Samsung Electronics is in quandary over when to start the operation of semiconductor plants under construction at Xian, Shaanxi Province in China and at Pyeongtaek, Gyeonggi Province in Korea and which semiconductor items to produce in these new plants. If memory chips are additionally produced in the plants despite lingering concerns about oversupply of semiconductors, the company may become embroiled in “a game of chicken” which would eat into its own earnings.
According to the semiconductor industry on Oct. 15, the price of DRAMs (DDR4 8 Gb) and NAND flashes (128 Gb MLC) stood at US$2.94 and US$4.11 per unit, respectively, as of September, showing little change for two consecutive months. Memory chip prices, which had plunged over the past 10 months, hit the bottom recently as chipmakers decreased output.
This year Samsung is adjusting chip production capacity by changing the planner production facility into V NAND or by changing the production process for 10-nano-class DRAMs from a first-generation (1x) method to a second-generation (1y) one. The chipmaker said in the conference call for the second quarter, “There is no artificial reduction in DRAM output.” Therefore, it is decreasing its output by halting the production of chips in relevant lines during the process transition.
SK Hynix announced a cut in the production of DRAMs and NAND flash after the release of the second-quarter earnings. Micron and Toshiba also reduced production capacity. Given all this, despite decreased demand for semiconductors, chipmakers could prevent memory chip prices from going down by adjusting their semiconductor supply.
Circumstances will become more difficult next year. If Samsung’s second plant in Xian, China and second plant in Pyeongtaek, whose construction will be completed at the end of this year, begin to mass produce memory chips, a fall in chip prices is inevitable. Out of this concern, the chipmaker said that it has not decided yet when to operate the new plants and which items to produce there. Industry watchers speculated that the second plant in Xian, China, will produce NAND flash like the first one, but the chipmaker denied it, adding that it has not decided yet. As the prices of NAND flash dropped to the break-even point (BEP) in the first half of this year, the second plant in Xian can possibly be used as the production base of DRAMs, which has much demand in the Chinese market.
Recent moves by competitors intensify Samsung’s concern. Micron, the third largest maker of DRAM in the world said at the conference call last month that, as the demand for DRAM is expected to rise by 18 to 20 percent next year, it will increase the supply of DRAM accordingly, announcing its plan to expand the output of DRAM next year. Intel, the largest vendor in the CPU-based system semiconductor industry, released “Optane,” which will take over a portion of the DRAM market, aggravating Samsung’s situation.
With its competitive advantages in technology and production capacity, Samsung can play a “game of chicken” to defeat its competitors, but this is very risky considering the recent global conditions of the industry. The Chinese authorities are looking into antitrust violations by Samsung, SK hynix and Micron. In case Micron is forced out of the market as a result of the game, it is obvious that the Chinese government will become harsher to the Korean chipmakers.
Although there are some expectations for another “super cycle” as a result of the commercialization of 5G, the demand for semiconductors is expected to be limited as Apple, the number one smartphone manufacture in US, is to release iPhone for 5G in the second half of next year and there is a shortage of contents for 5G. Demand for DRAM for servers, which contributed a lot to the outperformance of Samsung for the recent few years, is hardly likely to rebound as cloud service providers optimize software rather than purchasing DRAM
“As Samsung’s second plant in Pyeongtaek, into which 30 trillion won was invested, can develop EUV-based DRAM and expand facilities of foundry, the company will respond flexibly in consideration of market situations after the plant is completed,” said an official in the semiconductor industry, adding that “As the chipmaker needs to consider numerous things including the UC-China trade war, the biggest risk, and the result of the US presidential election, it is not easy for the chipmaker to make decisions.”