Samsung-full capex speed ahead, damn the downturn...

-Samsung said its not reducing its capex despite downturn
-A clear indication they want to take share/kill Micron & others
-Is the US government subsidizing predatory chip behavior?
-The last US memory chip maker is clearly threatened

Samsung announces worst results in 8 years

Samsung released its earnings which were the worst in eight years. But the news was not how bad the earnings were because we already knew the chip industry and specifically memory is in a sharp downturn.

The real news is confirmation of previous statements that Samsung is not slowing its record capital spending of $39B despite the fact that the industry is flooded in over supply.

This is akin to OPEC drilling new wells when the price of oil is plummeting. OPEC is clearly smart enough to know that when you are already in a hole, you stop digging.

That is unless you want to take advantage of the situation and be a predator.

We have seen this movie several times before

We mentioned several newsletters ago, that we have been in the chip business long enough to remember that the US had 7 memory manufacturers including notably Intel and IBM. It is also notable that we have lost memory manufacturers usually in the bottom of a memory cycle when the weaker players can’t cut it and collapse.

It takes nerves of steel to be in the memory business and aggressive attitude. We pointed out that many months ago Micron bailed out in the game of “chicken” with Samsung as Samsung has kept the pedal to the metal of its 18 wheeler of memory manufacturing versus Micron’s pick up truck.

The fact that Samsung is not slowing even though Micron caved in a long time ago can only mean that Samsung is out for blood and market share….thats the only rational answer….

Samsung can read balance sheets

If you read Micron’s balance sheet , they are in a net debt position going into a downturn with prices and profitability collapsing. What better time for Samsung to press its advantage than when a competitor is financially weak in an industry that requires rivers of cash (which Samsung still has).

This same movie has played out in prior cycles as larger memory makers drive out weaker competitors who can’t keep up. We don’t know what Micron’s access to cash will look like if we have a prolonged downturn which it seems we are about to see given that Samsung may not cooperate and slow down.

Is the US government subsidizing predatory behavior with Chips act?

Samsung is planning new fabs in the US and will likely get CHIPS Act money because of it. They have been promised both federal and local money for new fabs in Texas. Given that the CHIPS act has a limited lifetime Samsung might as well get government money while the getting is good.

The government is clearly incentivizing those with money in the semiconductor industry to spend it as you don’t get CHIPS Act money unless you ante up your money first and Samsung is one of the few with money to spend as Micron is under water and Intel just reported a very bad quarter.

So in effect , what we have is the US government, subsidizing and incentivizing Samsung to spend money in a downturn to the detriment to US based competitors such as Micron who don’t have the money to spend in order to get CHIPS Act subsidies.

The US government is helping Samsung run its last remaining US memory maker out of business. Sounds like the exact opposite of what the CHIPS Act was supposed to do.

Even though Samsung is a friendly and the fabs are being built in Texas, it would still be nice to have a US domiciled memory maker left. Certainly the same goes for Samsung’s foundry business and Intel. Subsidizing Samsung when Intel is in a world of pain and resorting to accounting tricks to shore up its balance sheet is not a great idea.

A long downturn could get even longer and deeper

We have been talking about an unusually deep and long downturn and we have been criticized for that view. We are now in the typical rosy analyst view where “the recovery is coming in 6 months”. We have heard this before only to have the can kicked down the road again by another 6 months. The view of a H2 recovery seems widely held because of this fallacy.

There is no firm evidence that supports a H2 recovery other than hope and a prayer. Samsung’s capex behavior reinforces the view of a longer and deeper downturn unless we see them slow down. A longer, deeper downturn, long enough to mortally wound competitors may be what Samsung really wants.

Yangtze memory in China is a survivor and beneficiary

China has taken the memory market by storm and already garnered significant share. One thing that is an absolute certainty is that the Chinese government will anything and everything to insure their success and growth. China would very easily subsidize Yangtze no matter how long and deep the downturn in memory thus insuring its survival. The government has Yangtze’s back.

This suggests that Samsung is doing Yangtze a favor by going after the competition as Yangtze will also be able to take share when the dust clears.

Its not just Micron but a threat to Toshiba

With Toshiba looking to be sold off and broken up, their appetite for capex in the face of a weak industry is also near zero. Even though they have cash where Micron doesn’t they are in a similar leaky boat along with Micron. Japan has long been a strong supplier of memory but could potentially lose another player here.

The stocks

This is obviously pretty bad for Micron. It is an existential threat. At the very least its very damaging and severely crimps their plans and future. We already knew that Micron cuts its capex to the bone so its not much of a further loss to equipment makers.

It could be a positive for Lam if Samsung is serious about continuing to spend on capex (unless this turns out to be a big bluff) as Samsung is their biggest customer. It doesn’t help Toshiba’s valuation nor Hynix and others. Irrational behavior in a closely balanced commodity market is always bad to all involved.

We would hope that someone in the US government has the sense to pick up the phone and call Samsung about their clearly predatory behavior against the US chip industry. We saw that Korea was noticeably absent from the triumvirate of the US, Japan and Netherlands against China even though Korea does make semiconductor equipment and is supposedly a partner with the US.

Maybe Korea/Samsung wants it both ways……..

About Semiconductor Advisors LLC

Semiconductor Advisors is an RIA (a Registered Investment Advisor),
specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.