Halloween Comes Early for Chip-Equipment Companies

SK Hynix’s surprise decision to slash capital expenditures by more than half for 2023 sends an ominous signal on chip demand—and the fortunes of chipmaking-equipment firms

By guest author Jacky Wong from the Wall Street Journal

Oct. 26, 2022

The feast for memory-chip companies has quickly turned to famine. Cutting capital spending is a necessary move to bring supply and demand back into line again—but that will heap more bad news on makers of semiconductor equipment upstream.

South Korea’s SK Hynix 000660 -7.33%decrease; red down pointing triangle, the world’s second-largest memory-chip manufacturer after Samsung Electronics, said Wednesday that it would more than halve its capital expenditure for 2023 after reporting worse-than-expected results for last quarter. That follows similar planned cuts at other chip companies. Micron Technology said last month that it would slash next year’s capital spending by 30%. Contract chip maker Taiwan Semiconductor Manufacturing Co. has also reduced its capital expenditure estimate for this year to $36 billion, from between $40 billion and $44 billion at the beginning of 2022.

All of this deals another heavy blow to companies selling chip-making tools. Chip-making equipment firms like Applied Materials and Lam Research will lose some Chinese customers after the Biden administration placed sweeping restrictions on exports to China’s semiconductor companies in early October.

SK Hynix said it faces “almost unprecedentedly soft demand” as shipments of smartphones and personal computers nosedive. Prices for memory chips dropped by around 20% in the September quarter. The company’s operating profit fell 61% from the previous quarter and its margins halved.

The market nonetheless seems to be looking past these disappointing results. Investors may be hoping that the drastic spending cut will help quickly alleviate the sudden global oversupply of memory chips. SK Hynix rose 0.4% Wednesday while Samsung gained 3%. Both stocks have lost around a third of their value since their peak last year.

The restrictions on China may also help resolve the chip glut. The new rules will essentially kneecap fast-rising Chinese memory-chip companies like Yangtze Memory Technologies—which the industry had long worried would bring much more supply to the market.

The semiconductor ban, however, has also created a headache for SK Hynix and Samsung, given that they have substantial manufacturing facilities in China. The two Korean companies got a one-year waiver to import chip equipment to their plants in China, but it’s unlikely that they will be able to expand further. SK Hynix has nearly half of its capacity for DRAM, used as working memory, in the country, according to Morgan Stanley.

Memory-chip companies tightening their belt may be good news for their own investors. But it adds up to another strong headwind for those selling equipment to them—and sends another signal of how unexpectedly deep the chip-sector bust is proving to be.