On October 9th local time, the South Korean President’s office announced that the U.S. Department of Commerce has agreed to provide an ‘indefinite waiver’ to Samsung Electronics and SK Hynix’s semiconductor factories in China. This means that American suppliers can now provide semiconductor equipment to Samsung and SK’s semiconductor factories in China without the need for any permits.
This undoubtedly gives a boost to South Korean companies in the semiconductor industry in the Chinese market, which can be described as ‘timely assistance.’
With both companies’ factories in China obtaining an ‘indefinite waiver,’ it also means that Samsung and SK Hynix can continue to upgrade and expand their operations in China, eliminating the previous uncertainties.
Some industry experts have stated that this move will likely lead to an increase in production capacity for Samsung and SK Hynix. To regain market share, both companies may further engage in price wars in the Chinese market.
However, when analyzing the current status of the semiconductor industry, especially in the memory chip business, it is not difficult to see that this ‘assistance’ may have come a bit late.
01
Extended Downturn in the Memory Market Set to Cause Supply Shortages Next Year
Storage chips have always been the backbone of South Korea’s semiconductor industry, with both Samsung and SK Hynix being giants in the storage sector. Samsung Electronics holds the top market share in both DRAM and NAND fields, while SK Hynix ranks second in DRAM and third in NAND.
According to World Semiconductor Trade Statistics (WSTS), the global memory market size in 2022 was $129.8 billion, with DRAM accounting for $77.8 billion and NAND Flash accounting for $47.1 billion. As industry leaders, it’s safe to say that these two companies have a significant share of this market.
DRAM and NAND Flash are primarily used in PCs, smartphones, and data centers, with very similar user bases. However, due to the industry’s downward trend caused by the “silicon cycle,” coupled with rapid production expansion by domestic manufacturers (which will be discussed later), demand in these markets has been steadily shrinking. As of now, the memory market has been in a downward cycle for eight consecutive quarters, approaching the longest historical downturn in the memory market.
These challenging market conditions have naturally affected both South Korean companies.
According to data, in the first two months of 2023, Samsung’s storage chip business had already incurred losses of 3 trillion Korean won, approximately $2.3 billion. For Samsung, this is not a crippling blow, considering their other semiconductor foundry and related businesses.
However, SK Hynix, which has “put all its eggs in one basket,” is facing more significant challenges. Although they have captured over half of the market in the field of AI acceleration cards with their HBM3 product, their overall storage chip business is experiencing substantial losses.
According to SK Hynix’s Q2 2023 financial report released at the end of July, their second-quarter revenue was 7.3059 trillion Korean won, down 47% year-on-year. Operating losses reached 2.8821 trillion Korean won, although it was a 15% improvement compared to the previous quarter, it still represented a year-on-year loss. Net losses amounted to 2.9879 trillion Korean won, down 16% compared to the previous quarter.
These losses have led to significant production cuts across the board.
SK Hynix’s financial report indicates that since the first half of 2023, most memory chip manufacturers have been cutting production to reduce inventory. Currently, the depletion of NAND Flash inventory is slower compared to DRAM, so SK Hynix plans to expand its reduction of NAND Flash production.
On the other hand, Samsung has initiated a large-scale semiconductor demand survey for 2024, analyzing the storage inventory situation of its major customers. A special Samsung task force will decide whether to continue reducing production based on the survey results. Following the survey, it is expected that market supply and demand will improve starting from Q4, and there may be supply shortages and price increases next year.
02
Unintended Consequences: U.S. Export Restrictions Impact on South Korean Semiconductor Industry
In recent years, the United States has been continuously imposing restrictions on its domestic semiconductor industry, tightening chip trade policies, and introducing export restrictions on equipment, among other measures. However, these measures have inadvertently harmed the semiconductor industries of Japan and South Korea.
As far back as 2005, SK Hynix established a DRAM production line in Wuxi, China, and subsequently made several rounds of investments totaling over $20 billion. According to a 2022 report by the market research firm TrendForce, this factory’s production capacity accounts for approximately 13% of global DRAM’s total production capacity. In 2020, SK Hynix also acquired Intel’s NAND business, including the factory in Dalian, with the full delivery of the acquisition expected by 2025. This factory’s production capacity represents about 9% of global NAND total production capacity.
On the other hand, Samsung chose Xi’an, China, for its semiconductor manufacturing facilities, with Phase 1 and Phase 2 projects commencing in 2012 and a cumulative investment of nearly $26 billion. It is reported that the Xi’an factory accounts for approximately 40% of Samsung’s global NAND total production capacity, equivalent to about 17% of the global NAND total production capacity.
The reduction in factory capacity due to supply constraints not only narrows the technological advantages of these two companies but also results in a loss of a significant market and profits in China.
On the other hand, domestic manufacturers in China are accelerating the implementation of their domestic replacement strategies. Earlier, the foreign industry research firm Yole Group conducted a teardown analysis of Yangtze Memory’s 232-layer flash memory chips. They found that Yangtze Memory’s chips used a dual-layer design, stacking two wafers together using Xtacking technology. While this approach has issues with lower yields and higher costs, it bypasses the reliance on restricted advanced processes and tools.
This innovative use of “outdated” process technology to pave a new path has been hailed by Yole Group as an “unexpected technological breakthrough.”
In light of such breakthroughs, complete isolation no longer makes sense. Hence, the “indefinite waiver” is mentioned at the beginning. However, in the current landscape where domestic replacements have already matured, this “assistance” may have come a bit late.
03
Words in the End
The storage chip industry has a long-running joke: whenever there is an oversupply of production capacity leading to a downward trend in storage product prices, manufacturers tend to conveniently experience “power outages” or “factory fires,” forcing them to reduce production.
However, since domestic Chinese storage and controller chips have entered the market, such news has become increasingly rare. Yangtze Memory, in particular, has earned the nickname “Yangtze Fire Brigade” due to the absence of such incidents.
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