The memory market is going through its worst downturn since the financial crisis of 2008. Even as the artificial intelligence and electric vehicle markets are growing, the consumer electronics and traditional server markets are in some of their worst-ever slowdowns. In fact, the latest PC shipment data just came out for the March quarter, showing a 29% decline in shipments from a year ago.
That especially hurts the memory market, as prices for memory chips can fluctuate a lot, unlike end devices.
But last week, all memory stocks got a boost when Korean giant Samsung announced it would be cutting memory output "by a meaningful level" to rebalance the memory market, which is in severe oversupply.
That's a rare move for Samsung, the largest player in the market, which has traditionally tried to grab market share from less-strong competitors during downturns. But it's a huge win for Micron Technology (MU +4.04%), not just for the short term, but perhaps longer-term as well.
NASDAQ: MU
Key Data Points
Samsung finally relents
Last week's move was so bullish for the memory players because one, Samsung is the largest memory producer in the world, and two, it had been the lone holdout in cutting back production, defying the rest of the industry.
Despite having the third-highest market share among DRAM manufacturers and the fifth-highest market share in NAND flash, Micron was actually the first of the major memory players to announce it was curtailing production back in November 2022, when it announced a 20% cut. Rival SK Hynix soon followed in Micron's footsteps late last year. And just recently, Micron said it would be increasing its production cuts to 25% while further cutting back on capital expenditures.
However, throughout last year and as recently as February, Samsung had maintained it had no intention of scaling back its own production, even as its profits were falling fast. Yet just at the end of last week, Samsung released first-quarter 2023 preliminary results, showing an overall profit of just 0.6 trillion Korean won ($450 million), down from 14.1 trillion Korean won in the year-ago quarter and 4.3 trillion Korean won last quarter. In conjunction with the release, the company also said, "We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured," according to media sources.
Why is Samsung making this move now?
It's a bit hard to understand why Samsung waited so long to make this move, and why it's doing so now.
Perhaps management had thought the memory market would bounce back sooner, but Samsung should have known that wasn't necessarily the case. Micron and SK Hynix had already pointed out the difficult conditions last Fall. Samsung has a leading 40.7% market share in DRAM and 31.4% in NAND flash, so it is even more likely to be in tune with its customers.
Meanwhile, Samsung's "Device Solutions" segment, which includes both memory and third-party foundry, recorded operating profit of just 0.27 trillion Korean won in the fourth quarter. Given current profitability among third-party foundries, that means Samsung's memory division was likely already losing money in Q4, with worse losses today.
It appears Samsung was dusting off its old playbook to increase production during downturns, in order to grab long-term market share and force competitors to go bankrupt or consolidate. Samsung's scale and diversity of earnings generally allows it to have more consistent results than other pure-play memory producers such as Micron, SK Hynix, Kioxia, and Western Digital.
However, the market may now be just about as consolidated as it's going to get, at least in DRAM. That makes further predatory pricing and market share grabs less practical.
Did Micron's moves affect Samsung's decision?
It's also possible Micron may have spurred Samsung along. For the previous few quarters, Micron had increased its inventory and walked away from sales of memory at prices it deemed too low. However, Micron changed its tune somewhat on its March 28 conference call with analysts, saying it intended to maintain flat market share and safeguard its market position, even if it had to reduce prices to do so. This led to Micron writing off about $1.4 billion in inventory last quarter, but it also showed that Micron was not going to let Samsung gobble up more market share without fighting back.
Thus, that may have been what spurred Samsung to change its mind. After all, if its two main competitors in DRAM weren't going to let Samsung take market share without a fight, it really wouldn't make sense to oversupply the market just to take a greater share of an unprofitable industry, would it? Why not join the oligopoly and scale back production, so that everyone can enjoy higher profitability?
Is Micron taking greater control of the memory market?
If it was Micron's lead that spurred Samsung to follow, it's not only a good short-term sign, but could signal Micron may be gaining clout in the industry. In DRAM, Micron had acquired Japan's Elpida in 2013, and Taiwan's Inotera Memory in 2016, bringing the DRAM industry to just three major players.
Since that time, Micron has gone from technology laggard to industry technology leader, actually surpassing Samsung last year on moving to the latest memory nodes. Micron was the first memory company to produce 1-beta DRAM and 232-layer NAND last year, ahead of competitors.
While Samsung has greater market share and scale, Micron's technology leadership as well as its lead in production cuts suggests it may now be big enough to affect other players' strategies, not just follow them.
Memory, like oil, is a commodity business that is partially controlled by the moves of a handful of large players, like OPEC+ does with the oil industry. With its newfound size and technological capabilities, Micron's recent leadership could signal a more positive long-term dynamic in dictating the industry's supply growth, even if short-term results look ugly.
