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Business Trends

Smartphone slump has chipmakers pondering fate of 'supercycle'

iPhone X production cut sends memory prices falling by 10%

An Apple store in Taipei. Apple has reduced production of its iPhone X.

TOKYO -- Prices of memory chips have dropped around 10% in three months, triggering worries that the global semiconductor industry may be entering a correction phase.

The culprits behind the fall are Apple, which halved output of its flagship iPhone X in the January-March quarter, and Chinese smartphone makers such as Oppo and Vivo, whose remarkable growth has come to a halt. What happens to semiconductor prices affects a host of players, from materials suppliers to makers of semiconductor production equipment, and the industry has reached a critical juncture.

Bullish semiconductor production equipment makers in Japan had said the industry was entering a "supercycle," moving beyond the so-called silicon cycle, in which the sector goes from boom to bust every three to five years. After all, chip demand is expected to grow, not only for smartphones but also household appliances in the age of the internet of things. And as investment in base stations for 5G mobile networks gets into full swing in the second half of 2018, demand for data center servers will grow in order to cope with a surge in volumes.

Apple started equipping iPhones with high-capacity flash memory in 2016 to expand their storage to levels sufficient for dozens of high-definition movies. This sparked a race for higher memory capacity among smartphone makers and drove up spot prices of such chips.

But the uptrend in NAND chip spot prices that began in the latter half of 2016 appears to have ended, with recent prices around 10% below levels from three months earlier.

Declining smartphone sales seem to be affecting the flash market. Worldwide smartphone shipments shrank 0.1% on the year to 1.47 billion units in 2017, according to U.S. research company IDC.

In response to weaker demand, South Korea's Samsung Electronics has decided to make DRAMs instead on certain lines at a newly opened flash memory plant near Seoul. JPMorgan Securities Japan sees Samsung's capital investment in the flash business decreasing 30% on the year in 2018.

The NAND flash memory chip market will enter a temporary correction phase, JPMorgan's Hisashi Moriyama said.

The trend could become a concern for production equipment manufacturers, which are counting on further earnings growth for fiscal 2018, which runs to March 31, 2019.

Disco said in early February that it logged a group operating profit of 40.1 billion yen ($366 million) for the first three quarters of the current business year, up 91% from a year earlier, thanks to strong demand for precision processing machines. For fiscal 2018, the company raised its profit projection to 50.1 billion yen, up 60% from the preceding year.

"We cannot think of any factor that will weaken the semiconductor market," Hitoshi Mizorogi, Disco's chairman, told reporters in Tokyo. "The shortage of manpower and parts for production of manufacturing equipment continues," he said. "Favorable conditions will continue into fiscal 2018 as demand for memory chips applicable to data centers will further increase."

Tokyo Electron posted a consolidated operating profit of 181.4 billion yen in the nine months to end December, up 92%.

Tokyo Electron said on Jan. 30 that it posted a consolidated operating profit of 181.4 billion yen for the nine months through December, up 92%. Advantest, a leading maker of semiconductor testing devices, logged 10.6 billion yen in group operating profit for the April-December period, up 14.6%, and upgraded its profit projection for fiscal 2018.

The correction period might prove to be a blessing. The fall in prices of three-dimensional NAND chips, which are difficult to mass-produce, could help expand the market and help fuel a shift from hard-disk drives, according to Tokyo Electron President Toshiki Kawai. "Moderate price falls are good for NAND memories," he said.

Tokyo Electron is adding a new development building at its Miyagi plant for the etch system in September and aims to double production capacity by fiscal 2019.

"We don't expect a fall in demand at all in 2018," Advantest President Yoshiaki Yoshida said, forecasting a steep increase in demand as adjustments to smartphone production in China come to an end after the January-March quarter.

The market for semiconductors has kept expanding for six years running, since its rebound after the global financial crisis that followed the 2008 collapse of Lehman Brothers. According to global industry group SEMI, the market is expected to grow 7.5% in 2018 from the previous year, amid steady investment to increase the production of memory chips.

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