As demand for PCs and smartphones slumps, so does demand for 3D NAND and DRAM memory. As a result, companies like SK Hynix suffer from dropping revenue and dramatic declines of profits. According to reports via Reuters and Nikkei Asia, in a bid to balance the books, SK Hynix plans to halve its capital expenditures next year and focus on the manufacture of more expensive types of memory. The company also plans to assess the future of its fab in China.
SK Hynix Cuts CapEx Due to Major Profits Fall
Just like other semiconductor companies, the memory maker believes that demand for chips will be sluggish for several quarters and supply will exceed demand, which means tiny profits amid lowering revenue. To that end, SK Hynix will reduce its CapEx investment next year by more than 50% year-over-year. The company does not disclose how much will it spend on new fabs and tools in 2023, but only says that it would be ‘at the upper range of 10 – 20 trillion won ($7 billion – $14 billion).
SK Hynix has good reasons to cut down its expenses. This week the company posted a 10.983 trillion won ($7.741 billion) revenue, which was down 7% compared to the same quarter a year ago. A 7% YoY drop is hardly significant, but the company also reported operating profit of 1.656 trillion won ($1.167 billion) in operating profit (a 60% year-over-year decline), and net income of 1.103 trillion won ($777.396 million) in the second quarter of 2022 (a 67% YoY decrease).
Reduce Production, Focus on Premium Segments
In addition to reducing its CapEx, SK Hynix will increase production of its premium products, which includes 238-layer 3D NAND memory that can be used to power the fastest SSDs with a PCIe 5.0 x4 interface. Also, the company intends to boost production of memory using its 1a-nm fabrication technology in general as well as premium DDR5, LPDDR5, and HBM3 for high-end applications like servers, AI, and analytics accelerators.
In addition, the company intends to lower production of commodity 3D NAND and DRAM memory in a bid to balance supply and demand on the market. Meanwhile, the company does not disclose how significantly it plans to cut its output.
Fab Dilemma
Back in September SK Hynix began to construct its $11 billion fab in South Korea that is set to come online in 2025. It remains to be seen whether the company will be able to build the new production facility on time with its reduced CapEx budget, but it looks like it might face a dilemma with its spendings on new manufacturing capacity.
Building a brand new fab is by definition more expensive than upgrading existing production facilities. SK Hynix has fabs in China and South Korea. The Chinese fabs may be cheaper to operate (and the company needs to cut costs now) and can even be upgraded with new tools produced in the U.S. in the next 12 months as the company has a waiver to ship new equipment from America to China for a year. But if the company’s partners fail to get an export license from the U.S. Department of Commerce to ship new tools and spare parts to SK Hynix’s facilities in Wuxi and Dallian (which is formally controlled by SK Hynix’s subsidiary Solidigm), these fabs will become obsolete in a couple of years (i.e., 2025 – 2026).
Given the risks associated with its Chinese fabs, it might make sense for SK Hynix to focus on investments in its all-new fab in South Korea. At present the company is considering several contingency plans for the facilities, some of which include transferring equipment to South Korea, reports Nikkei.
“As a contingency plan, we are considering selling the fab, selling the equipment or transferring the equipment to South Korea,” said Kevin Noh, chief marketing officer for SK Hynix, at the earnings call this week. “It’s a contingency plan. We want to [continue to] operate without facing this situation. We expect to extend it each year, but it is not for sure. It is very uncertain.”