Stiff Challenges to 'Semiconductor Korea'
South Korea's semiconductor companies with memory semiconductors achieved the highest performances in a super-cycle which began in earnest in 2017.
However, corporate customers' complaints spiked due to continuous hikes in prices of DRAMs and NAND flashes. In particular, Chinese smartphone makers such as Huawei and Oppo were reportedly very unsatisfied with the hikes as they had to stand small margins due to Apple's iPhone and Samsung’s Galaxy series. However, there was no way to stop the rise in prices of semiconductors because demand eclipsed supply.
Of late, some countries has been trying to keep “Semiconductor Korea,” which has been benefiting from the super cycle, in check. The United States and China, which are the biggest semiconductor consumers, are mounting pressure on Korea's semiconductor companies for their protectionism.
Memory semiconductors are Korea's largest export item. The Ministry of Trade, Industry and Energy announced on January 1 that Korea's semiconductor exports ballooned 57.4% year on year to US$97.94 billion. This figure is more than Korea's total exports of US$96.01 billion in 1994 and one sixth of Korea's total exports of US$573.9 billion, an all-time high in 2017.
Samsung Electronics and SK Hynix Renew Quarterly Earnings
Samsung Electronics and SK Hynix leading “Semiconductor Korea” really enjoyed the memory semiconductor super cycle in 2017. DRAM and NAND flash prices which started to climb in the second half of 2016, continued to rise throughout 2017.
Samsung Electronics, the No. 1 DRAM maker and NAND flash maker in the world, posted operating profits of 6.31 trillion won (US$5.67 billion) in the first quarter, 8 trillion won (US$7.2 billion) in the second quarter and about 10 trillion won (US$9 billion) in the third quarter. Its operating profit margins reached close to 50%.
Although the fourth-quarter settlement of accounts remains, it is certain that Samsung Electronics will outperform Intel in 2017 and rank first in the semiconductor market in terms of sales. This means that Intel will slide to second place in 24 years since the company rose to the top as the semiconductor king in sales.
SK Hynix also recorded the best performance ever. Starting in the first quarter of 2017, the company started its business with an operating income of 2.46 trillion won (US$2.2 billion), which is 800 billion won (US$720 million) more than 1.66 trillion won (US$1.49 billion), the previous highest operating profit. In the second quarter, its sales, operating profits and net profits all reached record-highs. This record continued in the third quarter, achieving triple honors for two consecutive quarters. Cumulative operating profit by the third quarter ran to 9.25 trillion won (US$8.3 billion), with annual operating profit exceeding 10 trillion won (US$9 billion) and 13 trillion won (US$11.7 billion). There is a possibility that its operating profits will exceed 16 trillion won (US$14.4 billion) in 2018.
When Samsung Electronics and SK Hynix renew their respective operating profits, investors are paying attention to "When will this party end?" Foreign securities firms came up with reports with red flags raised and the market sensitively responded to such reports.
US and Chinese Semiconductor Companies Launching Series of Attacks
It is being observed that Chinese and US semiconductor companies are trying to tackle Korean semiconductor companies enjoying a semiconductor boom in various ways.
Chinese companies are jumping on Korean companies, citing DRAM prices, and US companies are filing patent infringement lawsuits against Korean companies.
The US International Trade Commission (ITC) said on December 21, 2017 (local time) that US semiconductor company Bit Micro will filed a lawsuit against SSD (solid state drive) makers such as Samsung Electronics and SK Hynix for a violation of Article 337 of the Customs Act. Also accused were HP and Dell of the US, ASUS and Acer of Taiwan, Lenovo of China and VAIO of Japan among others.
The Korean semiconductor industry understands that the lawsuit takes aim at Korean companies. Certain solid state drives (SSDs) which Bit Micro claims that infringed upon its patent are high capacity storage devices and Samsung is enjoying a 30% share of the global SSD market.
In addition, seventh-ranked SK Hynix, whose market share is 3%, is included in the litigation while Intel, Western Digital, Toshiba, Seagate and Micron which are the second to sixth largest companies in the SSD market than SK Hynix were excluded.
In this regard, the lawsuit looks as a patent dispute, but is regarded as a trade issue where Bit Micro is mounting pressure on Korean companies virtually dominating the memory semiconductor market with Article 337 of the Customs Act as a weapon.
Article 337 of the Customs Act lets the ITC order import prohibitions on products that infringe upon intellectual property rights of US companies or individuals.
