According to data released by the South Korean government statistics agency on Thursday, in September, the national semiconductor output fell by 3%, marking a significant reversal compared to an 11% increase in the previous month. The growth rate of shipments also slowed from 17% in August to 0.7%. This is the first decline in South Korea's chip production in 14 months. Given their unique position in the chip industry, this sends a bad signal.
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However, we must also note that inventory levels indicate that stock is still being consumed rapidly, with September inventory down 41.5% compared to the same period last year. These data suggest that as demand for memory chips peaks, the industry may be gradually cooling down.
Reports indicate that semiconductors are the biggest driver of South Korea's exports and economic growth. The Bank of Korea is also closely monitoring semiconductor performance, having begun to adjust its policy by lowering the benchmark interest rate earlier this month. Some economists expect that if economic growth momentum slows more than expected next year, the easing cycle will accelerate.
While there are overall changes in South Korea's chip sector, a new shift is also occurring within the South Korean chip industry, where SK Hynix's profits have surpassed Samsung for the first time, which is another signal for South Korea's semiconductor sector.
<h2>SK Hynix Surpasses Samsung for the First Time</h2>
According to South Korean media Businesskorea, Samsung Electronics' semiconductor division's annual operating profit will fall behind SK Hynix for the first time. This development marks a significant shift in the global semiconductor industry's competitive landscape, where Samsung has traditionally held a dominant position.
Yesterday, Samsung Electronics announced its confirmed performance for the third quarter of this year. The sales of Samsung's Device Solutions (DS) division amounted to 29.27 trillion won, with an operating profit of 3.86 trillion won. This figure fell short of market expectations, which had anticipated an operating profit of around 4 trillion won. In contrast, SK Hynix achieved an operating profit of 7.03 trillion won in just the third quarter, surpassing the previous record for the largest quarterly performance set in the third quarter of 2018.
As of the first half of this year, Samsung Electronics' DS division's operating profit slightly led SK Hynix, at 8.36 trillion won and 8.3545 trillion won, respectively. However, the gap widened significantly in the third quarter, leading to SK Hynix's cumulative operating profit in the semiconductor business reaching 15.3845 trillion won, over 3 trillion won higher than Samsung Electronics' 12.22 trillion won.
Kyung Kye-hyun, head of Samsung Electronics' DS division, acknowledged the company's poor performance. &#34;Due to our performance not meeting market expectations, we have raised concerns about our fundamental technological competitiveness and the future of the company,&#34; he stated on October 17, immediately following the interim performance announcement. He added, &#34;We will restore our fundamental technological competitiveness.&#34;
In the third quarter, Samsung Electronics expanded sales of high-value-added products such as High Bandwidth Memory (HBM), DDR5, and server Solid State Drives (SSDs) to meet the demand from artificial intelligence and server memory sectors. The growth in HBM sales was particularly notable, increasing by over 70% compared to the previous quarter. DDR5 sales grew by 10%, and server SSD sales increased by 30%. As a result, the average selling prices (ASP) of DRAM and NAND flash saw high single-digit growth compared to the previous quarter.
Despite these efforts, profits declined due to one-time costs such as incentive terms and the foreign exchange impact of a weak dollar. Although the System LSI maximized sales and minimized inventory, it also faced performance issues due to increased one-time costs. In the foundry sector, the recovery in demand for mobile phones and PCs was weaker than expected, and one-time costs further impacted performance, leading to poorer results compared to the previous quarter.
However, as mentioned at the beginning, Samsung's long-time competitor SK Hynix in South Korea announced a strong financial report on Wednesday. According to them, they recorded the highest revenue since the company's establishment in the third quarter of 2024.
The company reported total revenue of 17.6 trillion won (USD 12.7 billion) in the third quarter, a year-on-year increase of 94%. Operating profit was 7 trillion won (USD 5 billion), compared to a loss of 1.8 trillion won (USD 1.3 billion) in the same period last year. Net profit was 5.8 trillion won (USD 4.2 billion), with a profit margin of 33%.
