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Will Samsung Dash Hope China’s Storage Market?

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Is Samsung’s massive $ 26 billion semiconductor investment just delaying China’s foray into the storage device market? While it is unlikely to stop China’s inevitable foray into the DRAM and NAND flash markets despite technological challenges, it could have a greater impact on its competitors’ investment plans as Samsung protects its leadership position. For buyers, this could mean lower prices for 3D NAND as the industry enters a phase of oversupply.

While China has the capital to invest in production capacity, industry observers say there is no way to technologically penetrate the storage market without a joint venture or partnership.

IC Insights was skeptical about whether Chinese startups would be able to compete with storage device leaders – Samsung, SK Hynix and Micron – even before Samsung announced its investment plans.

“The Chinese can afford a lot of capacity, but I don’t see them competing with the big technology providers in the next five to ten years,” said Bill McLean, president of IC Insights.

Samsung’s capital expenditures will “nullify any hopes by Chinese companies to become major players in the 3D NAND flash or DRAM markets” and “almost guarantee that without any sort of joint venture with a major existing memory supplier, New Chinese Storage startups have little chance of competing on the same level as today’s leaders, ”said McLean.

“Even before Samsung’s capital spending spike this year, we believed that without a joint venture with one of the largest memory suppliers, China’s memory suppliers would have little chance of competing in technology,” he added.

“All you have to do is look at a company like SMIC, China’s largest domestic foundry,” McLean told EPSNews. “You have been in business for about 15 years and are just starting to produce a significant amount of 28nm devices. Technically, they are currently about five generations behind TSMC. If after 15 years in business, SMIC can’t keep up with the leading foundry manufacturers, why would anyone think that it would be any different with memory? “

“Even if they developed advanced technology themselves, the new Chinese vendors would almost certainly infringe numerous DRAM and NAND patents owned by Samsung, SK Hynix, Micron, etc.,” said McLean.

Avril Wu, Research Director of DRAMeXchange, cannot say that it is “quite impossible” for Chinese startups in the storage market to compete on the same level as the big players, “but it will be considerably difficult and time consuming for smaller companies”. starting from scratch without any help (especially with regard to the DRAM design). “

Wu noted that “Chinese startups have made ‘some’ strides in 3D NAND development, but there isn’t much left on DRAM. Regarding the project design of DRAM and NAND, DRAM has a much higher barrier to entry. Therefore, it is difficult for these parties without a JV or partnerships to (legally) switch to DRAM. “

DRAMeXchange believes Samsung’s capacity expansion and technology migration will help the company maintain its technology lead over its competitors for a year or two, while it will certainly keep Chinese DRAM and NAND flash makers from catching up significantly.

“Currently, Samsung is obviously more concerned about potential NAND competition from China than about DRAM (since there is little competition for DRAM from China yet),” said Wu. “We believe that Samsung is more interested in strengthening its technical leadership role in the global market.”

Wu previously pointed out that the Chinese storage industry is expected to enter its formative development phase in 2018. “In order to prevent the Chinese DRAM and NAND flash manufacturers from catching up significantly, Samsung could increase its production capacities for these products and pursue an aggressive pricing policy. Potential market participants will not be able to expand their production capacities or improve their technologies as planned if they are under great financial pressure. “

However, China’s domestic IC production plans, especially for memory devices and processors, are unlikely to be halted.

“The development of China’s IC industry is driven by demand for import substitution, government policies, major sources of funding and innovative applications for semiconductor technologies,” said Jeter Teo, research director of TrendForce, in a statement. “At the moment, key products in the Chinese IC market such as processors and memory components are still being imported from overseas. In fact, for four consecutive years, from 2012 to 2016, China imported more than RMB 1.4 trillion in IC products annually. Hence, increasing domestic IC production has become a critical task for the Chinese government. “

Offer and prices

IC Insights recently revised its outlook for capital expenditure for the semiconductor industry. The market researcher expects spending in 2017 to increase by 35 percent to 90.8 billion US dollars. The biggest donor is Samsung. The electronics giant spent $ 11.3 billion on semiconductor investments last year, and this year the semiconductor company expects to double its spending to $ 26 billion.

“In my 37 years following the semiconductor industry, I have never seen such an aggressive surge in semiconductor capital expenditures. The sheer amount of Samsung spending this year is unprecedented in the history of the semiconductor industry, ”said McLean.

IC Insights estimates that Samsung’s $ 8.6 billion semiconductor capex in the fourth quarter of 2017 will account for 33 percent of the $ 26.2 billion of total semiconductor industry capital expenditures and approximately 16 percent of global semiconductor sales in the fourth quarter.

Here are IC Insights’ estimates of Samsung’s capital investment:

  • 3D NAND Flash: $ 14 billion (including a huge capacity increase at the Pyeongtaek factory)
  • DRAM: $ 7 billion (for process migration and additional capacity to compensate for lost capacity due to migration)
  • Foundry / Other: $ 5 billion (to expand 10nm process capacity)

Regarding the importance of Samsung’s investments to the industry, IC Insights expects it could spell a period of overcapacity in the 3D NAND flash market. But it’s not just related to Samsung’s spending. IC Insights believes that competitors such as SK Hynix, Micron, Toshiba and Intel will at some point increase their spending in order to maintain market share.

Competitors who increase their investment to maintain market share are more likely to happen in a “perfectly competitive market” than in an oligopoly. So we believe this is more likely to occur with NAND competition, but not with DRAM, ”said Wu of DRAMeXchange.

“It is difficult to predict how far Samsung’s actions will affect future DRAM and NAND markets unless we know the detailed plan for their investment spending,” noted Wu. “As far as we know, most of the capital expenditures currently go into 3D NAND development, which is the top concern for suppliers. As soon as 3D NAND becomes available to all vendors, ASP is likely to fall. However, NAND products have a high price elasticity of demand, so that lower prices will lead to higher demand in the short term. “

If Samsung pulls through the capacity expansion, the company’s production for DRAM will increase by 80,000 to 100,000 wafers for 2018, according to Wu. This means that Samsung’s total DRAM production capacity would increase from 390,000 wafers per month at the end of 2017 to nearly 500,000 wafers per month by the end of 2018. This will increase Samsung’s annual bit delivery growth rate to 23 percent in 2018 from the original forecast of 18 percent.

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