SK Hynix says chip industry woes “unprecedented”, to slash investment

SK Hynix speaks of problems in the chip industry "unprecedented"to cut investment

South Korean chip manufacturer SK Hynix Inc said the memory chip market is facing an “unprecedented deterioration” as its third-quarter profit collapsed amid a 60% surge in inflation and missed expectations.

“Supply will continue to outstrip demand for now,” the world’s second-largest memory chip maker said in a statement, noting a decline in notebook and smartphone shipments.

The company said it plans to cut its investments by more than 50% year-on-year next year.

The drop in earnings came as blistering inflation hurt demand for electronic devices and the memory chips they contain.

SK Hynix’s operating profit fell to 1.66 trillion won ($1.16 billion) in the July-September quarter, from 4.2 trillion won a year earlier. Earnings came in below analysts’ expectations of 1.87 trillion won in earnings, according to Refinitiv SmartEstimate.

Prices for DRAM chips, used in devices and servers, fell about 20% in the third quarter from the second, SK Hynix said. Prices from Nand Flash Chips, which serve the data storage market, fell more than 20%.

The lackluster results reflect its bigger rival Samsung electronics‘Third-quarter earnings slump and US peer micron Technology Inc.’s warning of a sharp drop in PC and smartphone sales.

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Chipmakers had been experiencing a sharp post-pandemic demand surge earlier this year, leading to shortages of certain chips and disrupting production of vehicles and various electronic devices.

But demand for chips has weakened significantly in recent months as rising inflation, rising interest rates and a gloomy economic outlook have prompted consumers and businesses to rein in spending.

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The global smartphone market shrank 9% year-on-year from July to September, marking its worst third quarter since 2014, according to the analytics provider channels.

DRAM chip prices are expected to fall further in the current quarter as memory chip companies have lost their bargaining power with customers who have stocked chips and are now struggling to clear them due to weak demand, said Wi Min-bok, Analyst at Daishin Securities.

As the memory chip glut continues into the first half of next year, SK Hynix joins the chipmakers who have begun to cut supply and investment. Micron Plans to Cut Capital Expenditures by More Than 30% Next Year; TSMC has also cut its investment plan for 2022.

SK Hynix said its investments in 2022 are expected to be in the “upper range of 10 to 20 trillion won.”

Despite the current slowdown in demand for server memory chips, SK Hynix predicts greater appetite over the longer term as hyperscale data centers continue to invest to meet growth in industries such as artificial intelligence (AI), big data and metaverse.

Revenue for the third quarter fell 7% year over year to 10.98 trillion won.

SK Hynix shares were flat in early morning trading, while the broader market was up 0.3%.