The first quarterly results in the era of Covid-19 from the bell-weather semiconductor industry in South Korea are both robust and beyond expectations, results from leading memory-chip suppliers Samsung Electronics and SK Hynix show.
With entire countries and cities around the world in lockdown, requiring people to work, study and recreate at home, the results suggest that online businesses such as Google, Apple and Amazon, which require massive databases, are upgrading server capacity.
This capacity is servicing on-demand businesses such as internet shopping malls and movie streaming services, while more and more people require PCs at home.
Samsung predicted that the B2B memory chip business would remain stable in both the second quarter and the second half, despite uncertainties due to the pandemic.
Even so, the world’s second-largest semiconductor producer and the world’s leading smartphone maker said overall earnings are expected to decline as Covid-19 will significantly affect sales of core B2C products such as smartphones and TVs.
Experts were less sure. Though they anticipate a solid performance in Q2 and Q3 for the memory chip sector, they fear that Q2 might prove bloody.
Memory chips in the black
Samsung disclosed Wednesday 6.44 trillion won (US$52.9 billion) in operating profits for the first quarter, down 0.71% from the previous quarter, but up 3.43% from the same period last year.
Its revenue reached 55.325 trillion won, down 7.6% from the previous quarter and up 5.61% from the same period last year. Net profit recorded 4.88 trillion won, falling from 5.04 trillion won in the previous quarter and 5.23 trillion won of the same period last year.
That figure is slightly higher than the 55 trillion won in sales, and 6.4 trillion won in operating profit of the earnings guidance released early this month. Operating profit also exceeded market consensus by 5%, according to industry analysts.
Samsung’s flagship semiconductor division posted 17.64 trillion won in sales in the first quarter, up 21.9% from a year earlier and up 5.1% on-quarter. Operating profit in the semiconductor sector fell 3.2% on-year to 3.99 trillion won, but increased by 15.7% from the previous quarter.
Last week, SK Hynix, the world’s third-largest chipmaker following Intel and Samsung, announced Q1 operating profits of 800.3 billion won, up 239% from the previous quarter but down 41% from the same quarter last year. According to Meritz Securities, the earnings result significantly exceeded market expectations of 510 billion won.
Chips and more chips
The semiconductor business is divided into sub-sectors. Memory chips, which Korean makers Samsung and SK Hynix specialize in designing and producing, store information for mobiles, PCs, servers and other devices.
Memory chips are divided into two main types. NAND flash chips preserve data when appliances are switched both on and off, while DRAM chips preserve data exclusively when appliances are switched on.
Logic chips, also known as system chips, are more sophisticated. They are used in the central processing units and application processers of smartphones, tablets and automotive infotainment systems.
The main designers of logic chips are US firms Intel and Qualcomm, while the main producers of logic chips are Intel and Taiwan’s TSMC, although Samsung is also a rising force in this sector.
The results of the memory chip business improved as demand, particularly for DRAM, from the server and PC sectors shot up due to social distancing initiatives. Demand from the mobile industry remained steady.
The demand for NAND remained solid as datacenters adopt high-density storage for high-volume content.
Profits from Samsung’s nascent logic chip business rose thanks to the effect of the weak won against the US dollar and the euro.
Logic chip giants Intel and TSMC also fared well, posting Q1 results in the black thanks to CPU server demand.
Intel and Meritz are both upbeat on Q2, noted Kim Sun-woo, an industry analyst of Meritz Securities. “Intel commented positively on the data center business in the second quarter, and TSMC did not make downward correction of this year’s earnings guidance despite the negative effect caused by Covid-19,” he said.
Q2 and beyond
Samsung predicted in a press release that the memory business would remain solid through 2020.
“Memory chip demand from the server and PC sectors is expected to remain solid in the second quarter thanks to home working, despite some risk of decreasing demand from the mobile sector,” the release stated. “The memory chip business is forecast to remain under favorable conditions in the second half due to expected continuing strong demand from the server and PC sectors.”
One industry source also told Asia Times that the memory chip business would sail smoothly in the second quarter. He noted that producers were increasing the input of wafers to produce DRAM chips in the second quarter compared to the first quarter, “so DRAM production is expected to increase in the second quarter though some risk remains.”
Other experts, however, are less upbeat on Q2.
Meritz’s Kim, warned that the memory chip sector is more freighted with risk than the logic chip sector, due to changes in price and demand.
“We are in the first shock of the coronavirus pandemic and more shock could come in the second quarter,” he said. “It is important for Korean DRAM makers to cope with possible price decreases if Covid shock leads to shrinking memory chip demand from the mobile sector, which is already suffering from decreasing shipments.”
Samsung said it plans to address possible market changes through flexible investments and product-mix adjustments. It also said it would strengthen its competitiveness by increasing the production of higher value-added chips and lowering production costs, utilizing a more refined production process.
Kim Yang-paeing, a researcher of the Korea Institute for Industrial Economics & Trade, said demand for memory chips was likely to fall in Q2.
“If we break down demand for memory chips, 30-35% comes from smartphones and 35-40% comes from data centers, the rest comes from PCs and other sectors,” he told Asia Times.
“Smartphone production has decreased by about 30%, so memory chip demand from data centers should increase by about 30% to compensate for losses faced by the mobile sector. But that’s not likely to happen.”
Chips should see an upward trend in Q3 and Q4 after declining in Q2.
“The memory chip sector will continue to improve till the mid next year or the end of the next year, but due to the shock by the coronavirus pandemic, it will stall for a while,” Kim of Meritz said.
Kim of KIET also predicted: “I expect economic activities to be normalized in late June around the globe. If so, the memory chip sector is expected to resume its recovery from the third quarter.”