All three figures are hailed as &#34;new records.&#34;
The company attributed its record performance to the continued demand for AI memory products from data center customers, with sales of High Bandwidth Memory (HBM) increasing by over 70% compared to the previous quarter and by 330% compared to the third quarter of 2023. HBM sales accounted for approximately 30% of total DRAM revenue for the quarter.
The average selling prices of DRAM and NAND memory products also rose, further driving SK Hynix's operating profit growth for the quarter. The company further noted that the demand for memory from AI servers is continuously increasing, and this trend is expected to continue until 2025.
<h2>How do the two giants view this situation?</h2>
In response to this situation, Samsung's chip division head, Koh Dong-jin, publicly apologized on October 8 after releasing preliminary profit forecasts. He stated, &#34;Our performance did not meet market expectations, which has raised concerns.&#34; He vowed to overcome this &#34;crisis&#34; and &#34;restore technological competitiveness rather than seek short-term solutions.&#34;
When releasing the financial report, Samsung Electronics stated, &#34;Due to investments in AI-related data centers, we expect an increase in demand for high-capacity and high-performance memory products, and we plan to expand the proportion of advanced processes.&#34; The company added, &#34;We will further expand HBM3E sales, develop and mass-produce HBM4 in the second half of next year, and actively expand sales of high-spec products, such as 128GB or higher DDR5 for servers and for mobile, PC, and servers.&#34;
Looking ahead, Samsung Electronics plans to mass-produce and sell HBM3E 8-layer and 12-layer products in the fourth quarter. HBM4 products are currently under development, with mass production expected in the second half of next year. The company also aims to meet the demand for high-capacity servers by accelerating the transition to 1b nanometers and utilizing 32 Gb DDR5. In the NAND sector, Samsung's goal is to expand sales of PCIe 5.0 based on V-NAND and consolidate its market leadership through the mass production and sale of high-capacity quad-level cells (QLC).
As for SK Hynix, reports indicate that they plan to focus on increasing sales of high-value-added products based on AI storage technology. The HBM3E 12-layer products that began mass production last month will be delivered as scheduled in the fourth quarter.
SK Hynix Vice President and Chief Financial Officer Kim Woo-hyun stated, &#34;With the highest management performance achieved in the third quarter of this year, we have solidified our position as the 'world's leading AI memory company.'&#34; He added, &#34;We will flexibly manage our product and supply strategies to meet market demand, ensure stable sales, and maximize profitability.&#34;
During the earnings call, Kim Mohan mentioned that although production capacity has reached its limit, the company's HBM capacity is still expected to double compared to last year.
This commitment is sure to please Nvidia, as it has promised investors to continue increasing GPU production.
He also denied claims that the rush to meet demand could lead to oversupply.
Mohan stated, &#34;Unlike general DRAM, HBM has a long-term contract structure, and negotiations for production volume and prices for 2025 have already been completed. We have a high level of foresight regarding demand, and given the strong demand for AI chips, we believe that HBM demand will exceed current expectations.&#34;
Regarding personal computers and mobile products, the company acknowledged that demand is recovering slowly compared to AI server memory, but as AI memory is optimized for individual devices, steady growth in demand is expected next year.
However, Mohan noted that new entrants in this segment and traditional markets are causing price fluctuations. He distinguished between traditional products like DDR4 and HBM or LPDDR5, stating that the company expects its blended average selling price &#34;to continue improving due to the increasing share of high-value products like HBM.&#34;
<h2>HBM, the Key to Competition</h2>
According to many articles, Samsung's struggles in the overall market stem from missing the AI opportunity. Losing the competition in HBM to SK Hynix is the root cause of the current situation for the storage giant. Recent reports have also indicated that since July 9, the company's stock price has dropped by 32%, resulting in a market value loss of $122 billion, making it the hardest-hit among global chip manufacturers
After facing repeated setbacks, Samsung seems to have received good news.
Samsung Executive Vice President Jaejune Kim stated that although the commercialization of its HBM3E chips had previously been delayed, the company has made &#34;significant progress&#34; in testing with major customers, presumably Nvidia. Reports indicate that Nvidia holds about 80% of the global AI chip market share, and if this is confirmed, it could significantly boost Samsung's HBM sales.
