hankyoreh

A person walks by a Samsung sign in this undated photo. (Yonhap)

With Samsung Electronics joining the industry trend of production cuts, all eyes are on whether the industry will improve in the second half of 2023. Even with reduced supply, there are concerns that unless the global economy rebounds and demand for semiconductors rallies, the slump in that sector will draw on into the long term.

The world’s No. 1 semiconductor maker formalized its plan for “forced reduction” of chip production on Friday. Following massive losses in its chip sector in the first quarter of the year, the company stated that in addition to technical production cuts through production line optimization, such as facility rearrangement and micro-process conversion, it was also adjusting memory production by “meaningful levels,” focusing on products with additional supply lines.

Samsung’s decision to cut production for the first time since 1998 is due to rapidly growing inventories. The company stuck to its “no production cuts” stance to pick off its rivals and capture a larger market share, but revised its strategy after a slump in global demand caused semiconductor inventories to snowball.

According to its year-end business report, as of the fourth quarter of last year, Samsung Electronics’ semiconductor (Device Solutions) inventory assets amounted to 29.57 trillion won (US$22.4 billion). This represents a 76.6% increase from the same period a year earlier (16.451 trillion won).

On Saturday, the Korea Development Institute diagnosed that the semiconductor industry economy has deteriorated to a degree akin to the dot-com bubble burst in 2001 and the global financial crisis in 2008.

“The fact that the semiconductor industry peaked in March 2022 and then rapidly declined from the second half of the same year to a level similar to the lowest point during the past economic crisis is the main reason for the recent economic slump,” the institute said in its report on April economic trends.

In Feb. 2023, domestic semiconductor production fell by 41.8% compared to the same month in 2022, a decline paralleling that in July 2001 (-42.3% year-on-year) and Dec. 2008 (-47.2% yo-y).

Some in the industry expect that Samsung’s decision to cut production, which came in the face of deleterious losses, will serve as a catalyst that will propel the industry on the road to recovery. Rather than a V-shaped rebound that’ll take immediate effect in the second quarter, it is more likely that the recovery will be U-shaped — showing gradual signs of improvement starting in the second half of the year.

“The effect can be expected three months after the production cuts are implemented,” Ahn Ki-hyun, the senior executive director at the Korea Semiconductor Industry Association, told the Hankyoreh. “After SK Hynix and Micron Technology, the second- and third-largest companies in the market, announced production cuts in 2022, the effects were seen from 2023. So, if the No. 1 company, Samsung Electronics, joins the cuts, the effect of the cuts will be seen in the second half of the year.”

According to Taiwanese market research firm TrendForce, Samsung, SK Hynix and Micron dominated the global DRAM market in the fourth quarter of last year, with shares at 45.1%, 27.7% and 23.0%, respectively.

The key is the timing and breadth of the recovery in semiconductor demand. If demand does not rebound even if supply is reduced, it may be too late for the industry to improve. In particular, the recovery of demand from China, which accounted for 40% of Korea’s semiconductor exports in 2022, is bound to play a role.

“For the market to change dramatically, the demand market must change,” said Kim Yang-paeng, a senior researcher at the Korea Institute of Industrial Economics and Trade. “The demand for semiconductors will increase only if the production of set products in the information and communication technology sector increases. If that is not the case, the semiconductor market will not change dramatically just by reducing production.”

In the history of South Korea’s semiconductor industry, there have been five major downturns since 2005 — one each in 2008, 2010, 2014, 2018, and 2022. The longest recession lasted from 2014 to 2016 (32 months), mostly due to the decline in the price of DRAM.

In the rebound phase, the shrinking supply of semiconductors, a global economic recovery, and the expansion of demand, such as subsidized smartphones in China, triggered the upturn.

By Ock Kee-won, staff reporter; Choi Ha-yan, staff reporter; Cho Kye-wan, staff reporter

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