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ANALYSISSamsung to hold steady in $66 bil. NAND chip sector

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Samsung Electronics then-Vice Chairman Lee Jae-yong attends a dinner held to celebrate the swearing in of President Yoon Suk-yeol, at a hotel in Seoul, May 10, 2022. Samsung Electronics' board of directors have approved the appointment of Lee as executive chairman of the company, according to a company statement published on Oct. 27, 2022. EPA-Yonhap
Samsung Electronics then-Vice Chairman Lee Jae-yong attends a dinner held to celebrate the swearing in of President Yoon Suk-yeol, at a hotel in Seoul, May 10, 2022. Samsung Electronics' board of directors have approved the appointment of Lee as executive chairman of the company, according to a company statement published on Oct. 27, 2022. EPA-Yonhap

NANDs viewed as possible target for Samsung in price war

By Kim Yoo-chul

In game theory, the game of chicken primarily involves two drivers, with vehicles on a converging route. The driver who risks a direct collision is the winner while the driver who swerves out of the way is the loser ― not to mention labeled a coward.

The danger, of course, is that both drivers firmly believe that the other will swerve first and consequently collide. Both can lose more than just the game. In the case of a collision, the size of the vehicles and their capacity in terms of bearing the impact are significant.

In businesses, the same game can be seen in a price war, with entities from the same industry focusing more on output expansion over profitability. In times of uncertainty, a market leader typically tries to intimidate the competition with its push aimed at reaping considerable benefits and a strong balance sheet.

Over the last few weeks, all major chipmakers have warned of the possibility of an extra supply glut in the global memory semiconductor industry and weakening chip prices, resulting in them announcing plans to reduce capital spending heavily next year. Specifically, South Korea's SK hynix, Micron Technology and Intel of the United States and Kioxia of Japan confirmed that they are on track to slash capital spending or chip output significantly.

But Samsung Electronics will not do so. The global leader in memory semiconductors, said it was seeing a continued weakness in the global memory chip market with little sign of visible recovery (a rebound in chip prices), until later next year. However, the company confirmed its plans not to pull back in terms of its capital expenditures, next year. Plus, no plans have been set to significantly lower its chip output.

"Samsung Electronics is positioned to just pursue what it wants given its ample cash and cash-equivalent assets. Because Samsung's core strengths lie in memory chip manufacturing, the company has to stay on course regardless of the market conditions," said Chae Min-sook, an analyst at Korea Investment.

During the pandemic, global memory chipmakers enjoyed a surge in their profits mostly thanks to pent-up demand. But the industry has recently been facing a downturn because of a fall in demand and high-level of inventory. Chipmakers were situated to have more inventory than earlier expected due to companies adopting work-from-home systems. This extra inventory led chip prices to see a further decline.

Memory chips by SK hynix are seen on a circuit board of a computer in this photograph taken Feb. 25, 2022. Reuters-Yonhap
Memory chips by SK hynix are seen on a circuit board of a computer in this photograph taken Feb. 25, 2022. Reuters-Yonhap

Therefore, chipmakers had no options but to respond to falling profits by cutting down their production and raising prices. Major economies' attempts to transition to a new normal amid the COVID-19 pandemic raised hopes for the supply and demand balance in the chip industry.

But contrary to expectations, the issue has quickly shifted from a supply shortage to a demand shortage as Russia's invasion of Ukraine further deteriorated existing global supply chain disruptions, according to officials, leaving top memory chipmakers with increased inventories.

In 2012, Japan's Elpida Memory entered court management and was acquired by Micron of the United States, which now trails SK and leader Samsung in the global memory chip market. In 2009, after a heavy price fall of DRAM products because of Taiwanese chipmakers' output expansion and moves to undercut prices to squeeze their chief rivals, the world's then-second-largest DRAM chip manufacturer, Qimonda of Germany, declared bankruptcy. This market turmoil didn't affect Samsung as the latter managed to increase its share of the market by doubling its output.

