There’s a Glut Brewing in a $161 Billion Slice of the Chip Sector

(Bloomberg Opinion) -- A crucial part of the semiconductor sector will likely be hit by an oversupply next year, pushing prices down and highlighting the vagaries of an industry that’s now facing a debilitating shortage of other components. That may mean falling earnings for some companies, but likely won’t make your new car arrive any sooner.

Prices of DRAM, the most ubiquitous of chips, will likely fall 15% in 2022 after buyers stocked their shelves this year to cope with global supply chain snarls. These semiconductors play a crucial role in all electronics by temporarily holding information used by a system’s processor. But they’re also a commodity product, making the market susceptible to even minor swings in the supply-demand balance — and that’s what we’re likely to see over the coming 12 months, according to industry researcher TrendForce Corp.

While demand is forecast to climb 17.1%, supply growth will be stronger at 18.6%, the Taipei-based company noted recently. But even that small difference is enough to drive prices down. A similar phenomenon is likely to occur in the other major memory chip category of NAND, which is used to store data in smartphones and computers, though with a less-severe decline of up to 5%.

Samsung Electronics Co., the biggest maker of both types, is already bracing for the downturn. Last month the South Korean company forecast shipments of DRAM, measured in bits, would be unchanged this quarter. In a sector where technological progress leads to unstoppable supply inflation, zero growth is a sign of downturn. Even in NAND the global leader will likely manage to boost volume by less than 10% for the period.

It’s not alone. Micron Technology Inc., the biggest U.S. supplier, in September forecast revenue well below expectations for the quarter ending this month, prompting a sell off in the company’s shares. The Boise, Idaho-based company pointed to slowing PC demand, after a blockbuster 18 months driven by the pandemic-inspired shift to work-from-home.

SK Hynix Inc., the world’s second-largest, is more optimistic. A possible inventory correction, as customers digest existing stockpiles, coupled with continued supply chain uncertainty, will continue to weigh on demand. Yet the South Korean company sees hope as data centers and cloud-computing providers continue expansion, and thus buy memory chips.

Unfortunately, such oversupply doesn’t afford much opportunity for these companies to divert capacity at their multi-billion dollar factories to churn out the semiconductors that remain in shortage. That’s because the $161 billion memory sector — which accounts for 29% of the global chip market — is so specialized that the equipment used to make such chips can’t be readily switched to produce other types, such as processors or sensors. And simply turning off the spigot won’t help much because their major cost is depreciation, which shows up on the earnings statement whether they make a billion chips or just one.

Instead, memory-chip makers will be left churning out their commodity components, while making strategic tweaks such as redirecting capacity to specialized versions used in smartphones or cars. But even that approach may have limited effect if the rest of the supply chain can’t keep up, leaving piles of memory  waiting to be installed in devices.

So while one part of the industry struggles to keep up, another will be trying to slow down, and the world is left ruing the fact that not all chips are created equal.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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