Morgan Stanley warns of challenges, but experts remain optimistic about AI demand

Despite Morgan Stanley’s warning, experts forecast stability in South Korea’s semiconductor industry due to strong AI demand

Graphics by Kim Sung-kyu·DALL·E 3

Earlier this year, Samsung Electronics (Semiconductor Division) and SK Hynix each reported around 8 trillion won (about $60.22 billion) in operating profit, sparking optimism that South Korea’s semiconductor industry had finally turned the corner after a four-year slump, signaling a “spring for semiconductors.” However, a recent report titled “Winter Looms” by American investment firm Morgan Stanley has cast a shadow over this optimism, warning that South Korean semiconductor companies are poised to face significant challenges. The report highlights that a drop in demand for memory semiconductors like DRAM, coupled with an oversupply of high-bandwidth memory (HBM), a critical AI component, could result in a prolonged downturn in the semiconductor market extending until 2026.

So, what has changed in the semiconductor industry in just a few months? And what is the outlook for this crucial domestic sector? To gain insights, we consulted senior industry insiders and experts. They generally concur that while the traditional DRAM market has deteriorated more than expected due to weak demand for PCs and smartphones amid economic slowdowns in the U.S. and China, a rapid industry decline is unlikely, thanks to ongoing demand for AI semiconductors in data centers.

Graphics by Kim Sung-kyu

The core of the “semiconductor winter” argument centers on the vulnerability of general-purpose DRAM, which makes up nearly half of the memory semiconductor demand used in smartphones and PCs. Concerns are mounting over the performance of Apple’s new iPhone 16 series, which has historically driven the smartphone market in the second half of the year. According to TF International analyst Ming-Chi Kuo, pre-orders for the iPhone 16 series have only reached 37 million units, marking a 13% drop from the previous model. Particularly notable is the continued slump in China’s smartphone market, which accounts for 20% of global demand. Counterpoint Research reports that smartphone shipments in China saw just a 2% uptick in the first quarter of this year compared to the same period last year.

The sluggish sales of smartphones and PCs have left manufacturers with excess general-purpose DRAM inventories from last year, pushing prices down. For instance, the price of PC DRAM (DDR4 8Gb) peaked at $2.10 in May but began to decline, reaching $2.05 last month.

◇The Rise of China’s CXMT

The aggressive expansion of ChangXin Memory Technologies (CXMT), China’s largest memory semiconductor company, is also contributing to the industry’s downturn. As China strives for self-sufficiency in semiconductors, the government is backing CXMT at a national level. CXMT’s low-cost DRAMs are increasingly being used in smartphones and home appliances made by Chinese manufacturers, posing a direct threat to Samsung Electronics and SK Hynix’s market share in China. A recent report by Nomura Securities predicts that CXMT’s DRAM production capacity, currently at 160,000 wafers per month, will rise to 200,000 by the end of this year and reach 300,000 next year. Morgan Stanley has cautioned that CXMT’s production expansion is already contributing to an oversupply of general-purpose DRAMs like DDR4. If CXMT continues to flood the market while smartphone and PC manufacturers are still holding significant inventories, DRAM prices could decline even further.

◇Samsung Electronics’ Pyeongtaek Plant Expansion

Another factor under scrutiny is the potential impact of Samsung Electronics’ new Pyeongtaek Semiconductor Plant 4 (P4). Originally intended to produce both DRAM and foundry (semiconductor contract manufacturing) lines, the plant has reportedly been repurposed to focus exclusively on DRAM production due to rising demand for memory semiconductors. The DRAM supply surplus could intensify when mass production at P4 begins next year.

Graphics by Kim Sung-kyu

While the outlook for the semiconductor industry may not be as promising as anticipated earlier this year, many believe it won’t be as dire as Morgan Stanley’s report suggests. The reasoning is that continued investment in AI will sustain demand for HBM and server memory semiconductors used in data centers. As one industry insider noted, “Although the recovery in PC and smartphone demand is slower than expected, sales of enterprise-grade large-capacity storage devices (eSSD) and advanced memory like DDR5 for AI data centers remain strong.”

Graphics by Kim Sung-kyu