[Kim Pyeonghwa's Peace and Chips] Memory Semiconductor Industry Returns to 'Chicken Game'? ... What's It About

Samsung Electronics and SK Hynix Diverge on Production Cut Plans After Q3 Earnings
Samsung Electronics Sticks to Original Plan, Opens Door to Chicken Game
Past Chicken Game Led to Bankruptcy of Germany's Qimonda and Japan's Elpida
Samsung: "Responding to Gradual Demand Recovery"

Editor's NoteSemiconductors. We hear about them every day, but explaining the concept is quite challenging. They are often called the rice of modern industry, so it's something you must know about, yet articles and books on semiconductors tend to be so difficult that people avoid them. But did you know that semiconductors are actually quite fascinating? Even a single semiconductor component hides the mechanisms of the entire industry and the interests of nations. Peace and Chips will spoon-feed you the hidden contexts and meanings of this somewhat uncomfortable semiconductor field. Just place your spoon and enjoy.

[Asia Economy Reporter Kim Pyeonghwa] Last week, as SK Hynix and Samsung Electronics consecutively announced their third-quarter earnings, there has been a flood of speculation about whether a 'chicken game' is unfolding again in the memory semiconductor industry. This is because, amid the sluggish memory market, global memory players including SK Hynix have chosen to cut production, while Samsung Electronics has maintained its investment stance. Since the current memory industry landscape was shaped by a chicken game, this issue naturally draws significant attention within the industry.

The chicken game is a type of game theory. It originated from an American car game often seen in movies. Two drivers face each other and drive straight ahead simultaneously; the one who swerves first to avoid a collision loses. Locally, cowards were called "chickens," hence the name chicken game.

In the market, the term is commonly used to describe a cutthroat competition among rival businesses. It usually occurs when multiple players compete in the market. Despite difficulties such as price drops and profit declines caused by overheated competition, companies endure until their competitors drop out, becoming the ultimate winner. The remaining few players then hold a significant market share, making it a profitable situation in the end.

In the semiconductor industry, chicken games occurred in the 2000s and 2010s. In the DRAM market, a key memory semiconductor product, Taiwanese and Japanese companies continued to increase production, leading to oversupply and significant price declines, which caused a series of profit drops in the industry. Companies unable to endure losses from selling at a loss began to collapse. In 2007, Germany's Qimonda and in 2012, Japan's Elpida filed for bankruptcy due to deficits. These were major players in the market, so these events had considerable repercussions.

As a result, the current DRAM market is divided among three players: domestic companies Samsung Electronics and SK Hynix, and the U.S. memory company Micron. Being an oligopoly, when memory demand was high, the few players shared the increased revenue and grew profits. However, this year, a cold wave hit the memory industry, raising concerns even for them. With inflation and weak demand causing complex external economic difficulties, leading to increased memory inventory and price drops, SK Hynix and Micron recently announced in their earnings reports that they would reduce investment and production. Meanwhile, Samsung Electronics stated it would not engage in artificial production cuts and would maintain investment from a long-term perspective.

Consequently, there is an interpretation within the industry that Samsung Electronics, as the top player, is trying to secure market dominance through a chicken game. If Samsung can withstand price declines due to its cost competitiveness compared to other competitors, there is concern that the market share of companies that choose to cut production will shrink. Although there are only three major players in the DRAM market, the NAND flash market, another memory segment, has more than six competing companies, which adds weight to this interpretation. Especially in the NAND market, the downturn is expected to last longer than in the DRAM market, meaning many companies must endure a prolonged cold wave.

Of course, there is also an argument that Samsung Electronics has no reason to pursue a chicken game in a market where competition has already ended and an oligopoly has formed. Samsung Electronics itself stated on the day of its third-quarter earnings announcement that it would not reduce production or investment separately, as the market recovery is expected to proceed gradually from next year, and it is responding to long-term demand. The semiconductor market experiences periodic booms and busts; while past cycles occurred every 4-5 years, the current fluctuations can happen within 1-2 years, emphasizing the need to respond accordingly. Securities analysts evaluate that this could ultimately create a favorable environment for Samsung Electronics.