Kim added that Samsung expects HBM3E sales to improve in the fourth quarter and plans to expand to more customers. Samsung's statement has raised concerns about a potential oversupply in the HBM chip market, putting pressure on the stock prices of other semiconductor companies like SK Hynix and Micron.
To better compete with SK Hynix, reports in September indicated that Samsung Electronics would collaborate with TSMC to jointly develop HBM technology and services, starting with unbuffered HBM4 chips, which are expected to enter mass production in the second half of 2025. Samsung intends to leverage this collaboration to supply &#34;customized chips and services&#34; to customers like Nvidia and Google.
Analysts noted that if Samsung and TSMC decide to jointly develop unbuffered HBM4 chips, it would mark the first collaboration between the two companies in the AI chip sector. Dan Kochpatcharin, head of TSMC's ecosystem and alliance management, emphasized that as memory processes become increasingly complex, collaboration with partners is more important than ever.
As for SK Hynix, the company is reportedly continuing to transition its production capacity from existing HBM3 products to eight-layer HBM3E products and plans to start supplying 12-layer HBM3E products in the fourth quarter. At that time, SK Hynix expects HBM sales (which accounted for 30% of SK Hynix's total DRAM revenue in the third quarter) to reach 40% in the fourth quarter.
The company stated that shipments of the fifth-generation HBM3E products from July to September exceeded those of the previous generation HBM3 chips.
Additionally, the company noted that shipments of the latest 12-layer HBM3E chips are expected to account for more than half of the company's total HBM product shipments in the first half of next year.
SK Hynix also pointed out that demand for AI chips will continue to grow, alleviating concerns about a potential decline in demand for HBM products.
During a financial report conference call, SK Hynix stated, &#34;It is still too early to talk about a slowdown in demand for AI chips, as we expect higher demand for computing power and computing resources in the future.&#34;
Regarding the next generation of HBM, SK Hynix Vice President Kim Chun-hwan revealed during a keynote speech at SEMICON Korea 2024 a month ago that the company plans to start mass production of HBM 4 before 2026, claiming that this will drive significant growth in the AI market
<h2>Final Thoughts</h2>
In fact, HBM cannot fully explain the current situation of both parties.
Some media have bluntly stated that the memory chip business was once the most reliable and profitable business for Samsung Electronics, but it is now precarious. Samsung Electronics has indeed failed to secure a leading position in the high-end AI memory chip sector represented by high bandwidth memory (HBM), and in the traditional or less advanced memory chip sectors, Chinese companies are also catching up. For Samsung, wafer foundry and LSI are also two other factors that will impact their future development.
SK Hynix, on the other hand, has a relatively simpler task, only needing to cope with the uncertainties brought by the storage market.
As the semiconductor industry continues to evolve, competition between Samsung Electronics and SK Hynix remains fierce. Both companies are striving to innovate and capture market share in a rapidly changing technological environment. The next few quarters will be crucial in determining whether Samsung can regain its leading position or whether SK Hynix will continue to surpass its competitors in the semiconductor field.
Author of this article: Semiconductor Industry Observer, Source: Semiconductor Industry Observer, Original title: &#34;Korean Chips, A Change is Coming&#34;

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South Korea's semiconductor industry experienced its first production decline in 14 months in September, with a 3% drop in output and a significant slowdown in shipment growth. Meanwhile, SK Hynix's profits surpassed Samsung for the first time, marking a significant shift in the global semiconductor competitive landscape. Samsung Electronics' semiconductor division's operating profit fell short of expectations, while SK Hynix achieved an operating profit of 7.03 trillion won in the third quarter, setting a new record

- In September, South Korea's semiconductor production fell by 3%, marking the first decline in 14 months, while shipments slowed significantly.  
- SK Hynix reported record profits, surpassing Samsung for the first time, highlighting a shift in the global semiconductor landscape.  
- Both companies are adapting to changing market demands, with Samsung focusing on high-bandwidth memory and SK Hynix capitalizing on AI-related memory products, intensifying their competition.

Korean chips, a change is coming