A Perfect Storm Slams the Memory Markets

Early in 2022, the near-term prospects for the memory markets, including both DRAM and NAND, were decidedly bright, despite the backdrop of tenuous geopolitical dynamics with the conflict in Ukraine and worsening China/US relations. Bit production growth in 2022 for both markets was predicted to be in line with demand, and prices for the year were expected to be relatively healthy (down ~3% for NAND and up ~5% for DRAM). Early in the year, it appeared that the COVID-derived supply chain complications of 2020 and 2021 were diminishing, and things were returning to some semblance of normality. According to Yole Intelligence, part of Yole Group’s DRAM and NAND Market Monitors, the promising demand landscape and rational production growth outlook prompted enthusiastic forecasts of record revenues for both DRAM and NAND.

In the final weeks of Q2 2022, however, circumstances quickly began to change, and the hopes of banner years for the memory markets were dashed. A perfect storm of demand-side developments crashed into the memory markets, and not even the most rational production plans for 2022 could withstand the onslaught of bad news.

What went wrong?

There were, broadly speaking, three developments that began in the second quarter that brought about an abrupt change in near-term prospects for the memory markets. The first was the rapid deterioration in market sentiment. The US Index of Consumer Sentiment (ICS), for example, plummeted from above 70 at the beginning of 2022 to 50 in June (for reference, the ICS averaged ~100 for 2018-2019). While the ICS has bounced back to over 58 in August, it is still lower than it has been at any other time in the last ten years and highlights consumer ill sentiment about their near-term prospects.

Similarly, Bloomberg’s survey of economists showed that in July nearly 50% of economists believed a recession would hit the US in the next 12 months, up from just 20% in March 2022. This shift in sentiment is largely driven by the persistent presence of inflation, prompting central banks to raise interest rates which, many suspect, will have the knock-on effect of curtailing economic activity.
Sentiment alone did not move the memory markets; rather, it was companies’ reactions to the growing economic storm clouds that hurt them. Memory customers, many of which were sitting on elevated memory inventories (in no small part due to the COVID-related supply chain challenges of the past few years), began depleting inventories to strengthen their balance sheets. As customers, both large and small, began to eat through their inventories, their memory purchases fell sharply.

The second development was China’s persistent adherence to its “Zero COVID” policy. While the policy had been well established by Q2 2022, the extent of the continuing lockdowns and the impact of the lockdowns were underestimated. As late as August 2022, over 70 major cities were still under full or partial lockdown –affecting more than 300 million people. While much of the developed world was shifting into the post-COVID era, strict lockdowns remained common in China. For many in the world’s largest market, the priority remains the day-to-day necessities and not smartphones, gaming systems, or PCs. The third development that has softened global memory demand Is the further delay of Intel’s Sapphire Rapids server products. This oft-delayed product was at one point expected to launch in 2021. In June 2022, Intel revealed that the chips wouldn’t ship until late 2022…by August, the schedule had slipped to Spring 2023. Sapphire Rapids is a highly anticipated product and is particularly important for the DRAM market as it will be the first server CPU from Intel that will support DDR5.

Additionally, this will be the first server CPU from Intel that will support PCIe gen 5.0 enterprise SSDs. For the DRAM market, in particular, the Sapphire Rapids delay complicates things for suppliers, who must now delay their DDR5 ramp since homes for the new memory standard will be limited until Sapphire Rapids is broadly available.

What Can Suppliers Do?

When the market is oversupplied, suppliers have only a few options available to them to help restore balance. They can reduce investments and thereby lower future production growth, build inventory and thereby limit the amount of memory entering the market, and idle capacity, reducing supply in the near term and counteracting ballooning inventories.

Suppliers have been quick to cut their near-term spending plans to bring the market back into balance. However, the lead time of spending cuts to impact memory production is, at best, six months, and often 6-12 months. This means that actions taken in the summer of 2022 will not impact this year…all eyes are now on 2023. DRAM capex cuts are expected to drop production growth in 2023 to <10% y/y, while cuts in the NAND market are expected to lower 2023 production growth to <20% y/y.

Suppliers have been willing to build inventory recently, but how high are they willing to go? Suppliers may feel confident in their production plans for next year, but their demand visibility continues to be obscured by customer inventory, supply chain disruptions, and product delays. There are far more questions about near-term demand than there are certainties:

• Given the current weak demand, how long will customer inventories last?
• Will Sapphire Rapids launch in Spring 2023 or be delayed yet again?
• Will China’s adherence to zero COVID lessen after the Communist Party congress in October?
• How long will central banks continue raising interest rates?
• Will jobless rates soar if/when a recession hits?

The uncertainties put memory makers in a challenging position. They are unable to look to 2023 and feel confident about demand. As such, they are unwilling to build inventory sufficiently high to stave off the precipitous pricing declines that have occurred over the last few months. Instead, memory makers, like their customers, are paying close attention to their own balance sheets and are reluctant to let inventory pile up.

Another tactic open to suppliers, idling manufacturing capacity, is generally a last resort for the memory producers. It is almost always more profitable for suppliers to run fabs at maximum output than to let billions of dollars of depreciating memory equipment sit idle. DRAM profit margins are currently high enough that idling capacity will not be economically necessary in the near future. NAND profits, however, are low enough that idling capacity might soon become a necessity for all players. In fact, in recent weeks both Micron and Kioxia have announced utilization cuts, indicative of just how much memory conditions have deteriorated.

The next several quarters (or perhaps years) promise to be turbulent economic times and difficult waters for memory suppliers to navigate. Poor visibility of actual demand and little confidence about near-term forecasts have caused all memory suppliers to slash spending and move to a very conservative bias. For DRAM suppliers, the cuts to 2023 capital expenditure and their higher inventory levels will likely be enough to prevent the industry from losing money. Although the next 12 months will see margins heavily eroded, the structure of the industry and relatively high margins entering this downturn will likely ensure continued (though much lower) profitability.

The prospects for the NAND industry are less certain. Margins were much lower entering this turbulent time, and it appears no amount of future spending cuts will be enough to prevent some, if not all, suppliers from seeing NAND margins turn negative. This perfect storm may very well be the harbinger of consolidation, with a healthier, more vital industry emerging when the storm clouds eventually clear.

Walt Coon
Vice President of NAND and Memory Research
Semiconductor, Memory and Computing Division, Yole Intelligence (part of the Yole Group)

Mike Howard
Vice President of DRAM and Memory Research
Semiconductor, Memory and Computing Division, Yole Intelligence (part of the Yole Group)