According to the research data released by TrendForce yesterday, due to some suppliers such as Micron and SK Hynix having initiated DRAM production cuts, the average price of DRAM fell by nearly 20% in the first quarter, and it is estimated that the decline in the second quarter will be narrowed to 10-15%. However, as the demand recovery situation in the second half of 2023 is still unclear, the downward cycle of DRAM prices has not yet seen an end. In the current situation where the original factory inventory level is still high, unless a larger-scale production cut occurs, the subsequent contract price is likely to reverse.

TrendForce also shared their analysis report on NAND Flash, as they said, most suppliers have already started to reduce production. Therefore, the vicious cycle of suppliers undermining each other has been controlled to a certain extent. It is currently expected that the overall NAND Flash ASP decline in the first quarter of 2023 will be 10-15%, less than the decline in the fourth quarter of 2022.

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From the market performance, the performance of the three major storage giants is also not very ideal.

Micron Reports the Largest Loss in History

Micron Technology reported that due to inventory write-downs of more than 1.4 billion US dollars on Tuesday, it has created the largest quarterly loss on record. However, the stock price has risen as executives said that the memory market may have bottomed out.

"We now believe that customer inventory in several end markets has been reduced, and we expect the supply and demand balance to gradually improve in the coming months," said Micron CEO Sanjay Mehrotra in his prepared speech. "Excluding the impact of inventory write-downs, we believe that our balance sheet days of inventory outstanding (DIO) has peaked in the second fiscal quarter, and our quarterly performance is close to transitioning to continuous revenue growth."

According to financial report data, Micron lost 2.31 billion US dollars in the second fiscal quarter, which is a loss of 2.12 US dollars per share, with sales of 3.69 billion US dollars, lower than 7.79 billion US dollars a year ago. According to FactSet, the company had the largest quarterly loss of 1.94 billion US dollars in the same quarter of 2003. The memory chip expert located in Idaho reported a loss of 1.91 US dollars per share after considering the stock-based compensation and restructuring costs brought by the recent layoffs, while a year ago it reported an adjusted earnings per share of 2.14 US dollars.

According to FactSet data, analysts on average expected an adjusted loss of 67 cents per share, with sales of 3.71 billion US dollars. After the results were announced, Micron's stock price immediately rose by more than 1% in after-hours trading, and closed down 0.9% to 59.28 US dollars.

Due to the decline in the storage chip market and the demand for many projects related to its core products (such as personal computers, smartphones, and cloud computing servers), Micron has suffered losses. After the initial outbreak of COVID-19, consumers and enterprises hoarded electronic products in a frenzy, leading to a surge in memory demand. The slowdown in procurement led to an increase in inventory and a rapid decline in memory chip prices.

"The semiconductor memory and storage industry is facing the most severe recession in the past 13 years, and the pricing environment is extremely weak, which has had a significant impact on our financial performance," Mehrotra said in a conference call on Tuesday afternoon.Other comments on the conference call focused on the end of this dynamic, with Mehrotra's most specific conference call focusing on the key data center market, where staunch supporters of cloud computing have suspended purchases. In Tuesday's prepared remarks, however, Mehrotra said that the rise of generative AI programs like ChatGPT will turn the market around.

"In the data center, we believe our revenue bottomed out in the second fiscal quarter, and we expect revenue to grow in the third fiscal quarter. By the end of 2023, data center customer inventory should reach a relatively healthy level," he explained, focusing on servers for AI programs that require several times the memory chips of standard servers.

After competitors Samsung Electronics and SK Hynix made similar moves in their recent earnings calls, analysts widely predicted inventory write-downs, which the company's CFO hinted at earlier this month. The only disagreement lies in the scale: Citi Research analyst Christopher Danely believes Micron will write down about $1 billion or more to "reduce inventory days and make it easier for Micron to sell inventory," while TD Cowen analyst Krish Sankar estimates a write-down of $550 million to $850 million.

Samsung and SK Hynix's Difficulties

For Samsung and SK Hynix, like Micron, they first face the challenge of revenue.

According to earlier reports by South Korean media, South Korean semiconductor giants Samsung Electronics and SK Hynix are expected to face losses of several trillion won in their chip business in the first quarter of this year, reflecting the impact of inventory accumulation and a slowdown in consumer spending, which will be a major operational challenge for the companies.

The Korea Herald recently reported that, according to documents filed by Samsung with the Korean Financial Supervisory Service, the company's total inventory assets reached a record high of 52.2 trillion won (about NT$1.22 trillion) as of the fourth quarter of 2022, far higher than the 41.4 trillion won (about NT$965.1 billion) in the same period of 2021.

