Historic crash for memory chips threatens to wipe out earnings

Bloomberg

The memory-chip sector, famous for its boom-and-bust cycles, had changed its ways. A combination of more disciplined management and new markets for its products — including 5G technology and cloud services — would ensure that companies delivered more predictable earnings.

And yet, less than a year after memory companies made such pronouncements, the US$160 billion industry is suffering one of its worst routs ever. There’s a glut of the chips sitting in warehouses, customers are cutting orders, and product prices have plunged.

“The chip industry thought that suppliers were going to have better control,” said Avril Wu, senior research vice president at TrendForce. “This downturn has proved everybody was wrong.”

The unprecedented crisis isn’t just wiping out cash at industry leaders like SK Hynix Inc. and Micron Technology Inc., but also destabilising their suppliers, denting Asian economies that rely on tech exports, and forcing the few remaining memory players to form alliances or even consider mergers.

It’s been a swift descent from the industry’s pandemic sales surge, which was fueled by shoppers outfitting home offices and snapping up computers, tablets and smartphones. Now consumers and businesses are holding off on big purchases as they cope with inflation and rising interest rates. Makers of those devices, the main buyers of memory chips, are suddenly stuck with stockpiles of components and have no need for more.

Already, Samsung Electronics Co. and its rivals are losing money on every chip they produce. Their collective operating losses are projected to hit a record US$5 billion this year. Inventories — a critical indicator of demand for memory chips — have more than tripled to record levels, reaching three to four months’ worth of supply.

Samsung looks to be the only one that will escape relatively unscathed, thanks to its heft and diversified business, but even the South Korean giant’s semiconductor division is headed toward losses. Investors will get a sense of the damage this week when the company reports quarterly earnings.

“Chip equipment companies’ sales are plunging by around 30 percent to 50 percent. This is not a normal situation,” said Greg Roh, head of technology research at HMC Investment & Securities.

Shares in Samsung fell as much as 2.3 percent Monday morning, in its biggest intraday fall in 12 days. SK Hynix fell 1.6 percent.