[One Year Trade Deficit]② Semiconductor Export Decline... Inventory Hits Highest Level in 10 Years

The slump in semiconductors, the largest export item in our country, also directly contributed to the prolonged trade deficit for the second consecutive year. In particular, the price weakness of memory semiconductor products such as DRAM and NAND, which have a large export share within semiconductors, dealt a direct blow to exports. Last month, semiconductor exports plummeted by more than 40% compared to the previous year, shrinking for the seventh consecutive month since August last year (-7.8%). Experts predict that the downward trend in major semiconductor product prices will continue until the first half of this year, and they foresee that the recovery of the trade balance may also take considerable time.

According to the Ministry of Trade, Industry and Energy on the 2nd, semiconductor exports last month amounted to $5.96 billion, a 42.5% decrease compared to the same period last year. Semiconductor exports have gradually declined since an initial 7.8% drop in August last year. The sharp decline of over 40% in exports occurred for the second consecutive month, following January this year (44.5%). Prices of memory semiconductors such as DRAM and NAND fell due to weak demand and inventory accumulation, which expanded the trade deficit. The fixed price of DRAM dropped from an average of $3.41 during January-April last year to $1.81 in January-February this year. The fixed price of NAND also fell from $4.81 during January-May last year to $4.14 last month. The high figures from February last year, which achieved the highest semiconductor export performance for that month in history ($10.37 billion, 23.8%), also contributed to the decrease in semiconductor exports last month. The share of semiconductors, which accounted for 23.8% of total exports in February last year, has dropped to about half at 11.9% as of last month.

Worsening Semiconductor Exports → Inventory at Highest Level in 10 Years

The recovery of semiconductor exports by the end of this year also remains uncertain. According to the Korea Eximbank's '2023 Semiconductor Industry Export Outlook,' NAND flash prices are expected to rebound in the third quarter of this year, but DRAM prices are anticipated to continue declining until the fourth quarter. Even if semiconductor demand improves from mid-year, Korea's semiconductor exports are projected to shrink by 11.5% year-on-year to around $116 billion.

The core reason for the sharp decline in semiconductor exports lies in weak demand caused by the global economic slowdown. As demand decreases, semiconductor inventories surge, and prices fall, creating a vicious cycle. The market views semiconductor inventory levels as the highest in 10 years. Last year's operating rate index also fell by 28.5%, from 134.9 at the beginning of the year to 96.4 at year-end. This is why the global semiconductor market is currently engaged in a battle against inventory. Woo Chang-hee, senior researcher at Hana Financial Management Research Institute, said, "The current semiconductor inventory level is estimated by the industry to be more than 20 weeks higher, which means that even without producing any semiconductors, sales could be sustained for about five months solely from inventory."

The increasing inventory has also led semiconductor manufacturers to postpone equipment imports or artificially reduce production by adjusting wafer input volumes, which is another negative factor. In fact, SK Hynix is reducing wafer input volumes to cut production, focusing on low-profit products, while Samsung Electronics is optimizing production lines and transitioning to next-generation product processes to achieve natural production cuts instead of artificial reductions. This suggests that the share of domestic semiconductor exports is expected to continuously decline over the coming months.

AI Chatbot Boom, Demand Recovery Expected

On the other hand, recent expansion of artificial intelligence (AI) services is expected to act as a positive factor accelerating the recovery of the semiconductor industry. The boom of the AI chatbot 'ChatGPT' has rapidly increased demand for specialty memory such as HBM (High Bandwidth Memory) and PIM (Processing-In-Memory). Most of these specialty memories are produced by Samsung Electronics and SK Hynix. Not only ChatGPT but also the future expansion of AI-based platforms and services could continuously increase demand for ultra-high-performance memory semiconductors, which is a positive signal for our companies. The potential resumption of data center investments in the second half of the year is also noteworthy. As China lifts city lockdowns and reopens its economy, expectations are growing that large-scale data center investments will follow. Previously, Chinese companies announced plans to invest 700 billion yuan (130 trillion won) in cloud services over the next 3-5 years starting from 2020, but these plans were delayed due to COVID-19.

The government has also launched comprehensive support to restore semiconductor exports. It is promoting the training of semiconductor-related personnel and strengthening R&D tax benefits. First, together with companies, it plans to secure 2,365 master's and doctoral-level experts over the next 10 years by sharing a total project cost of 222.8 billion won equally. It is also pushing to expand the tax credit rate for semiconductor facility investments. The plan is to accelerate the passage of the Restriction of Special Taxation Act in the National Assembly, which would raise the current 8% credit rate for large companies to 15%. Researcher Woo predicted, "As semiconductor demand revives from the second quarter, inventory reduction and semiconductor price increases will follow, leading to a gradual recovery in exports, with growth resuming from the fourth quarter."