NAND sector still growing with number of players

Newly promoted Samsung Executive Chairman Lee Jae-yong said the company is at a pivotal moment. "Now, it's time to act more boldly and ambitiously," Lee was quoted as saying in a press release.

Investors and analysts say because the global DRAM chip segment is already fully rationalized with the top three controlling more than 94 percent of the market, chances are low a price war will be happening in the DRAM sector. Estimates by Omdia, a market researcher, said that as of last year, Samsung accounts for 42.7 percent of the global DRAM market, followed by SK with 28.6 percent and Micron with 22.8 percent.

"Given the profit margins of Samsung, SK and Micron ― 37 percent, 32 percent and 34 percent, respectively, as of the third quarter of this year ― the likelihood of aggressive behavior by Samsung in the DRAM sector nears zero as there's just nothing for Samsung to expect to gain by doing so," a senior executive at one of Samsung's first-tier local suppliers, said by telephone. Profit margin is also known as net margin and it indicates how much net income a company generates with total sales achieved.

But when it comes to the NAND chip sector, the other segment in the memory chip industry, Samsung may consider ramping up supply and undercutting prices to squeeze the industry by investing more. Unlike DRAMs, NAND flash chips are used for data storage and the chips' downstream application areas are corporate servers and data centers, considered as more profitable than memory for PCs and mobile devices.

The Omdia data also showed Samsung was the leader in the global NAND chip market with a 33.9-percent share, followed by Kioxia and Western Digital, which had 18.9 percent and 13.9 percent each, as of last year. SK and Micron had 13.2 percent and 10.6 percent, respectively. The estimated value of the global NAND chip sector this year is at $66.5 billion, data has shown.

Secretary of State Antony Blinken, second from left, Applied Materials CEO Gary Dickerson, left, and Applied Materials senior vice president of Semiconductor Products Group Prab Raj, center, pose for a photo with employees at Applied Materials in Santa Clara, Calif., Oct. 17, 2022. AP-Yonhap
Secretary of State Antony Blinken, second from left, Applied Materials CEO Gary Dickerson, left, and Applied Materials senior vice president of Semiconductor Products Group Prab Raj, center, pose for a photo with employees at Applied Materials in Santa Clara, Calif., Oct. 17, 2022. AP-Yonhap

"Samsung's confirmation that it won't slash its chip output and will invest more into memory chips, next year, should be interpreted as the company's clear intention to lower the overall inventory level. It's now necessary for Samsung to break the price war in the DRAM industry, again. However, the global NAND flash chip market should see a consolidation, eventually," said Hwang Min-seong, chief of the tech team at Samsung Securities.

"That's because there is more room to squeeze rivals in the NAND sector both from the capacity and technology standpoints," the senior analyst said. Samsung's investment next year will be focused on migrating DRAM tech, filling in equipment for its soon-to-be-built U.S. foundry plants and increasing NAND chip outputs.

As of the third quarter of this year, the profit margin of Samsung's NAND business reached 10 percent, while both SK (excluding the performance of SK-owned, U.S.-based Solidigm) and Micron were known to have reported a minus 10-percent-level profit margin in the NAND business, respectively, according to company officials.

Investors' questions are how quickly and to what extent a new order in the global NAND flash chip segment may prevail. Given South Korea's backing of U.S.-led chip alliance initiatives with likeminded counties and support for the CHIPS Act, Washington's latest measures to impose new license requirements for chip production equipment destined for China stand to become an unofficial trigger for a price war between the existing global NAND chip sector players.

China-based Yangtze Memory Technologies (YMTC) was getting ready to commence production of its advanced three-dimensional (3D) NAND chips. But KLA, Lam Research and Applied Materials ― all of which are U.S.-based ― recently ceased supplying the parts needed to produce such chips to the YMTC under the new export rules.


Kim Yoo-chul yckim@koreatimes.co.kr


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