Samsung Electronics is seeking a paradigm shift in its key memory chip business putting more focus on market share over elevated profit margins.

As a new order has prevailed in the industry with three key players ¯ Samsung Electronics, SK hynix and Micron Technology of the United States ¯ the shift by market leader Samsung has added to worries that the industry may see an extension of the ongoing bearish trend in terms of profitability.

Typically and theoretically, more concentrated industries behave better and in general, compared to the destructive 1990s and 2000s ¯ in which the industry saw more than 10 players.

"The competitive dynamic is better but not as good as we thought due to Samsung's aggressive and opportunistic behavior. Rather than sit back and enjoy elevated profit margins with a 40 percent market share in DRAMs, Samsung is intent on stretching their share to closer to 50 percent," Bernstein Research's senior analyst Mark C. Newman said in a recent report.

DRAM (dynamic random access memory) chips are used in all digital devices with NAND chips, another type of memory, to store data even when the power has been switched off.

Newman said the company is gaining significant market share in the NAND sector.

"Although Samsung cares about profits, their actions have been opportunistic and more aggressive than we predicted at the expense of laggards particularly Micron Technology in DRAMs and SK hynix in NANDs," he said.

SK hynix is expected to be hugely impacted. "In NAND, we see Samsung continuing to stretch their lead in 3D NAND, which will put continued pressure on the rest of the field. SK hynix is one of the two obvious losers."

In rare criticism, Newman stressed this strategy shift has destroyed the "level of trust" among competitors, perhaps "permanently," as demand has dropped drastically with PC sales growth down to high single digits in 2015 with this year shaping up to be the same.

"Sales of smartphones, the main savior to memory demand growth have also weakened considerably to single digit growth this year and servers with datacenters are not strong enough to absorb the excess, particularly in DRAM," Newman said.

The analyst implied the strategy shift by Samsung may cause additional oversupply in the industry, putting others in danger in terms of profitability.

"The oversupply issue is if anything only getting worse, with higher than normal inventories now an even bigger worry. Although we were right about the shrink slowing, thus reducing supply growth, the flip side of this trend is that capital spending and R&D costs are soaring thus putting a dent in memory cost declines," the analyst stressed.

Mentioning these reasons, Newman said combined with a weak demand environment and aggressiveness, this means that prices continue to fall faster than costs.

"Thus, this will be destroying the level of profitability that the global industry saw in 2014 and 2015," he added.

As for another concern, Bernstein Research said China's potential entry into the market and new technologies will provide further worries "over the longer term."

But the so-called "China effects" will be limited.

"China is the huge potentially disruptive entrant that, although it may indeed eventually fail, has a practically limitless balance sheet and hence holds the potential to make things downright ugly when that supply potentially hits in 2018," the research firm said.

"Today's oversupply situation would become infinitely worse if and when China's XMC ramps up big amounts of capacity. New memory technologies such as 3D X-point, ReRAM and MRAM stand on the sidelines and threaten to cannibalize part of the mainstream memory market," he said.

Consequently, "the three players" need to focus more on finding measures to lift demand as the oversupply of DRAMs will force prices to continue to fall without any demand recovery.

Samsung Electronics declined to comment.

But sources familiar with the issue told The Korea Times that the company has already acknowledged the estimated impact from the result of its strategy shift toward expansion.

"This is why Samsung Electronics plans to control the output of its latest DRAM chips using the industry's first 18-nanometer processing technology throughout this year. Also, Samsung's continued reluctance on what type of chips will be fabricated at its massive Pyeongtaek plants, south of Seoul, which are being built, is its response to such market concerns," an official said by telephone.

By: DocMemory
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