SK Hynix also faces the same predicament, with the company's total inventory assets soaring 75% to 15.7 trillion won (about NT$365.9 billion) in the fourth quarter of 2022. It is believed that SK Hynix's business is more focused on dynamic random access memory (DRAM) and NAND flash memory (NAND Flash), accounting for more than 90% of total revenue, making it more susceptible to market downturns and suffering greater damage.

The report cites industry sources as saying that the prices of PC DRAM and NAND flash memory chips have now fallen close to cost; South Korean securities firm KB Securities estimates a drop of 19% and 18% respectively in the first quarter of this year.

Due to the disappearance of the pandemic bonus, coupled with the aggressive interest rate hikes by major Western economies, not only has the demand for TVs and other home appliances declined, but the market's purchasing power has also been greatly reduced, leading to an excess of chip inventory and a decline in prices. Data from market research firm FnGuide shows that Samsung's semiconductor division will have an operating loss of 1.91 trillion to 4.47 trillion won (about NT$44.521 billion to NT$104.193 billion) in Q1; SK Hynix's loss is predicted to be around 3.11 trillion won (NT$72.458 billion).In addition to this, the U.S. CHIPS Act has also brought unprecedented pressure on these two Korean semiconductor giants.

According to the rules released by the U.S. Department of Commerce, in the $52.7 billion chip subsidy process, the U.S. has added "national security guardrails" to restrict the production increase and scientific research cooperation of subsidized chip factories in "foreign countries of concern."

The "national security guardrails" follow three principles: subsidized chip factories are not allowed to use funds from other countries for support. Within 10 years of receiving U.S. government subsidies, the investment of subsidized chip factories in "foreign countries of concern" will be strictly limited. In addition, it also includes joint research or technology licensing work with technology, products, and foreign entities.

According to these detailed rules of the United States, the scope of foreign entities of concern in the "national security guardrails" has been expanded, including the entity list of the U.S. Department of Commerce. At the same time, the clause has clear restrictions on the expansion and consumption of more-advanced semiconductors and legacy semiconductors in "foreign countries of concern."

For example, a "significant transaction" for more-advanced semiconductors is defined as an investment exceeding $100,000; "substantial expansion" is defined as an increase in production capacity of more than 5%. The clause stipulates that if the above definitions are exceeded during the expansion or construction of more-advanced semiconductors, the U.S. Department of Commerce has the right to reclaim subsidies for chip factories.

For mature process chips, that is, logic chips of 28 nanometers or lower defined in the bill, the clause prohibits chip factories from increasing production capacity in "foreign countries of concern" by more than 10%. If expansion is desired, at least 85% of the production capacity must ultimately be consumed by the "foreign country of concern" market, and it must notify the U.S. Department of Commerce.

After the details were announced, Korean media breathed a sigh of relief for the first time, and Samsung and SK Hynix also said they would review the impact in detail. On Tuesday, Korean chip manufacturers expressed deep concern about the detailed guidelines of the U.S. CHIPS and Science Act, saying they were forced to pay more to obtain U.S. chip subsidies and incentives.

They said that excessive demands to disclose sensitive information considered as commercial secrets to the U.S. government may greatly reduce the attractiveness of accepting national funds to build new facilities in the country.

According to the latest guidelines released by the U.S. Department of Commerce on Monday, semiconductor companies hoping to obtain funding from the CHIPS Act must provide detailed revenue and profit forecasts for their new chip manufacturing factories, and the U.S. government plans to assess their applications based on this. The department provides an Excel-based tool that applicants can use to submit pre-applications to start a dialogue with U.S. officials before completing the full application. The data to be submitted includes the number of wafers, startup rate, output, yield, expected selling price of chips, and estimated annual price changes.

Companies will also be required to disclose data on semiconductor materials such as silicon, nitrogen, oxygen, sulfur, as well as related consumables and labor costs. However, this information is confidential and will not be disclosed in their financial reports.For this reason, South Korea, home to two memory chip manufacturers Samsung Electronics and SK Hynix, is becoming increasingly frustrated with the detailed guidelines of the U.S. CHIPS Act. "Some requirements are hard to accept. Even American companies like Intel would find them hard to accept," said an executive of a South Korean chip manufacturing company.

"Since we are being asked to expose ourselves to high commercial risks, we are not sure what kind of returns we can get," he added. South Korean government officials have already stated that the requirements of the U.S. $53 billion chip subsidy plan are "unconventional," and come with "unconventional conditions that are completely different from the subsidies usually provided for foreign investment."

Seoul's Minister of Industry and Trade, Lee Chang-yang, said earlier this month, "Given the high investment costs, the attractiveness of investing in the U.S. is diminishing."

For the storage trio, there is also a lot of uncertainty about their future operations.