South Korean chip production slumps as inflation hits electronics demand

South Korea’s chip production fell last month by the most since the global financial crisis, reflecting the deepening industry downturn as chipmakers struggle to clear large inventories and inflation saps demand for electronics.

The country’s chip output decreased for a fourth consecutive month in November, sliding 15 per cent from a year earlier for its biggest drop since 2009, according to Statistics Korea. Output was down 11 per cent month on month as semiconductor inventories surged more than 20 per cent from a year earlier.

The sharp increase in inventories highlights a supply glut of memory chips as global demand for technology products is hit by high inflation after a two-year boom during the coronavirus pandemic. South Korea, home to Samsung Electronics and SK Hynix, is a leading producer of microchips.

“Demand has been hit by the slowing global economy and large inventories. Customers are not buying chips as demand has collapsed,” said JJ Park, an analyst at JPMorgan in Seoul.

“Inventory destocking will be completed throughout next year and the market could rebound in 2024.”

Chipmakers are cutting their investment plans to adjust to the oversupply. SK Hynix, along with US rival Micron Technologies and Japan’s Kioxia Holdings, are slashing spending, though Samsung is not considering an output cut.

Samsung expects the memory chip market to remain sluggish until the end of 2023. The industry leader was sticking to its past strategy of increasing capital spending during the downturn to grab market share, analysts said.

“Samsung is back-stabbing its fellow oligopoly competitors,” Dylan Patel, chief analyst at semiconductor research group SemiAnalysis, wrote in a report earlier this month. “Samsung is looking for a Pyrrhic market share victory.”

Samsung said during its third-quarter earnings call in October that its capital spending this year would reach Won47.7tn ($37.5bn). The guidance calls for a jump in fourth-quarter spending, almost double that of the second and third quarter, according to Patel.

In July, Samsung began production at its new domestic chip factory in Pyeongtaek, one of the world’s largest semiconductor production facilities. Its increased capital spending and chip production will exacerbate the global oversupply, analysts have warned.

“The oligopoly is broken, as Samsung’s new chair wants to eat market share,” Patel noted, warning of “pure carnage” in the Dram (dynamic random-access memory) market.

In October, Samsung promoted the group’s de facto leader Lee Jae-yong to chair from vice-chair in a symbolic move that confirms Lee will officially be at the helm of the $250bn tech group after receiving a presidential pardon. Lee was convicted of bribery and embezzlement in 2017.

Samsung is expected to announce weaker fourth-quarter earnings next week after reporting its first profit fall in almost three years in the third quarter. Analysts expect SK Hynix to post record losses next year, hit by the industry slump.

Shares of Samsung and SK Hynix closed 2.3 per cent and 1.3 per cent lower respectively on Thursday, as the benchmark Kospi Composite stock index fell 1.9 per cent