SK Hynix will begin to cut DRAM production from Q4 2019 as well as reduce its NAND flash wafer start by 15% as compared to its 2018 output. Last quarter, the company had said it would reduce NAND flash wafer starts by 10%.
The fresh set of announcements come after the company reported an 89% year-on-year (YoY) decline in operating profit in Q2 2019. This was despite a 13% quarter-on-quarter (QoQ) increase in DRAM bit shipments, mainly due to the growing demand from the mobile and PC DRAM markets. However, DRAM prices are still weak. In fact, average selling prices (ASPs) have dropped by 24%. It was a similar story in the NAND flash market where the company’s shipments increased 40%, but ASPs were down 25%.
Exhibit 1: SK Hynix DRAM bit shipment and Blended ASP from 1Q18 to 2Q19
Source: Counterpoint Research – Memory Tracker and Forecast
Usually, both DRAM and NAND flash have the characteristics of a boom-bust cycle. As a result, these two products normally do not reach the bottom at the same time. Therefore, the production capacity is interchangeable to can make up for each other’s losses. However, this time, the situation is very different. Both DRAM and NAND flash are at the bottom of their bust cycle, which is hurting Samsung, SK Hynix, and Micron. It is still unclear how long the threat of the trade war between Japan and South Korea will last. In order to reduce the risk of raw material shortage as well as limited resources for investment, SK Hynix must choose between a cut in spending on DRAM or NAND flash.
Currently, spot prices of both DRAM and NAND flash have rebounded. However, contract pricing has not seen a significant rebound because of high inventory in the channels. Therefore, SK Hynix’s DRAM investment cuts can increase its bargaining power. However, this takes time and has risks since other competitors take this chance to grasp more share from SK Hynix. The two main applications of DRAM are smartphones and servers. The growth of both smartphones shipment and DRAM content will be limited while the server market is still in a downturn. Therefore, we expect that DRAM prices will rise marginally in the short-term but will continue to be weak afterward.
The situation for NAND flash is different. The demand for NAND flash in smartphones is still growing. The average storage size in smartphones in 2020 is expected to reach 72GB, up from 64GB in 2019. The storage size of the flagship smartphone will be at least 128GB in the H2 2019. In addition, the demand for NAND flash in SSDs is also growing. Both PCs and servers require larger and faster NAND flash. The mainstream capacity of SSD in PC is moving to 512GB from 256GB. The average capacity has also risen to 321GB. As the unit price of NAND flash declines, the penetration rate of SSD in both PC and server will also increase significantly. Therefore, we expect to see the penetration of SSDs in PCs continuing to rise and cross the 50% mark this year. The NAND flash market is expected to recover in Q4. Demand will increase as prices decline. As a result, it can help companies like SK Hynix increase the bit growth and improve the utilization rate of their production lines.
In conclusion, it makes sense for SK Hynix to cut DRAM investment. In the case of limited resources in raw material and CAPEX, the bit growth of DRAM will be lower than that of NAND flash. SK Hynix should immediately stop producing 36 and 48 layer products as they are not economically viable. Instead, the company can do better by focussing on improving the yields, increase the capacity of NAND flash, its 96 layer products, and even 128 layer NAND flash. This can increase utilization and effectively reduce costs.