[Concall] SK Hynix "Cut Investment by 50% Next Year... Emergency Plan if Equipment Regulations Make Chinese Factory Difficult" (Comprehensive)

"Although hypothetical, contingency plans for worst-case scenarios are also in place"
"Demand for high-value products like DDR5 HBM remains strong"

On the 5th, citizens visiting the Semiconductor Expo held at COEX in Gangnam-gu, Seoul, are visiting the SK Hynix booth.

[Asia Economy Reporter Moon Chaeseok] SK Hynix has decided to cut production next year and reduce investment by more than 50% compared to this year due to the memory semiconductor downturn. Amid difficulties in introducing EUV (Extreme Ultraviolet) lithography equipment, which is essential for upgrading its memory semiconductor plant in Wuxi, China, due to U.S. export restrictions on semiconductor equipment to China, it has been confirmed that SK Hynix is preparing contingency plans for the worst-case scenario. The contingency plans include various options such as selling the Chinese plant and equipment and exporting semiconductor equipment from China to Korea. Demand for high-value-added memory semiconductors such as Double Data Rate (DDR) 5 and High Bandwidth Memory (HBM) 3 is expected to remain solid.

On the 26th, SK Hynix's Head of Business, Noh Jong-won, said during the Q3 earnings conference call, "Considering the sharp decline in memory semiconductor demand and supply-demand imbalance, we are considering reducing next year's investment by more than 50% compared to this year's late 10 trillion won level," adding, "This will be a significant reduction in investment comparable to the industry's Capex cuts during the global financial crisis in 2008-2009."

Regarding the U.S. export restrictions on semiconductor equipment to China, he said, "For now, we have received a one-year grace period from the U.S. Department of Commerce to allow equipment supply to the DRAM plant in Wuxi and the NAND flash plant in Dalian acquired from Intel, enabling equipment import without separate permits," and added, "We hope this grace period will be extended annually."

If advanced equipment introduction becomes difficult for memory semiconductor companies, factory operations will be disrupted. SK Hynix needs to introduce EUV lithography equipment to its Wuxi DRAM plant but expects equipment import to be impossible for the time being. Assuming the absence of EUV, to expand the DRAM plant, some EUV equipment must be placed in Korea and operated as backup support. In this case, an increase in production costs must be accepted.

SK Hynix also revealed that it is preparing contingency plans in case the grace period is not extended after one year. Noh said, "Each piece of equipment requires a separate license, making equipment introduction difficult," and added, "If equipment introduction issues cause operational problems at the Wuxi plant and other plants in China, we will activate the 'contingency plan,' which includes various scenarios such as plant sales, equipment sales, and equipment export to Korea in the worst-case scenario where operation is deemed impossible." However, he added, "Since this contingency plan is for extremely extreme situations, we hope to operate the plants without such circumstances occurring."

As long as SK Hynix operates plants in China, various U.S. restrictions such as equipment regulations inevitably cause pain, but relocating production bases is not easy. Noh said, "Previously, the business model of producing products in specific regions most efficiently and cost-effectively to supply worldwide worked, but increasing uncertainties from various restrictions are affecting management decisions," adding, "Although diversifying production bases seems indispensable in the mid-to-long term, making significant changes to production bases in the short term is difficult."

Demand for high-value-added memory semiconductors such as DDR5 and HBM is expected to remain solid. SK Hynix said, "DDR5 will account for more than 20% of the total annual server market," and "This is expected to expand to 30% by the end of the year." It added, "For PCs, it will account for about 30% overall and increase further by the end of the year."

However, inventory is expected to continue increasing until the first quarter of next year. Therefore, SK Hynix plans to reduce production mainly for low-profit products. In addition, it decided to reduce next year's investment scale by more than 50% compared to this year's expected late 10 trillion won investment. SK Hynix said, "We are reviewing production cuts by adjusting wafer input, rearranging lines within factories, and adjusting line operations to improve future efficiency, some of which are already underway." It also explained its strategy to defend profitability by expanding high-value-added product lines, stating, "238-layer NAND flash will begin mass production and supply from mid-next year, and the server-oriented share of DDR5 will expand to more than 30% by the end of next year."

It also admitted that production capacity (capability) itself will not dramatically increase. Currently, SK Hynix is even considering scenarios where next year's DRAM production bit growth (bit shipment growth rate) decreases. Noh said, "Next year, there may even be no bit growth for DRAM."

It also announced that it will enter mass production of the most advanced 238-layer NAND flash from next year. Earlier in August, it announced the completion of the development of the most advanced 238-layer NAND flash process. Park Chandong, SK Hynix's NAND flash marketing manager, said during the Q3 earnings conference call on the 26th, "We announced the completion of 238-layer NAND flash development at the U.S. FMS (Flash Memory Summit) last August, and customer samples will be provided from early next year," adding, "Mass production and supply will start from mid-next year." Park added, "Since we were the first in the industry to introduce double stack and PUC (Peri Under Cell) technology, we believe there will be no major issues in mass production of 238-layer NAND flash."

He lamented that the performance of Solidigm, Intel's NAND business unit, has not been good. In response to related questions, SK Hynix explained, "Since Solidigm is a private company, it is difficult to disclose Q3 results specifically, but on an annual basis, excluding one-time costs, it recorded a slight profit on a 'Non-GAAP' basis and is expected to have a loss of several million dollars on a 'GAAP' basis." He added, "The market conditions on a GAAP basis are much worse than expected at the beginning of the year, so Solidigm's performance is also deteriorating."

This content was produced with the assistance of AI translation services.