According to TrendForce, prices for 4Q22 contracts were mostly finalized in October in contract market. The QoQ decline in the overall DRAM ASP has now reached 18~23%. This discrepancy is due to the fact that Samsung maintains a rather aggressive approach for pricing. Regarding 1Q23, TrendForce has revised the QoQ decline in the overall ASP from 5~10% to 15~20% provided that Samsung continues to be this competitive. TrendForce is also not ruling out the possibility that prices could drop by more than 20% for some types of DRAM products.
As for spot market, October saw spot transactions at their lowest level so far for this year. Moving into November, the ongoing decline in DRAM spot prices will unlikely ease anytime soon as China maintains its strict zero-COVID policy and enforces lockdown for local outbreaks. Furthermore, the major DRAM suppliers have made substantial price concessions in their contract negotiations, thereby creating downward pressure on spot prices as well. TrendForce has observed that the average spot price of the mainstream 1Gb DDR4 chips has been falling rapidly since October 24 with the daily decline exceeding 1%.
Until November 9, the sequential drop in the average spot price of 1Gb DDR4 chips has reached 8.36%. At the same time, spot prices of server DRAM modules have now fallen below the lowest point in the previous cyclical downturn and arrived around US$70. This indicates that there is a considerable room for a further drop in contract prices in 1Q23. Regarding weekly change in the spot price trend of the mainstream chips (i.e., DDR4 1Gx8 2666MT/s), the average spot price slid by 2.30% from US$ 2.222 last week to US$2.171 this week.
The U.S. Department of Commerce announced new semiconductor restrictions on October 7 in the United States. In addition to existing restrictions on the logic IC sector, this new update extends to the memory category. In addition to Chinese-funded enterprises, the extent of these restrictions stipulates foreign-owned production centers located in China will also need to apply for approval on a case-by-case basis in order to continue to obtain manufacturing-related equipment. The US ban has far-reaching effects and may extend to the global chip industry.
U.S. ban hobbles China’s semiconductor industry, affecting foundry and memory industries
The U.S. Department of Commerce announced a series of chip export control measures on the 7th, which mainly restrict China’s ability to obtain advanced computing chips, develop supercomputers, and manufacture advanced semiconductors.
However, relevant restrictions also prohibit third-country companies such as TSMC from using US-made equipment to service Chinese customers without U.S. approval in some cases. According to TrendForce, a market research agency, the ban will expand the scope of these restrictions. In the future, it will target American companies, including CPUs, GPUs, and AI accelerators, used in HPC fields such as datacenters, AI, and supercomputers. All of these items will require review before export to China. In addition, foundries may no longer be able to manufacture any of the above-mentioned HPC-related chips for any Chinese IC design house.
TrendForce believes, regardless of whether the client is a Chinese or American IC design house, most HPC-related chips are currently manufactured by TSMC with mainstream processes at the 7nm, 5nm, or certain 12nm nodes. In the future, whether the situation is American factories no longer being able to export to the Chinese market or Chinese factories being unable to initiate projects and mass produce wafer starts, it will all have a negative impact on the future purchase order status of TSMC’s 7nm and 5nm processes.
In terms of memory, according to the new specifications announced by the U.S. Department of Commerce, the DRAM portion of sanctions will be limited to the 18nm process (inclusive) and equipment must be reviewed by the Department before import. This move will greatly restrict or delay the sustainable development of China’s DRAM sector and China’s memory manufacturers will be the first to bear the brunt of these sanctions.
TrendForce indicates that CXMT possesses the largest memory market share for a Chinese company in the domestic Chinese market. Since 2Q22, the company has been committed to moving from the 19nm process into the 17nm process. Although the purchase of machinery to fulfill future needs had been accelerated before the ban, volume is still insufficient. CXMT continues to build new plants, including Phase 2 in Hefei and SMBC (SMIC Jingcheng), which is in discussion with SMIC. All of these projects will face difficulties in obtaining equipment in the future.
The C2 plant of SK hynix’s DRAM production center in Wuxi is also affected by the restriction order. The factory accounts for approximately 13% of the world’s total DRAM production capacity and its process has evolved to 1Ynm and more advanced nodes.
In terms of NAND Flash, TrendForce indicates that the import of NAND production equipment into China will be further restricted in the future, especially for equipment used in the manufacture of product of 128 layers and above (inclusive), requiring prior approval before import. It is estimated that this ban will significantly impact the long-term plans of China’s YMTC to upgrade its factory campuses, restrict YMTC from further expanding its customer base as the ban may will greatly limit non-Chinese customers’ adoption and consideration of YMTC products, and impact Samsung’s Xi’an plant and Solidigm’s process migration plan in Dalian.
