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Chip sector’s bright spot brings back bad memory

The outlook for the chip sector’s brightest spot may be dimming. Semiconductor demand is faltering as companies and officials spend billions adding supply. The $166 billion memory chip market is consolidated at present, so leaders like Samsung Electronics can quickly cut output and protect profit. Chinese entrants and attempts by foreign governments to reshore manufacturing might upend that soon.

As pandemic-induced shortages ease, while inflation and recession concerns deduct from demand for smartphones, PCs and other electronics, a chip glut is looming. Because chipmakers are investing record sums to increase capacity nevertheless, the market could find itself swamped for some time.

At present much of new investment is concentrated in processors, an area of strategic competition as governments try to build artificial intelligence champions. The memory market is in better shape. Semiconductors used for storage accounted for 28% of the $595 billion of total chip revenue last year, according to industry tracker Gartner. Although prices have been falling, memory-chip makers like South Korea’s Samsung have navigated the downturn with aplomb. The $317 billion conglomerate reported a 12% year-on-year rise in operating profit, of nearly $11 billion, in the three months to end-June.

A strong dollar helped the South Korean giant, as did resilient demand from data centres. Most helpful is the way just three companies, Samsung, compatriot SK Hynix and U.S.-based Micron Technology, dominate the memory market. As demand falls and inventories rise, the troika can easily curb supply to preserve margins. SK Hynix yesterday said it was mulling a considerable reduction to its capital expenditure plans next year; spending on property, plant and equipment at Samsung declined 14% in the first half of 2022 from a year earlier.

This may not last. Well-funded entrants from China such as Yangtze Memory Technologies are hungry to break in. YMTC is aggressively expanding in so-called NAND storage chips, and could double its market share to 10%, according to Nikkei. Other governments are keen to bring tech manufacturing back to their own borders. The U.S. Senate recently approved a bill allocating $52 billion for local chip production. So far Washington’s focus is on non-memory semiconductors, but officials elsewhere are paying attention to storage. Earlier this week, Japan announced it would give its local memory champion a $680 million subsidy. Disruption is in store.

South Korea’s Samsung Electronics on July 28 reported revenue of 77.2 trillion won ($59.1 billion) in the three months to June, an increase of 21% from the same period last year. Operating profit rose 12% to 14.1 trillion won.

The company said demand for server memory chips remained solid, but mobile and PC chip demand would continue to weaken. Reuters

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