Bit Micro is not the first company that requested the US government to put a ban on the import of Korean products, citing the infringement of patent rights. In September of last year, Tessera, a US semiconductor company, filed suit against Samsung Electronics at the ICT, the US Federal Court and the International Court of Justice for allegedly infringing its patent on wafer level packaging (WLP) technology used in a semiconductor manufacturing process. Tessera's parent company, Xperi, also claimed that the Galaxy smartphone loaded with Samsung's semiconductors infringed upon their 10 patents. Tessera also asked for a ban on imports and sales of smartphones, tablet PCs and laptops with Samsung semiconductors.
Netlist, a US memory semiconductor company, filed a patent infringement lawsuit against SK Hynix in July 2017 with an LRDIMM (load reduced dual in-line memory module) product. In September of 2016, Netlist made an issue out of a patent on server memory semiconductor. But Netlist did not give up even after receiving a preliminary ruling that Hynix did not infringe upon the patent from the ITC. In October 2017, the company did not give up its offensive against SK Hynix, including filing a patent infringement lawsuit against SK Hynix's modularization technology for server memories at the ITC.
China is also holding Korea in check. At the end of December 2017, Chinese media outlets carried a report that Chinese smartphone makers complained about hikes in Samsung's semiconductors so Chinese government officials gave their opinions to Samsung. Chinese smartphone companies expressed their dissatisfaction when Korean DRAM makers such as Samsung Electronics and SK Hynix announced they would raise prices of mobile DRAMs by 3% to 5% in the first quarter of 2017. This is certainly an action to undermine a market economy principle that a price is set by supply and demand.
On December 22, 2017, the 21st Economic Report of China said that the National Development and Reform Commission in charge of economic policies in China, accepted complaints from Chinese smartphone companies and looked into hikes in DRAM prices by summoning Samsung Electronics officials.
At the same time, the Chinese media are promoting an anti-Korean semiconductor atmosphere while fueling a rumor that Samsung Electronics and SK Hynix have fixed DRAM prices. China's state-run Xinhua News Agency said on January 21, "DRAM prices hit its highest level since 1993," and The IT Media Electronics World is raising an allegation of price fixing with similar logic. Global DRAM prices have skyrocketed, and Samsung Electronics and SK Hynix have enjoyed tremendous gains thanks to monopoly and oligopoly, they say.
"We have not received official investigations or official documents related to the matter," Samsung Electronics and SK Hynix said. “However, there is concern that Chinese authorities will soon launch an investigation as Chinese companies have an intention to pushing the Chinese government and media to press Korean semiconductor companies.”
At present, it is an overriding view that even if an investigation of Korean semiconductor companies over a price fixing allegation is launched, it will hardly lead to import restrictions linked to trade issues. However, it is pointed out that Korean companies should remain very attentive as stronger attempts are being made to keep in check Korean companies taking the lead in the memory semiconductor market.
China is not the only country that is pressuring the Korean semiconductor industry with 'the government accepts if the industry complains'. The same is true of the United States. In fact, there is a vague aspect that American companies are caught up in anti-dumping issues mainly in steel, electronics, etc., because semiconductors are in a supply situation. So the company is suing and the government is driving it into anti-dumping. As a result, it can be analyzed that the patent litigation is going to tame Korea, a memory semiconductor powerhouse.
‘Semiconductor Korea’ to Face Big Tackles In 2018
In the global semiconductor market, the position of "Semiconductor Korea" secured a solid position in the memory sector. Some experts point out that as Korean semiconductor companies’ expansion to system semiconductors is limited and checks on them by each country are expected to continue in 2018, it is difficult to become optimistic about the Korean semiconductor industry.
Why did Chinese smartphone makers put pressure on Korean DRAM makers to fix DRAM prices?
According to market researcher IHS, the Chinese DRAM market is estimated to reach US$47 billion in 2018, more than US$ 10 billion in 2017 than US$37.5 billion in 2017.
In particular, Chinese smartphone makers are the largest consumers of mobile memory semiconductors. Mobile DRAMs account for 30% of total DRAMs.
Chinese smartphone manufacturers are big customers of DRAMs. Therefore, they are inevitably sensitive to prices. This is the reason why they are trying to prevent DRAM prices from rising.
According to market researcher DRAMExchange, the price of a DRAM in June 2016 stood at US$1.31 but shot up to US$ 3.59 in November but the price was at the same level as as US$3.50 in early 2014. Returning to 2014, DRAM prices hit the bottom by falling for six consecutive quarters, dropping to US$1.25 in May of 2016.
