[ANALYSIS] Samsung unlikely to join Micron in chip output cut

U.S. President Joe Biden, right, and Chinese President Xi Jinping shake hands before a meeting on the sidelines of the G-20 summit meeting in Bali, Indonesia, Nov. 14. AP-Yonhap

Global market leader in chips could adjust production: executives

By Kim Yoo-chul

Worries are growing that the global technology downturn may be wider, deeper and even longer-lasting than expected. Some Wall Street analysts have been forecasting the chip industry to face its worst drop in more than two decades, reaching back to 2001.

The semiconductor industry is essential and foundational to the global economy, as semiconductors are used in all sectors of the economy from cars, communications and clean energy to information technology. But even the worst is yet to come.

All the leading chipmakers enjoyed a heyday both in sales and profits during the pandemic, as delivery times for core parts and machinery for all industries exceeded more than a year thanks to increased demand and tight supply. That caused them to stockpile at least a year's worth of inventory and expand capacity.

But consumer confidence in both advanced and emerging economies is being dented by the still-high inflation. In the meantime, expectations of additional monetary tightening are leading major tech firms to slash their expenditures for corporate server and software upgrades.

Lead times have shortened sharply as chipmakers are experiencing painful inventory corrections and stockpile reductions. Plus, Russian President Vladimir Putin's brutal war against Ukraine is being blamed as an extra cause of concern for the industry from a supply chain standpoint, as supply chain instability is anticipated to extend the period of inventory correction.

Unsurprisingly, chipmakers are hoping to handle these difficulties through hiring freezes and layoffs, cutting facility investment plans, reducing factory output and warning investors of a sharp reversal in profits.

Micron Technology of the United States swung to losses in the latest quarter, the first such drop in seven years. The U.S. chipmaker announced restructuring measures including job cuts and the suspension of employee bonuses. SK hynix is also expected to suffer an operating loss of around 1 trillion won for the three-month period ending Dec. 31, analysts said. SK representatives declined to comment.

Samsung plans no significant output reduction

Despite Micron and SK applying large-scale cost-cutting measures in a way to tackle notable sequential declines in revenue and margins, it's very unlikely Samsung Electronics, the leader in memory chips, will change its stance on the chip production issue.

Samsung Electronics Chairman Lee Jae-yong, second from right, inspects the company's smartphone manufacturing plant located near Hanoi, Vietnam, Dec. 23. Courtesy of Samsung Electronics

The baseline is that Samsung is still positioned to preserve margins until the first quarter of next year, and consumer confidence could recover in the second quarter of 2023 at the earliest, with economists expecting inflation to moderate after the January-March period.

"Samsung Electronics is in the process of reducing chip stockpiles. Any decisions by the company to cut its chip output artificially would be a plus factor in terms of short-term supply rebalance. But it seems like Samsung isn't considering cutting its memory chip output significantly, as it is involved in talks with its top clients, including carmakers, about recovering healthy inventory levels," an senior executive at a top-tier parts supplier of Samsung said by telephone, claiming that the company will focus on migrating chip technology and filling in equipment for its soon-to-be-built U.S. foundry plants.

"There is a very high chance for Samsung to apply measures for adjusting the production of its memory chips and the decision of the timing of actual facility investment(s) depending on the progress of its chip inventory reduction level," the executive said. Samsung Electronics declined to comment.

Samsung holds a 43.5-percent market share in DRAM chips as of the second quarter of this year, followed by SK with 27.4 percent and Micron with 24.5 percent, according to research firms. It plans to release the company's fourth-quarter earnings estimates early next month.

The U.S.-based investment bank Goldman Sachs said in a recent report that it was expecting Samsung's semiconductor business unit to report an operating profit of 1.5 trillion won for the fourth quarter, a year-on-year drop of 83 percent. Earlier, its semiconductor chief, Kyung Kye-hyun, told employees that it has reduced its guidance for semiconductor sales in the second half of this year by 32 percent from its April forecast, according to Samsung.

"Well, yes, Samsung Electronics isn't seeing a near-term reprieve in its memory semiconductor business and I would expect the market weakness will last through June next year. Because the memory chip market has consolidated and Samsung doesn't want to see its market share reach near 50 percent due to possible antitrust issues, it wants to maintain the status quo by not applying artificial measures," said a fund manager at an EU-based investment bank operating in Seoul. "Samsung is looking so busy to work through a faster reduction of its chip inventory level."

The manager stressed that recent output cut decisions by SK and Micron would help the industry see an early balance between available supply and correct qualification.

Political significance of memory semiconductors

The ongoing memory chip industry downcycle can't be explained from the industry standpoint alone, just as the industry saw over two decades ago when then German-based chipmaker Qimonda declared bankruptcy because of a huge supply glut during the Asian financial crisis.

Semiconductor chips are seen on a circuit board of a computer in this photo taken Feb. 25. Reuters-Yonhap

Company executives and political analysts said that because semiconductors have become a new center of gravity in the global power contest, Samsung isn't positioned to decide on a memory chip production cut, if any, due to market factors.

"Greater geopolitical tensions between the U.S. and China may delay investment decisions and affect global supply chain costs with the diversion of manufacturing away from China. Supply chain migration from China to other regions could lead to higher-than-expected capital expenditure, raise production costs and barriers to accessing markets," Shelley Jang, director and primary rating analyst at Fitch Ratings, told The Korea Times in a separate call.

The Chinese city of Xi'an, for example, accounts for some 42 percent of Samsung's NAND production and 15 percent of global supply, according to Fitch estimates. If Samsung applies its decisions to cut the production of NAND chips at its Xi'an factory, then that may cause staffing problems, sources said. NAND flash, another type of memory chip used in data storage, is the other segment in the memory chip industry.

Citing its growth potential, some analysts expect Samsung, also the leader in the NAND sector, to ramp up its NAND supply in a bid to squeeze smaller industry players, as there are six or seven players still competing for a share in the sector, which is valued at $66.5 billion, according to market research firm Omdia.

"Samsung will focus on increasing NAND chip outputs," said Chae Min-sook, an analyst at Korea Investment.

Samsung invested heavily during past downturns and benefited with increased market shares when the industry recovered. But assuming that the nature of the game has changed, with the industry's leading players pursuing profits over market share, there's no need for Samsung to send any incorrect signals to its clients by intentionally cutting its chip production, said analysts and fund managers.

"Despite the weak sector outlook, the ratings on Samsung Electronics are supported by a well-diversified business portfolio that helps to mitigate cash-flow fluctuations, particularly from the cyclical display panel and semiconductor businesses," Jang said.

Given the cyclical nature of the semiconductor industry, which means that even a downturn should not be seen as catastrophic, there will certainly be noticeable pickups in chips that the hyper-scalers are building.