South Korea's leading semiconductor makers, Samsung Electronics and SK hynix, are likely to post deficits of billions of won in the first quarter of this year amid weakening memory chip prices and higher inventories.

Posing great challenges for the firms are accumulated substantial amounts of inventory and slowing consumer spending.

According to Samsung’s regulatory filing to DART, the Financial Supervisory Service’s electronic disclosure board, Sunday, its inventory assets reached an all-time high of 52.2 trillion won ($39.9 billion) as of the fourth quarter last year, compared with last year’s 41.4 trillion won.

The company’s chip business division accounted for the lion's share of the total figure, with 29.1 trillion won in the same year, up nearly 12.6 trillion won from the same period tallied in 2021, the data showed.

SK hynix was in a similar situation, where its inventory jumped about 75 percent on-year to 15.7 trillion won during the cited period, according to the company’s regulatory filing. Since the company specializes in DRAM and NAND flash chips, which account for over 90 percent of its revenue, it has been hit harder by the sluggish market conditions.

Pent-up demand during the pandemic for home appliances, including TVs, has lost momentum, and aggressive rate hikes in major economies have significantly weakened consumer spending power. This situation, on top of the inventory surge, has resulted in a sharp drop in chip prices.

According to market watchers, the prices of PC DRAM and NAND memory chips are reportedly getting closer to their costs. KB Securities forecast the prices of DRAM and NAND chips will drop by a further 19 percent and 18 percent, respectively, in the January-March period.

While falling chip prices and soaring inventories affect the companies’ earnings, both Samsung’s chip business and SK are expected to take a turn into the red in this first quarter, logging operating losses of between 1.91 trillion won and 4.47 trillion won, and 3.11 trillion won, respectively, according to an analysis provided by FnGuide.

Global chip suppliers have been cutting their production to cope with worsening business conditions. US memory maker Micron has reduced DRAM and NAND wafer production by approximately 20 percent, while Japan’s Kioxia and US Western Digital also cut their flash wafer production by 30 percent each.

Despite witnessing a sharp drop in chip profits, Samsung maintains it will not be "artificially" cutting output and will keep up investment in its chips business. However, it has hinted at the possibility of a “natural” reduction through process conversion.

At Wednesday’s shareholders meeting, Samsung shared a downbeat forecast for its chip business this year but said it will continue to invest to secure clean rooms and technology advances in its efforts to “turn misfortune into advantage.”

"We will be flexible in executing infrastructure investment given volatile market conditions,” said Lee Jung-bae, president of Samsung's device solution division. “We’re also planning to enhance our investment efficiency and improve the corporate structure.”

Last October, SK hynix announced its 2023 plan to cut its capital expenditures by at least half and reduce the production of low-profit products during its earnings call for the third quarter of 2022. The firm has slashed its wafer starts in major production lines since the last fourth quarter and this year’s DRAM and NAND wafer production will also be reduced compared to last year. But it has no plans to cut more investment for this year despite the grim outlook.

Market watchers suggest the world’s two largest memory chip makers to reduce their production further to prevent soaring inventory assets and boost semiconductor prices. Reducing supply is the way to accelerate rebound in their chip businesses, they said.

"Delaying the decision to cut production is highly likely to extend the period for (the chip) prices to remain below production costs by more than three quarters," Daishin Securities analyst Wi Min-bok said. "Chip manufacturers' further production cuts are either very imminent or (implicitly) already underway."

Meanwhile, Taiwan-based market analyst firm TrendForce predicted that global NAND flash revenue will continue to see a decrease of 8.1 percent in the first quarter, but as major chip suppliers continue cutting back on production, it will allow them to alleviate their current overstock inventories. The drop in average selling prices of the product will shrink to around 10-15 percent, it said.

By: DocMemory
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