Hynix 'Cutbacks', Siltron 'Expansion'... Divergent Investment Strategies of SK Brothers

SK Hynix Cuts Capital Expenditure Amid Memory Slump
SK Siltron Makes Aggressive Investments to Meet Surging Wafer Demand

[Asia Economy Reporter Han Yeju] "We will strive to expedite the (memory) supply-demand balance by significantly reducing investments next year in line with market conditions. We are considering cutting next year's investment by more than 50% compared to this year. This is a substantial level comparable to the industry's facility investment cuts during the financial crisis in 2008-2009. Due to very high industry inventory, SK Hynix plans to minimize wafer capacity investments for production increases and delay some process transition investments." (Q3 earnings conference call, Noh Jongwon, President of SK Hynix Business Division)

SK Group's semiconductor siblings, SK Hynix and SK Siltron, have set completely opposite investment strategies amid declining demand and falling prices in the memory semiconductor market. While Hynix decided to tighten its belt by cutting investments and reducing production, Siltron, a wafer (semiconductor substrate) manufacturer that forms the foundation of semiconductors, plans to expand investments regardless. This is based on forecasts that the semiconductor market will grow in the long term and that the wafer market will also expand. Their earnings outlooks are also contrasting. While Hynix's earnings forecast has been sharply downgraded, Siltron's outlook is increasingly positive.

According to the semiconductor industry on the 6th, SK Hynix announced that it will reduce next year's investment scale to less than half of this year's (in the high 10 trillion won range) and cut production mainly of relatively less profitable products. The company aims to maintain an investment reduction and production cut stance for a certain period to normalize the market's supply-demand balance.

SK Hynix was hit hard by the semiconductor downturn in Q3 this year. Operating profit was 1.6555 trillion won, down 60.3% from the same period last year, and sales were 10.9828 trillion won, down 7.0% year-on-year. Net profit fell 66.7% to 1.1026 trillion won. It was an 'earnings shock.'

The decline in sales volume and prices was due to reduced demand for DRAM and NAND amid the global economic downturn. Shipments from major memory customers such as PC and smartphone manufacturers all decreased. Although the company improved cost competitiveness by increasing the sales ratio and yield of the latest process 10nm 4th generation DRAM (1a) and 176-layer 4D NAND, the price drop exceeded cost reduction, leading to a significant decrease in operating profit, the company explained.

There is even speculation about a possible loss in Q4. Some forecasts suggest an operating loss of 186.9 billion won (KB Securities). The performance of Solidigm, the NAND flash subsidiary acquired from Intel last year for $9 billion (about 11 trillion won), is also poor. Moreover, since most of the memory semiconductor revenue comes from DRAM and NAND flash, and more than half of sales occur in China, the situation is challenging.

SK Siltron Gumi Plant 2 exterior. [Photo by SK Siltron]

On the other hand, SK Siltron, an unlisted company under the same SK Corporation, is opening its wallet. Following its decision to invest 1.0495 trillion won over three years in Gumi in the first half of this year to expand a 42,716㎡ semiconductor wafer factory, last month SK Siltron spent 855 billion won to expand its 300mm silicon wafer production facilities. Once the investment plan totaling 2.3 trillion won by 2026 is completed, production capacity is expected to increase significantly.

SK Siltron is also collaborating with UK wafer manufacturer IQE to develop high-performance wafers for power semiconductors. SK Siltron signed a strategic cooperation agreement with IQE to jointly develop gallium nitride (GaN) wafers. GaN wafers are used in semiconductor manufacturing for electric vehicles, 5G communication equipment, and IT devices.

The background for SK Siltron's investment expansion is the strong growth momentum in the wafer market, with expectations for continued growth in the near term. The demand for wafers is surging due to the development of small IT devices such as smartphones and Internet of Things (IoT) devices, and the increasing use of semiconductors in various fields such as aviation, solar power, and electric vehicles is expected to require more wafers. Global market research firm Transparency Market Research (TMR) forecasts that the wafer market will grow annually by 9.3% from this year, reaching a market size of 18.8 trillion won by 2031. Technavio also predicts the wafer market will grow at an annual rate of 6.73% until 2025, reaching 6 trillion won.

In particular, with China, one of the key regions for wafer production, slowing down, it is analyzed that Taiwan, Japan, and Korea have a timely opportunity to gain an advantage in wafer competition. According to SK Corporation, SK Siltron recorded an operating profit of 277.8 billion won in the first half of this year, a 132% increase compared to the same period last year, and a good trend is expected in the second half as well. Technavio analyzed, "The growth of wafer companies in key regions such as Korea and Japan is faster than in other regions," adding, "Investment expansion by these companies is driving wafer market growth."

Another reason that promotes wafer production facility investment is that wafer supply is made through long-term contracts of 3 to 5 years, which can reduce demand uncertainty. An industry insider explained, "The wafer industry has a mechanism of long-term supply contracts," adding, "Since sales prices and volumes are fixed during the contract period, there is a low risk of profitability deterioration even in short-term market downturns, allowing stable long-term investments."

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