Some experts say that the Chinese government which declared a policy to promote its semiconductor industry is trying to hold overseas semiconductor companies in check.
In 2015, the Chinese government announced that it would invest 165 trillion won to raise the self-supply ratio of semiconductors to 70 percent by 2025 in its 'Chinese Manufacturing 2025' report. With such government support, it is expected that Chinese semiconductor companies such as Fujian Jinhua Semiconductor, Innotron Memory, and Tsinghua Uni Group will start production in the second half of 2018. It is said that Fujian Jinhua will roll out high value-added DRAMs, Innotron, mobile DRAMs and Tsinghua Uni Group, a subsidiary of Tsinghua Uni Group, 3D NAND flashes.
However, market watchers predict that even if Chinese semiconductor makers begin mass production of DRAMs and NAND flashes at the end of 2018, gaps between Chinese semiconductor companies and global makers such as Samsung Electronics and SK Hynix will remain wide in terms of yield rates and performance.
"Even though China will promote its semiconductor industry at the government level, Chinese companies will hardly narrow gaps of two to three years with Korean semiconductor companies for the time being as the semiconductor industry has very high barriers in terms of technology and investment," said an official of the semiconductor market.
"Since a report that the Chinese Tsinghua Uni Group would invest in a large-scale memory semiconductor facility in the third quarter of 2015, concern over oversupply of memory chips from China was raised,” said Kim Kyung-min, a researcher at Daeshin Securities. “But in fact, Chinese companies’ investment direction was shifted to NAND flashes instead of DRAMs which are structurally difficult to mass-produce."
However, a lot of attention is now being paid to whether Chinese authorities will actually begin regulating prices. The Korean semiconductor industry forecasts that it is unlikely for the Chinese government will explicitly put pressure on overseas semiconductor makers as memory semiconductors are in a short supply.
Growing Risk Factors that Cannot Be Ignored
Along with such mounting pressure on Semiconductor Korea, red flags are also raised here and there. This is because forecasts have been steadily made that the semiconductor boom will shrink this year with domestic and foreign securities firms taking the initiative.
The Hana Financial Research Institute warned in December, 2017 that the semiconductor industry could face a recession from China within two to three years. Earlier, in November, Morgan Stanley reported that the DRAM and NAND flash business peaked due to supply growth. The semiconductor super cycle reached its end and would face oversupply starting in 2018, they said.
The Korean government expects semiconductor exports to continue growing for the time being in 2018. "The fourth industrial revolution kindles an increase in products with semiconductors such as those for the internet of things (IoT), driving up semiconductor prices," said an official of the Korean Ministry of Trade, Industry and Energy. “As semiconductors are also used in products that are not related to semiconductors such as self-drive cars and smart factories, a semiconductor boom will continue for now."
The Korea Institute for Industrial Economics and Trade projected that this year's semiconductor exports would jump 22.9% from last year. However, the think-tank warned about a possibility that the Korean economy could be hit hard by a weakening semiconductor market as exports account for a high percentage of the semiconductor market. In addition, export conditions for the future are uncertain due to "three new negative factors –- a strong Korean won, a high interest rate and rising oil prices.
Experts in the semiconductor industry agree that the semiconductor industry will continue to enjoy a boom in 2018, but the boom will weaken. Demand for smartphones will continue to remain strong but it is unlikely that the semiconductor industry will record dramatic growth until next year. The point now is how significantly the growth of the semiconductor industry will slow down compared to last year.
In the securities industry, it is expected that debates on the semiconductor cycle will become more intense this year, both at home and abroad. Already in Korea in the second half of 2018, analysts began to focus on the market. 'Pessimism' was based on traditional logic such as prices and supply and demand, while those with 'optimistic' views focus on opportunities for creating new demand through technological change.
"We think the semiconductor market is ignoring risk to a price environment," Samsung Securities said in a report. "We expect the semiconductor market to switch to a decline after mid-2018."
On the other hand, "Demand will increase due to the expansion of data-based computing such as cloud technology,” Citi Global Market Securities said. Rather, the company took an opposing view by expecting that the semiconductor industry will suffer lack of supply in the NAND sector after mid-2018.”
With debates among experts heating up, it is said that year 2018 will be the first year to tell good semiconductor experts from bad ones. "NAND prices are on a gradual decline and smart phones which created bid demand will not sell as well as in the past and Samsung Electronics and other companies have announced plans to increase DRAM production lines," said an official of an asset management company. "With numbers disclosed, domestic analysts’ capabilities will begin to clearly show depending on their insights to interpret the numbers and read technological changes.”