The days of lofty prices and sky-high demand for memory chips are over. Micron Technology (MU -4.61%) announced on Wednesday that it was dramatically ramping up its efforts to keep inventory levels in check as demand for DRAM and NAND chips slump.

What started as selective utilization reductions at its factories have now been expanded to across-the-board cuts. Micron is slashing wafer starts for DRAM and NAND chips by 20% compared to the fiscal fourth quarter of 2022. These cuts affect mature process nodes and cutting-edge process nodes alike.

On top of reducing production, Micron is considering further reductions to its capital spending plans. The company has already announced that it would knock capital expenditures down about 30% in fiscal 2023, but it now looks like deeper cuts are in the cards.

Supply and demand

Micron now expects to produce fewer bits of DRAM in calendar 2023 than it did in calendar 2022, and it sees bit production rising by just a single-digit percentage for NAND. The company sees this production slowdown as necessary to bring supply chain inventory levels back into sync with demand.

Micron is taking a proactive approach. Memory chips are, for the most part, commodities. In a commodity market, pricing is largely determined by supply and demand. During periods when demand is outstripping supply, prices can rise dramatically. During periods when there's too much supply, prices can fall dramatically.

Right now, prices are tumbling. During the fiscal fourth quarter of 2022, Micron suffered a low-teens-percentage decline in DRAM pricing and a mid- to high-single-digit percentage decline in NAND pricing compared to the previous quarter. Given Micron's aggressive actions, it's safe to say that those declines have likely accelerated.

The complication with Micron's strategy to slash production in hopes of improving the supply-demand dynamic is that it's not operating in a vacuum. Micron can cut production all it wants, but if other industry players take that as an opportunity to steal away market share, the supply chain inventory situation won't improve, and Micron will be stuck with lower volumes and lower prices.

Samsung is also in the memory chip business, and it's not being nearly as aggressive as Micron. In its third-quarter report, the company said that it was aligning its supply strategy with the midterm market outlook. Samsung is expecting a second-half recovery next year driven by server memory, and it plans to "...reinforce market leadership by actively meeting the rising demand for new interfaces, including DDR5 and LPDDR5/x, and for high-density products," the company said in a statement.

SK Hynix is following a more aggressive path than Samsung. The company plans to cut capex in half next year, and it's cutting production of its lower-margin products. Year over year, SK Hynix expects DRAM and NAND wafer production to decline in 2023, and the company will slow down some tech migrations.

A lot of uncertainty

The best-case scenario for Micron is for all the major memory chip producers to cut production enough to halt the downward spiral in pricing quickly. This will be tough to achieve. Predicting demand is difficult under normal circumstances, and it's even more difficult given the tumultuous state of global economies. Even the announced production cuts may not be enough if demand weakens further.

The worst-case scenario for Micron is for one of its competitors to take advantage and start trying to maximize market share. The good news is that there are far fewer memory chip suppliers today than in the past. The odds of the worst-case scenario playing out may be lower with fewer players capable of causing problems.

Expect Micron's revenue to tumble next year as production cuts and lower prices take their toll. Profits and free cash flow will sink as well, but it's hard to say how far the bottom line will fall. In the long run, demand for memory chips should continue to rise. In the short run, it's a real mess.