Recovery Phase
Continuing their struggle, both Samsung Electronics and SK hynix faced losses in the second quarter, following their challenging performance in the first quarter. The cumulative deficit for both companies in the first half of this year reached a substantial figure, nearly approaching 15 trillion won (US$11.76 billion). Nevertheless, there is renewed optimism for a potential turnaround in the latter half of this year, driven by the reduction in its production of NAND flash memory and a surge in demand for artificial intelligence-related high-value products, such as DDR5 and High Bandwidth Memory (HBM).
SK hynix released its financial results for the second quarter on July 26, revealing an accumulated loss of over 6 trillion won in the first half of the year alone. According to the company’s disclosure, the second-quarter consolidated revenue, based on the linked basis, stood at 7.3059 trillion won, accompanied by an operating loss of 2.8821 trillion won. Compared to the same period last year, the revenue experienced a significant drop of 47.1 percent, marking a continuation of losses for three consecutive quarters.
Samsung Electronics is also bracing for the official release of its second-quarter results on July 27, following the preliminary announcement earlier this month. As indicated by the preliminary figures, the operating profit remained a mere 600 billion won, and it is estimated that the semiconductor division alone incurred an operating loss ranging from 3 to 4 trillion won, building upon the 4.6 trillion won loss in the first quarter.
Despite the ongoing losses, industry experts perceive that the semiconductor market has entered a recovery phase, as evidenced by the gradual reduction in the rate of operating losses. In the case of SK hynix, the loss scale for the second quarter diminished compared to the preceding quarter, and the operating loss rate also improved from 67 percent in the first quarter to 39 percent in the second quarter. During a post-results conference call, SK hynix CFO and Vice President Kim Woo-hyun said, “The company recognized an inventory valuation loss of approximately 500 billion won as NAND prices continuously declined in the second quarter. This was a significant reduction in loss compared to the previous quarter.”
The Business Survey Index (BSI) for August, released by the Federation of Korean Industries on the same day, also provided encouraging signs. The BSI for the electronic and communication equipment sector, which includes semiconductors, rebounded above the baseline of 100.0 for the first time in 11 months since 117.6 in September 2022.
In response to the persistent deterioration in performance, SK hynix decided to implement further reductions in NAND flash production. The company aims to curtail the current production level by approximately 5 to 10 percent. Vice President Kim said, “Since NAND has higher inventory levels and lower profitability compared to DRAM, we decided to expand the scale of the existing NAND reduction to normalize inventory levels sooner.”
Some experts view this reduction as a measure to enhance profitability. Kim Yang-paeng, a researcher at the Korea Industrial Technology Institute, stated, “The NAND market is more challenging than the DRAM market due to fierce competition. Reducing production is a method to proactively cut costs and decrease inventory, which can help reduce the scale of losses and improve profitability. However, there could be a reverse effect when production volume decreases substantially during an upturn phase.”
Additionally, SK hynix underscored its dedication to supply high-value products like HBM3. The company said, “We have accumulated experience and technological competitiveness in the early stages of the HBM market and plan to continue leading the market.” It also highlighted that the revenue from graphical DRAM, including HBM, has grown to exceed 20 percent of total DRAM revenue. This is largely attributed to increased sales of AI servers, which demand HBM, and high-capacity DDR5 modules, both contributing to the enhancement of the DRAM average selling price (ASP).
Consequently, SK hynix appears determined to focus on improving NAND profitability and boosting HBM sales in the second half of this year. During a communication event at the Cheongju plant on the same day, SK hynix President Kwak Noh-jung announced the establishment of the “HBM Capability Enhancement Task Force” and the “NAND Profitability Enhancement Task Force.”
With AI memory demand remaining strong, the AI memory market based on ChatGPT is expected to continue to expand in the second half of this year. During the conference call, when inquired about the HBM product road map, SK hynix revealed plans to commence mass production of 5th generation HBM, HBM3E, in the first half of next year, with the 6th generation product, HBM4, set to enter mass production in 2026. Samsung Electronics is also expected to unveil products such as HBM3P, the 5th generation, in the second half of this year.