The Memory Chip industry has always run in economic cycles of expansions and contractions. During the Pandemic, the industry was looking at a revenue boom and was planning to capitalize on this surge by expanding into new sectors like 5G communication and cloud computing. Experts vowed to get out of the economic cycle and establish a more stabilized industry.
Yet today, the $160 billion industry is facing an unprecedented crisis as Mirco Chip stocks are increasing amidst dwindling demands.
According to a report from Gartner, the Global Memory Chip revenue fell by 10% in 2022. Experts are predicting that the situation is going to get even worse. In 2020, the pandemic boosted the demand for memory chips as people were confined to their houses and bought phones, tablets, laptops, and other smart devices to stay connected to the world.
However post pandemic, the world is heading for a recession with rising inflation and massive layoffs. This in turn has dwindled the demand for gadgets and devices that use memory chips. Thus, companies that were riding on the pandemic boom are now facing a crisis of excessive stock of memory chips.
TrendForce Senior Research Vice President Avril Wu said that the downturn has proved the whole industry wrong as they had predicted that the suppliers would be able to control the outcome.
Asian economies like South Korea and Japan are facing the major brunt of this downward trend as they thrive on technology export. Top global companies like SK Hynix Inc (South Korea), and Micron Technology Inc( US) are facing a cash crunch amidst the decreasing demand for microchips. The problem is not only affecting individual companies but also technology behemoths like Samsung.
It is reported that Samsung Electronics and almost all its competitors are losing money on chips with the total operating loss of these companies predicted to hit a record-breaking $5 billion in 2023. The industry stockpile has increased three times the normal level which indicates that the production has exceeded the actual consumer demand.
Having too much stock in hand leads to loss of profits, increased storage costs, limited cash flow, and shortage of working capital. In the case of microchips the added risk of obsolescence makes it even worse for these companies.
Companies have already started implementing aggressive counter strategies to contain the losses. Micron Technology of the US has decided to reduce its output and cut the budget for its new plant and equipment. CEO, Sanjay Mehrotra said that the rate at which the whole industry rights itself will depend on how quickly Micron’s competitors make similar moves. He further added that the cross-cycle nature of growth and profit was still there and so he believed that they just have to run this cycle to get back to profitability.
South Korea’s SK Hynix Inc, has also slashed its investments and scaled back output in order to bear the losses. SK Hynix is especially affected by the current economic downturn as it acquired the flash memory chip business of Inter Corp in 2020. The $9 billion deal has now left the company with the burden of the additional stockpile. Meanwhile, Intel played it cleverly by exiting the declining industry which is dominated by Asian giants like SK and Samsung.
All eyes are now glued on Samsung which is going to report its fourth-quarter earnings this week. Experts are predicting the profits to hit a six-year low as consumers are in savings mode. Every move that Samsung makes for its microchip division, will now affect the global chip industry, including its competitors.
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(Via)
