Bust Looms Over $60 Billion Splurge by Korean Chip Giants

(Bloomberg) -- Record spending by South Korea’s semiconductor giants is raising the specter of another downturn in the chip industry’s boom-bust cycle.

Samsung Electronics Co. and SK Hynix Inc., the biggest makers of the memory chips used in mobile devices, have announced about $60 billion of investments in facilities that each year could pump out millions of silicon wafers -- the building blocks of semiconductors.

The capital spending is underpinned by expectations that new technologies will fuel demand even as growth in the global smartphone market stalls. Artificial intelligence, Internet of Things and autonomous driving are among uses for memory that Hynix and Samsung are counting on to soak up the increased supply.

But with Chinese firms also expanding rapidly and the government in Beijing intent on becoming a force in the lucrative business, the stage is set for new chips to flood the market. Global silicon output is expected to rise to a record 13.8 billion square inches by 2021, according to SEMI, an international association for electronics suppliers.

“Once volumes start to be churned out from these factories in addition to ones in China, prices are going to start dropping very fast,” said Lee Joo-wan, a semiconductor analyst at Seoul’s Hana Institute of Finance. “This is a bubble.”

Samsung is the world’s biggest maker of both DRAM and Nand, holding market share of more than 40 percent in the two memory technologies favored for smartphones, according to data compiled by Bloomberg from IDC. Hynix was number two in DRAM and while it ranks fifth in Nand, it has an interest in the second-ranked player Toshiba.

Samsung is riding the boom in chips to record revenue with earnings on Wednesday expected to show net income surged 17 percent to 12.9 trillion won ($11.3 billion). The chip unit alone probably had operating profit of 13.6 trillion won, according to Kim Sun-woo, an analyst at Meritz Securities Co.

Hynix last week reported quarterly operating profit of 6.47 trillion won, topping analysts’ estimates.

With so much money coming in, Samsung is spending 30 trillion won on a chip factory south of Seoul that is expected to be completed by 2021. The Suwon-based company has also committed 6 trillion won to expand production in Hwaseong and is enlarging its semiconductor plant in Xi’an, China, in a three-year investment totaling $7 billion. 

Bust Looms Over $60 Billion Splurge by Korean Chip Giants

Hynix is spending 20 trillion won on its newest Nand factory south of Seoul that opened earlier this month. It is also investing 3.5 trillion won to set up a new plant in Icheon, where it’s based, and also plans a foundry in Wuxi, China next year in a joint venture with the investment arm of the local government.

But the market may be about to turn sour. Researcher Trendforce, which tracks the global semiconductor industry, expects prices to drop into 2019. Its DRAMeXchange division this month predicted a 5 percent drop for DRAM in the December quarter while Nand could decline as much as 15 percent. Next year, the decline could be as high as 20 percent for DRAM and 30 percent for Nand.

“There has been a slowdown in the DRAM price increase throughout this year, and we believe this trend will continue into the fourth quarter and the first quarter of next year,” Sean Kim, head of investor relations at Hynix, said in a conference call last week. “We do not expect any sharp decline, but then it’s likely to remain flat or have a small decline in the price.”

Samsung has grown by investing regardless of the boom-bust cycle, instead betting that prices will eventually rise along with demand. And part of the increased spending has to do with growing costs of upgrading facilities to cope with deepening technical challenges.

“There are several long-term trends which will be hugely dependent on semiconductors which will drive demand for many years to come,” said Mike Howard, vice president of memory research at French researcher Yole Developpement. “If the markets get over-supplied then suppliers will simply reduce their capex and this will have a very quick impact on supply and bring markets back into balance.”

Bust Looms Over $60 Billion Splurge by Korean Chip Giants

To be sure, the chipmakers can adjust their production depending on market demand, which helps to head off any collapse in prices. Samsung is said to be planning to curtail growth in bit volume next year, which measures the amount of memory produced, to keep supplies tight, Bloomberg News reported last month.

Hynix also said last week it would cut down investments next year and scrutinize demand more frequently. It’s not just leading chipmakers that are scaling down investments. DRAM maker Nanya Technology Corp. cut its capex for 2018 by about 12.5 percent to NT$21 billion ($678 million).

Any downturn for chips carries risks for South Korea itself with President Moon Jae-in describing the industry as “the engine” of its economy. In August, Asia’s fourth-largest economy got 23 percent of its exports from semiconductors.

“We are on the eve of a big downturn,” said Jim Handy at Objective Analysis, a California-based research firm. “Semiconductor manufacturers dramatically increased their capex in 2017. This will naturally lead to a price collapse in 2019.”

©2018 Bloomberg L.P.