No more foul plays

Samsung Electronics and SK hynix, the world’s two leading makers of memory chips used in consumer electronics products and mobile devices, are vowing to end their destructive competition over market share amid a deepening global downturn. / Korea Times file

Samsung, SK talk of ending semiconductor game of chicken

Executives of both Samsung Electronics and SK hynix, the world’s two largest makers of computer memory chips, admit the companies had been playing a dangerous game of chicken that can’t last. It remains to be seen whether they can deliver on their promise to end it.

Despite volatile demand for consumer electronics products, the chipmakers have been spending massively to boost their production capacity in a blind obsession with market share.

And as the game of chicken goes, the worst possible outcome occurs when both players don’t yield, Jun Dong-soo, president of Samsung’s memory business, told reporters recently.

“This type of competition was inevitable in the past as there were many suppliers and buyers in the memory chip market. Chipmakers hoped to scare their rivals into backing off in the spending race and concede their market share. Well, nobody’s backing off and the results have everyone worse off,’’ Jun said on the sidelines of a business meeting at a southern Seoul hotel.

Jun said that Samsung, the top maker of memory chips, has yet to finalize its investment plan for next year.

“Samsung’s memory chip business is at a crossroads due to the industry’s realignment. In the past, chip suppliers profited greatly when the market was bullish and bled severely when the market turned weak. However, now the number of major chip buyers has been halved and a winner-takes-all atmosphere appears to be taking place,’’ he said.

The fierce competition between chipmakers in 2008 hurt the industry by resulting in oversupply that accelerated a decline in chip prices amid a decline in demand.
While Samsung and SK hynix appear to have cemented their positions in the semiconductor market, Jun claims it will be critical for the companies to provide new values. He talked about how the arise of the mobile Internet led to the demise of traditional computer makers like Dell and Hewlett-Packard and the rise of Samsung Electronics and Apple.

“We need to be more attentive to clients’ demands and be quick in responding to them. This has something to do with the difficulty we are experiencing in finalizing next year’s chip budget. If our clients want us to provide more products with creative input, then of course we will spend more to provide that,’’ he said.

Samsung invested 11.8 trillion won in its chip business for the first nine months of the year, including 2.1 trillion won in the third quarter.

SK hynix CEO Kwon Oh-chul also stressed he doesn’t think the global chip industry will suffer from steep price falls again as it’s highly unlikely the market will see an extended game of chicken.

“The major chip vendors have narrowed to three or four. Chips are no longer just about volume and price but more about technological differentiation and providing new values. This is making it harder for smaller vendors to compete without the financial capability to make heavy investment and absorb down cycles. So there is less reason for them to compete blindly in volume,’’ Kwon said.

The two senior executives pointed out that chip manufacturers are being asked to produce chips on thinner technologies to save costs and produce specialized chips for finished products that are becoming more individualized and sophisticated.

Jun was positive that Microsoft’s new operating system Windows 8 will awake idling demand for conventional computers. “Budget PCs like ultrabooks will also help spur the demand for chip-embedded products,’’ he said.

“Next year will definitely be a crucial period to decide the intensity of memory chip industry realignment. We will closely monitor about the possible impact of tablets to conventional computers. How a Microsoft alliance will secure its bottom line is another point. That’s why Samsung needs to maintain greater flexibility in investments for facilities,’’ said Jun.

In a related note, software research analyst at the Technology Business Research (TBR) Matthew Casey said Windows 8 will provide stability to the industry and counter the effect of PC shipment declines moving forward.

Widespread adoption within enterprise customers will likely come within the first two years on the market as Windows 7 matures. Where Microsoft will see the largest near-term growth will be in consumer space, with mobile device and tablet users being the first to heavily adopt the operating system, said the TBR analyst. <The Korea Times/Kim Yoo-chul>