Chipmakers Confute China’s Price-Fixing Investigation with Facts

"The supply of server DRAMs for cloud service expansion will not meet explosive demand, too this year," said the state-run Korea Institute for Industrial Economics and Trade (KIET), forecasting the memory semiconductor market early this year.

The ground is simple. Supply will not be able to keep up with demand. It became difficult to secure a high yield due to an exponential increase in process difficulty, and the facility investment had grown astronomically, the KIET explained. “This year's supply of DRAMs will continue to be insufficient as it did last year, and it will be difficult to secure supply in the short term,” the KIET said.

In actuality, according to market researcher Gartner, the DRAM sufficiency ratio has been getting lower and lower. If the supply ratio is 100%, it means that supply equals demand and if the ratio is less than 100%, supply is insufficient. The sufficiency ratio reached 100.2% in 2015 before dropping to 99.5% in 2016 and 97.6% in 2017. It is expected to stand at 96.1% this year.

It is against this backdrop that many semiconductor industry watchers suspected China’s motives when the Chinese government launched on May 31 a price fixing investigation into three semiconductor companies -- Samsung Electronics and SK Hynix of Korea and Micron of the US. They noted that the semiconductor industry structure did not allow them to fix prices. They asserted that certain companies could not artificially create a situation in which supply falls short of demand in a big cycle where the 4th Industrial Revolution set off an explosive increase in demand for high-tech information technology, giving rise to a spike in semiconductor demand and prices.

In particular, Samsung Electronics and SK Hynix have continued to invest in facilities on nearly unprecedented scales while maintaining 100% utilization rates every year. This means that they have been running semiconductor factories 24 hours a day, 365 days a year. Samsung Electronics, which ranks first in terms of DRAM and NAND production capacities, invested between 12 trillion won (US$10.8 billion) and 14 trillion won (US$12.6 billion) in facilities every year from 2013 to 2016 and spent 27.3 trillion won (US$24.5 billion) last year. SK Hynix with the second largest DRAM market share, also invested between five trillion won (US$4.5 billion) and six trillion won (US$5.4 billion) every year from 2014, and spent 10.3 trillion won last year. "We could not stop lines in the middle of production and it was a real challenge to meet the demand," said an official of the semiconductor industry. "There was no reason to prune supply intentionally."

Semiconductor companies also said that an unwritten law on the prohibition of price fixing had been in place based on past experiences. In 2004, Samsung Electronics, SK Hynix and Japan’s Elpida paid fines of one trillion won for fixing semiconductor prices, and some employees even did time. After that, the semiconductor industry created a strict culture not to repeat the same mistake.

Semiconductor companies also said that market situations naturally created their high operating profit ratios criticized by some industry experts. They said that they could not sell their products for high prices unless their products were good products. In fact, the launches of the most advanced products ahead of others empowered Samsung Electronics and SK Hynix to chalk up operating profit ratios of about 50%. In the case of Samsung Electronics, its innovation led to mass-production of the world's first 10-nanometer DRAMs and third-generation 64-layer V NAND flashes.

Rather, they argue that this case is China’s strategic perverseness. China suggested a possibility that China will launch an investigation of Micron of the US on a price fixing allegation in the trade war with the United States. It is also pointed out that China has been buying time for its focus on the IT industry. China's Tsinghua Unigroup announced on June 4 that it would commercialize a 5G semiconductor chip next year and the Chinese government declared that it would elevate its semiconductor sufficiency ratio from the current 15% to 70% by 2025.