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Expectations are growing that the not-so-vibrant chip industry will regain growth momentum, a market consensus strengthened by local chipmakers' new business strategies and reports from global investment banking powerhouses and local brokerages, Monday.
SK hynix, one of Korea's major chip producers alongside Samsung Electronics, said July 26 that it will reduce the output of dynamic random-access memory (DRAM), a drastic move to deal with rapidly falling chip prices amid softening global demand.
The measure is fueling expectation that Samsung will follow suit. The firm's second quarter performance will be announced July 31.
SK hynix's move followed the firm's "earnings shock" in the second quarter.
The firm said July 26 that its operating profit is estimated to be 637.6 billion won ($538 million) in the April-June period, 14 percent lower than market consensus which expected 744.1 billion won.
The second-quarter figure is a 53 percent drop from 1.3 trillion won posted in the quarter earlier, and an 89 percent drop from 5.5 trillion won from the year before.
The firm's sales also slid to 6.4 trillion won in the second quarter, a 5 percent decrease from the quarter before and a 38 percent drop from a year earlier.
However, ahead of the worse-than-expected performance announcement, Goldman Sachs, a New York-based multinational IB, upgraded the firm to buy, a move followed by many local brokerages thereafter.
The investment bank largely helped dispel growing investor concerns over fresh trade dispute between Korea and Japan over the latter's export restriction on three key materials needed to produce semiconductors.
They are photoresist, fluorinated polyimide and etching gas.
"While we will need to monitor the etching gas procurement situation closely… the controls would not have an impact on as wide a range of products as initially thought," it said.
The IB also said photoresist controls affect materials used in extreme ultraviolet (EUV) lithography processes and fluorinated polyimide controls affect materials used in the manufacture of foldable organic light-emitting diodes (OLED).
"Materials used in DRAM, NAND, and OLED, currently the mainstay end-products, are not affected," it said.
"Only etching gas (hydrogen fluoride) controls affect all end-use applications, and Korean companies said they are therefore considering other procurement options, including substitute materials. Our impression is that investor concerns about the potential impact on the overall supply chain are somewhat overblown."
Fitch Ratings Asia-Pacific Corporates Director Shelley Jang said companies in other regions could benefit from extra demand but the positive impact would be limited given the moderate share of these companies in the memory chip market.
"Samsung and SK Hynix account for more than 70 percent of the memory chip market and any disruption in production would have an impact on the global supply especially for the high-end market, and it would be difficult to find sufficient alternatives as Korean manufacturers dominate the industry," Jang said.
The ratings agency official added that possible supply disruption could lead to a price recovery of chips or at least slow the speed of price decline.
"The companies are responding to the current situation by cutting capex. For example, SK hynix already announced its plan to decrease its capex and we expect Samsung will follow suit. It is likely to see a gradual recovery of memory chip price towards the end of this year."
Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research, said the impact of Japan's export control over Korea hinges on the ability for Korea semiconductor manufacturers to substitute the key inputs.
"As Korea is highly dependent on Japanese imports for the key inputs and Japan dominates in both market share as well as state-of-art technology, we expect Korean firms to have a hard time finding an alternative supply upholding the same quality. This substitution not only takes time but may also push up the price, eroding the profit margin for Korean manufacturers," the economist said.
Further impact, she added, will also depend on the roll-out of Korea-Japan trade feud.
"We take a cautious stance over the near-term outlook of Korea's chip industry as the trade dispute is only one facet of the drag ― deteriorating demand over the cyclical slowdown of the semiconductor cycle and heightened uncertainty over trade war also put a dent on the performance and it is hard to expect such headwinds to dissipate soon."
Samsung Electronics' shares closed at 46,550 won July 30, up 0.98 percent from a day earlier; while SK hynix closed at 78,900 won, up 2.47 percent.
The share prices of the two have seen steady increases since early- to mid-June. Samsung Electronics closed at 43,800 won June 3 and SK Hynix 63,700 won June 17.
