[Chip Talk] 'Demand < Supply' in the NAND Market... Semiconductor Industry Focuses on Production Cuts

Domestic semiconductor companies such as Samsung Electronics and SK Hynix are focusing on additional NAND flash production cuts in the second half of the year. This is because NAND demand is recovering more slowly than DRAM, resulting in significant performance impacts due to price declines.

SK Hynix NAND 238-layer

On the 7th, the semiconductor industry is looking to the recovery of the NAND market as the key to Samsung Electronics and SK Hynix's performance recovery in the second half. While DRAM prices are expected to rebound mainly for products applying special processes with increasing demand, NAND has yet to show such signs. There is a prevailing sentiment that the NAND market recovery will lag behind DRAM, making it urgent to control NAND production volume. The extent to which NAND production cuts can be effective in the second half, when DRAM-centered market recovery is expected, has become the performance recovery point for the semiconductor industry.

According to the latest price statistics from market research firm DRAMeXchange, the fixed transaction price for NAND flash used in memory cards and USBs (128Gb 16Gx8) averaged $3.82 last month. This price has remained unchanged for three consecutive months since April. After Samsung Electronics and SK Hynix announced additional NAND production cut plans on the 26th and 27th of last month, the spot prices of some NAND products (transaction amounts centered on actual demand at distributors, etc.) showed some movement, but there is still a long way to go before a rebound.

The semiconductor industry sees additional NAND production cuts as necessary in the second half. They judged that inventory losses related to NAND products had a significant impact on the deficit performance in the second quarter. Samsung Electronics and SK Hynix's DRAM divisions focused on selling high value-added products such as High Bandwidth Memory (HBM) and Double Data Rate (DDR) 5, achieving an improved single-digit negative operating profit margin compared to the first quarter, while NAND is estimated to have recorded an operating profit margin around -100% due to inventory valuation losses.

Samsung Electronics 8th Generation V-NAND

Samsung Electronics stated in a conference call after announcing its second-quarter results, "As we have cut memory semiconductor production, DRAM and NAND inventories peaked in May and are rapidly decreasing," adding, "We plan to continue production cuts in the second half to normalize inventory, with particularly significant additional adjustments in NAND production." SK Hynix also explained, "Memory demand has been recovering since the second quarter, but it is still insufficient to normalize the elevated inventory levels since the second half of last year." They added, "Since NAND inventory levels are higher and profitability is lower compared to DRAM, we plan an additional 5-10% production cut."

NAND production cuts are likely to be concentrated in China, where the factories are located. Samsung Electronics' Xi'an plant accounts for about 40% of Samsung's NAND flash production. It is known to produce 270,000 12-inch wafers per month. Although NAND production at the Hwaseong and Pyeongtaek semiconductor plants is much larger than that of Xi'an, the upgrade of production processes at the Xi'an plant has been slow due to the US-China hegemony conflict, so NAND production cuts may focus on older models. SK Hynix also operates the Dalian plant acquired from Intel's NAND flash business in 2020. Production cuts are expected to focus on low-layer-count NAND, which has lower customer demand.

However, even if the semiconductor industry undertakes additional NAND production cuts, it is unlikely that the NAND division will return to profitability in the third quarter. Both Samsung Electronics and SK Hynix expect operating profit turnarounds in the DRAM division due to price increases. In contrast, NAND aims not for profitability but to reduce operating losses, as the NAND market recovery is not expected to be strong enough to achieve profitability immediately.

NAND remains a market with supply exceeding demand. However, market research firm Omdia forecasts that if production cuts take effect, the supply-to-demand ratio for NAND will decrease after peaking in the first quarter of this year. The ratio is expected to decline from 1.29% in Q1 to 1.18% in Q2, 1.12% in Q3, and 1.07% in Q4.

Meanwhile, Omdia estimates the NAND market size this year at $43.229 billion in sales. This represents a 27.2% decrease compared to last year's $59.412 billion. If production cuts take effect, the market is expected to grow by 22% to $53.142 billion next year. Due to increased use of artificial intelligence (AI), demand from data centers, and the expansion of electric and autonomous vehicles, Omdia predicts that by 2025, the NAND market size could surpass that of DRAM.

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