SK Hynix, the second largest maker of electronic memory chips, is not ruling out the sale of its semiconductor plant in China if the recent US trade restrictions affect operations too much.

As a contingency plan, SK Hynix is ​​considering selling the factory or equipment, or transferring the equipment to South Korea, Noh Jong-won, the top manager in charge of general business, said in a conference call to reporters and analysts on Wednesday.

SK Hynix hopes that doesn't happen.

But the South Korean company is mentally preparing for a possible exit.

Patrick Welter

Correspondent for business and politics in Japan based in Tokyo.

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Given the many restrictions on the Wuxi factory, SK Hynix "can only suffer," Noh said.

In the factory, SK Hynix produces DRAM memory modules for its customers, which are mainly required in computers and in large data centers.

It is estimated that the Wuxi plant produces around 40 percent of the company's DRAM chips.

Previously, SK Hynix reported that it plans to more than halve its investments in the coming year.

The company speaks of a radical cut at a time when demand is falling to an unprecedented extent.

The announcement is a warning sign for the semiconductor industry, whose situation during and after the corona pandemic was largely determined by a shortage of microchips.

Profit fell 67 percent year-on-year to 1.1 trillion won in the third quarter of the year.

Revenue was 7 percent lower at 11 trillion won.

Operationally, SK Hynix made 60 percent less profit than a year ago and clearly missed the expectations of financial market analysts.

Hope for further exemption

The United States earlier this month passed regulations that would largely cut off China from the latest technology semiconductors, manufacturing know-how and manufacturing facilities.

Like other competitors, SK Hynix has received a one-year exemption to continue supplying machines to its production facility in Wuxi, China.

"We expect and hope that there will be a one-year extension after that," Noh said.

"But that is not certain given the high level of geopolitical uncertainty." For SK Hynix, it is essential in the medium to long term to diversify the production base, said Noh.

With these thoughts on relocating production, the company is showing that the threats from the United States in the trade war with China are already having an effect and are also affecting close allies such as South Korea and Taiwan.

In response to the economic slowdown, SK Hynix announced that it would gradually reduce production, initially for less profitable products.

Investments, which are expected to be in the high end of the 10 trillion to 20 trillion won range this year, will be more than halved in 2023.

The stock gained 1.7 percent on the Seoul Stock Exchange over the course of the year - a signal that investors are approving of efforts to adjust the supply.

Since the beginning of the year, the share has lost around 27 percent in value.

Other large manufacturers of memory chips such as Kioxia or the American Micron have recently withdrawn their investment and production plans.

Samsung Electronics, the world market leader for electronic memory components, will present its quarterly results on Thursday.

Samsung had previously reported that operating profit had fallen by around 32 percent.

As reasons for the poor business development in the third quarter, SK Hynix cited the global economic and geopolitical uncertainties and the surge in inflation in important markets, but also the fact that customers' inventories were still well stocked.

Demand for computers and smartphones, the most important end products with memory chips, fell significantly in the period from July to September.

SK Hynix reported that prices for dynamic and static memory devices have fallen by at least 20 percent.

Improvement only in the second half of 2023

In this analysis, the semiconductor industry is not only burdening the macroeconomic environment, but also the hangover after the rapidly increasing demand for electronic devices and thus microchips during the pandemic.

With the emerging shortage of chips, many customers struggled to fill their stockpiles.

These stocks are now being reduced to normal levels, so current demand is low.

SK Hynix storage is also currently larger than normal.

For dynamic DRAM memory, the company expects the memory cycle to peak in the first quarter of 2023, followed by an improvement over the course of the year.

The business with these storage elements is largely determined by the demand for large data storage devices, for example for cloud computing.

For NAND non-volatile memory, which is more tied to consumer electronics businesses like smartphones, the recovery date is unclear, the company said.

SK Hynix is ​​hoping for a turn for the better in the second half of next year.

The South Korean company is the second largest manufacturer of electronic memory components after Samsung Electronics.

In the business of dynamic memory chips (DRAM), which serve computers or smartphones as a kind of short-term memory, SK Hynix is ​​number 2 after Samsung.

When it comes to static storage elements, NAND or flash memory, the company is number 3 after Samsung and Kioxia, formerly owned by Toshiba.

SK Hynix is ​​involved in Kioxia as part of a consortium.

NAND memory can be described as long-term memory in which photos, films of text documents are permanently stored.