SEOUL -- South Korean chipmaker SK Hynix's plan to solidify its position as a second-ranked player in memory chips has hit a snag with the delay in the initial public offering of Japanese peer Kioxia Holdings.
SK Hynix intends to acquire a large chunk of Kioxia once the company goes public, a move that would create an alliance of No. 2 players better positioned to fend off upstart Chinese rivals. Kioxia's decision to postpone the IPO was driven mainly by a lack of support from institutional and individual investors.
Nikkei first reported Kioxia's IPO delay on Sunday, nine days before the company was scheduled to list. The development has not changed SK Hynix's plan to purchase a 14.96% stake in the target, but it essentially puts the acquisition and the formation of an alliance on hold.
"As investors, we will monitor the situation," a source at SK Hynix said in response to the news.
SK Hynix's path to becoming a major Kioxia shareholder dates back to three years ago when U.S. private equity group Bain Capital called on the South Korean chipmaker to join a consortium put together to purchase Kioxia's precursor Toshiba Memory.
As part of the deal, SK Hynix footed 395 billion yen ($3.74 billion) in exchange for convertible bonds and other assets. Those holdings leave SK Hynix in position to be Kioxia's third-largest shareholder after Bain and Toshiba. A prompt conversion of the bonds after Kioxia lists is a "logical" forecast, according to securities filings.
SK Hynix is unable to acquire more than 15% of Kioxia shares until 2028 without securing an agreement from the target. This provision was put in place in consideration to Japan's Ministry of Economy, Trade and Industry, which had expressed reluctance against an investment by a South Korean company.
Even with the investment ceiling, SK Hynix is eager to spend funds on Kioxia as a defensive measure against competitors.
There is currently a three-party oligopoly among manufacturers of dynamic random-access memory, or DRAM. South Korean compatriot Samsung Electronics held the biggest share last year at 42.7%, while SK Hynix ranked second at 28.8% and U.S.-based Micron Technology was third at 23.4%.
The landscape is more crowded when it comes to NAND flash memory. While Samsung controls 35.9% of the market, runner-up Kioxia sits with a 19% share. Close behind are U.S. rivals Western Digital and Micron, the pair holding 13.8% and 11.1% shares, respectively.
SK Hynix trails as the fifth-largest NAND producer at 9.9%, edging out Intel's 9.5% share. If another competitor steals the march on Kioxia, SK Hynix's future prospects for an alliance would be cut short.
When it comes to commodity products, there are several cases where three-way oligopolies ultimately form as the result of mergers and exits. SK Hynix faces an uncertain future of retaining top three status as Chinese challengers surge in market share.
In China, ChangXin Memory Technologies and Fujian Jinhua Integrated Circuit are busy mass-producing DRAMs. Yangtze Memory Technologies is doing the same for NAND. If SK Hynix forms an alliance with Kioxia, the entity would be better equipped to beat back this contingent.
DRAMs temporarily store data while NAND hold data for a long term. The two types are found in mobile devices, computers and servers. Because of their differing market cycles, manufacturing both leads to stable earnings.
This business strategy describes market leader Samsung. The tech conglomerate divvies up investment between both memory chips based on the anticipated demand-supply balance and takes in sustainably ample income. This approach grants the company an significant advantage in the race to develop next-generation memory chips.
Another wild card to SK Hynix's ambitions is Western Digital, the Kioxia chipmaking partner that had opposed SK Hynix's participation in the initial acquisition process. As a joint investor in Kioxia chip fabs, the U.S. company is wary of interference by its South Korean rival.
In 2014, SK Hynix agreed to pay a $287 million settlement to Toshiba over allegations that the South Korean company wrongfully obtained flash-memory technology. This came after the arrest of a former SK Hynix employee that worked for SanDisk, Toshiba's then-business partner that was later acquired by Western Digital.
SK Hynix will stop at nothing to get ahead, said a Western Digital executive.
On the other hand, SK Hynix has turned in healthy earnings as of late. For the second quarter, its operating profit tripled from a year earlier while its operating margin recovered to 23%, a high in the manufacturing industry.
This performance owes to the surging demand for memory as the "new normal" of telecommuting drives up data transfer volume.
The perceived threat from China has receded as well in the face of U.S. trade restrictions against Chinese enterprises. Even so, SK Hynix seeks to avoid falling into the same trap that has impacted the solar panel and liquid crystal display industries.
"The Chinese will stake their national pride and definitely catch up in five or 10 years," said a source close to SK Hynix.