and capacity. Following the launch of the 12Gb LPDDR5 mobile DRAM, Samsung expects to develop 16Gb LPDDR5 next year to consolidate its competitive advantage in the global memory market.

Under the influence of the dispute between Japan and South Korea, according to Korean media reports, the Korean industry said on the 6th that Samsung Electronics decided to replace all of the more than 220 Japanese raw materials and chemicals used in the semiconductor production process with domestic products or products from other countries. Then, on the 12th, Samsung revealed that it had found a supplier in Belgium that could supply it for more than half a year.

According to the latest report from DRAMeXchange, Samsung and SK Hynix have a combined market share of 74.4%, and the two Korean companies dominate the global DRAM market. Compared with Samsung's strong expansion of DRAM market share, SK Hynix, the world's second largest DRAM supplier, has seen a slight decline in DRAM market share, with its share in the second quarter of this year falling to 28.7% (down from 29.9%) from the same period last year.

At the same time, according to flash memory market news, the demand recovery in the storage market this year was lower than expected, while the price decline was greater than expected, resulting in a decline in revenues and even a halving of profits for major storage manufacturers in 2019. SK Hynix also recently expressed its willingness to reduce capital expenditures and tighten its management model.

Against the backdrop of the Japan-South Korea dispute, although Samsung and SK Hynix are both Korean companies, there is still unavoidable competition between them. In terms of DRAM, according to a report by Korea Times, according to industry officials, SK Hynix and Samsung Electronics are competing for advantages in the high-end DRAM market, such as high-bandwidth memory (HBM2E) DRAM chips, which are expected to become the next growth engine for memory chip manufacturers. It is reported that SK Hynix has successfully developed the industry's highest bandwidth HBM2E product. HBM2E DRAM chips are produced using TSV's advanced semiconductor packaging technology and are used in high-end graphics processor units (GPUs), supercomputers, and artificial intelligence (AI) systems that require higher memory performance.

According to Nikkei reports, Japanese manufacturers began to develop rapidly in the DRAM market from the second half of the 1970s. In the early 1980s, Japan surpassed Japan's share. In 1986, Japanese companies' share of the global DRAM market reached 80%. After reaching its peak, Japan's DRAM market share began to decline rapidly. Since the late 1980s, Japanese companies have begun to withdraw from the DRAM business one after another-in 1999, Hitachi and NEC merged their DRAM businesses to establish Elpida Memory. In the same year, Fujitsu withdrew from the general DRAM business. In 2001, Toshiba sold its DRAM business to Micron. In 2003, Elpida absorbed Mitsubishi Electric's DRAM business. In this way, the Japanese DRAM manufacturer is Elpida. In 2012, Elpida went bankrupt and was acquired by Micron. So far, Japanese DRAM has completely fallen.

(Photo source: China Report Network)

On August 12, 2019, foreign media reported that as trade conflicts between Japan and South Korea escalate, South Korea is considering restricting DRAM exports. Imagine if Japan still had a major DRAM manufacturer at this time, it would not have to force itself into such an embarrassing situation.

After the weak were eliminated and the strong were retained, the global industry entered a fierce integration in history. The remaining three large companies with real technology are Samsung, SK Hynix and Micron. Samsung and SK Hynix are still at the center of the Japan-South Korea trade dispute. As an American company, can Micron stay out of it?

Obviously not. As far as the overall market environment is concerned, according to TrendForce statistics, although the spot price of DRAM increased by an average of 24% in July due to the Japanese government's stricter export controls on South Korea, the price of the mainstream product DDR4 8GB was still on a downward trend in July (from US$28.5 to US$25.5, a drop of 10.5%). As a member of the DRAM market, Micron naturally cannot escape this invisible hand. From its latest quarterly financial report, in the third quarter of 2019, Micron Technology's revenue fell 38.6% year-on-year, and its net profit fell 78% year-on-year, which shows the impact of the weak storage market on it.

Compared with Samsung and SK Hynix, Micron seems to have not escaped the impact of trade frictions, but was affected earlier than Korean manufacturers. Due to the impact of Sino-US trade in the past period of time, Micron suffered a great blow in the Chinese market and once interrupted its supply to Huawei (later the New York Times reported on June 25 that Micron Technology had confirmed on the 25th that it had resumed supplying Huawei two weeks ago).

At the same time, as the third largest player in the DRAM field, Micron faces pressure not only from the competition with the top two manufacturers. Some market insiders believe that as trade conflicts continue, Chinese companies may use Korean DRAM products exclusively. According to relevant data, 60% of SK Hynix's DRAM production is in Korea, and the remaining 40% is in China. In addition, there are also rising local DRAM manufacturers chasing after Micron, which is also one of the challenges facing Micron.