Chicken Game Looming in Memory Chip Business

Foxconn (Hong Hai Precision Industry) Group, well known for manufacturing the Apple iPhone, is preparing to enter the memory semiconductor business. As China is set to begin to produce memory chips next year following Taiwan’s reattempt to enter the memory semiconductor market, there are growing concerns that a chicken game in the memory chip industry will take place as it did ten years ago.

On May 7, Digitimes, an IT-specializing media outlet in Taiwan, reported that the Hon Hai Group was planning to establish a group of semiconductor affiliates and establish two factories to produce 12-inch memory semiconductor wafers by reorganizing its structure.

The group has a semiconductor facility manufacturer, a CBT company and an IC company as its affiliates and designs and produces semiconductor wafers, design circuit boards and produces software and memory semiconductors. Although Hon Hai has not commented on this, Chinese Internet media outlet Pengpai quoted multiple industry sources as saying that Hon Hai would assemble a technology development team with engineers from the outside. The industry expected that at least 8 trillion won would go into the construction of two 12-inch wafer factories.

Hon Hai's move seems related to the Chinese government's focus on semiconductors. Hon Hai is a Taiwanese company, but most of Foxconn factories that produce products for Apple are located in China. The Chinese government, which has been affected by the US government’s sanctions on and investigations of ZTE and Huawei, is expected to announce a plan to raise the second-term semiconductor fund of 300 billion yuan in the near future.

The semiconductor industry is paying attention to a possibility of a comeback by the Taiwanese memory semiconductor industry which played a chicken game with Korean and Japanese companies in the past. Taiwanese makers which had started producing DRAMs in the late 1980s, a little late than Korean companies, began to aggressively expanded DRAM production in 2005 As a result, Taiwanese makers chalked up a market share of 18% after Korean companies which ranked first in 2007. However, Taiwan’s aggressive production expansion led to the weakened profitability of Taiwanese as well as German and Japanese DRAM companies and their withdrawal from the semiconductor business. Currently, some Taiwanese companies such as Nanya and Winbond are recording a market share of a little more than 3% in the memory semiconductor market.

But with the rise of the Internet of Things (IoT) and artificial intelligence (AI),the demand for memory semiconductors has increased over the past two years. This has given Taiwan an opportunity to make an attempt to make a foray into the memory semiconductor market again. Samsung Electronics, SK Hynix and Micron, which survived the chicken game, have achieved an operating profit ratio of 50% thanks to a boom in the DRAM market. Taiwanese semiconductor makers seem to have judged that they can recover their old glory when combining recent market conditions and China's big capital with their own technological power.

The semiconductor industry is concerned that a chicken game may occur again if Taiwan’s reattempt to enter the semiconductor market overlaps with China's full-scale production of semiconductors. At the end of next year, China’s Tsinghua Unigroup will start the operation of a 3D NAND flash plant which has been under construction in Wuhan since 2016. Fujian Jinhua Integrated Circuit will begin mass-producing 25- to 30-nm DRAMs in September next year by investing 37 billion yuan. YMTC is also expected to launch 32-layer NAND flash products in the first half of 2019.

"If Taiwan's technology is coupled with China's financial strength, Taiwan can grow much faster in the memory market," said an official of the semiconductor industry. "It is urgently needed to develop next-generation semiconductors at a time when micro-process competition in the memory semiconductor market nearly reached its limit.