U.S. temporarily exempts several suppliers as ban disrupts supply chains
In order to mitigate excessive impact of the U.S. imposed China chip ban on the semiconductor industry, the U.S. recently exempted several semiconductor companies (including in the United States, Taiwan, and South Korea) from certain restrictions.
According to Wall Street Jounal, Intel, SK Hynix, and Samsung have all received one-year exemptions. SK Hynix also issued a statement stating that the company has completed negotiations with the U.S. Department of Commerce and has obtained approval to provide equipment and items required for the development and production of DRAM semiconductors in Chinese manufacturing plants without additional licensing requirements. The authorization period is one year.
In addition, Nikkei Asia News also quoted sources as saying that TSMC has also received a one-year exemption to continue ordering U.S. chip manufacturing equipment to expand its Chinese plant. According to people familiar with the matter, the U.S. government has assured TSMC that the equipment will be shipped to its Nanjing fab, which means the company’s China’s development plan remains unchanged and is progressing smoothly.
Current U.S. sanctions on China have extended their reach to strike at HPC and sectors such as aerospace, automotive market, and military industry. TrendForce indicates, the market for high-end computing chips (including CPU, GPU, etc.) has borne the brunt of these restrictions at this stage, while those providing related storage such as DRAM and NAND Flash also face potential supply disruption. At present, this not only includes domestic companies in mainland China but also extends to related US-based suppliers. Among them, server companies that rely on high-intensity computing will face greater scrutiny.
Impact analysis on server terminal shipments
In terms of server terminal shipments, since relevant component suppliers have not yet been able to confirm whether services provided by the four major cloud service providers (CSPs) in China, Baidu, ByteDance, Alibaba, and Tencent, involve military use, before CSPs sign MOUs (memoranda of understanding), component manufacturers may temporarily delay shipments to the Chinese market. However, TrendForce believes, due to the fact that current CSP buyers’ component inventories remain sufficient, the short-term impact on global server market shipment performance is relatively low and long-term impact depends on the evolution of the US Department of Commerce’s rules.
Huawei and Sugon, two companies that have received attention at this stage due to the US ban, have previously withdrawn from the x86 server market and turned into cloud business providers and whole server delivery has been transferred to other domestic OEMs and outsourced computing power leasing, so as not to be affected by sanctions. However, due to the previous CPU ban, Sugon has turned to AMD to obtain authorization for localized chips, which may be significantly curtailed by this ban. In 2022, Sugon’s market share in the overall server market will be approximately 2.3% and 8.5% of the Chinese market.
TrendForce believes, it cannot be ruled out that relevant Chinese OEMs may have server products that may be rendered to government supercomputing centers in the future. Inspur, H3C, and Lenovo will face more exacting future scrutiny and, if consequences intensify, the mainland Chinese industrial chain may feel direct effects. Although commercial servers are not currently on the list of directly restricted items, if friction between the United States and China intensifies in the future, it cannot be ruled out that the U.S. Department of Commerce will add more potentially risky Chinese server OEMs and CSPs onto the UVL list. If certification cannot be realized within 60 days of being included in the UVL list, these entities will be included on the entity list. The worst case scenario will be a future trend of negative growth in Chinese server demand.
Since the restrictions enumerated in this ban are primarily concentrated in the HPC field, the greatest factor affecting Sugon is the company largely providing server OEM to government departments including in supercomputers, military aerospace, and government server farms. At present, there are 8 national-level supercomputing centers in mainland China and the supercomputer located in the center of Wuxi is the headquarters of China’s self-developed chips including the self-developed Sunway TaihuLight. As the U.S. Department of Commerce continues to strengthen its sanctions, China’s supercomputing technology and domestic research capabilities will be severely damaged in the future.
Impact analysis on GPU and CPU sectors
At present, companies utilizing high-end graphics cards are primarily concentrated in the HPC sector. In terms of CSPs, Alibaba and Baidu are the largest companies in mainland China. These two CSP companies account for up to 60% of the market share of GPU usage in China. Before the previous ban at the end of August, Chinese CSP operators had to submit purchase applications before procurement but they could not apply at all after the ban. However, based on the premise that buyer inventory levels on hand remain high and the supply of goods through distribution channels is sufficient, no effect on demand is forecast until 1H23. Nonetheless, it will be a challenge in the long-term. Since the ban expressly prohibits supercomputing center applications such as HPC, TrendForce assesses that GPU servers used by supercomputing centers will be directly affected, which accounts for up to 30% of China’s GPU market.
In terms of chip computing performance control, ECCNs 3A090 and 4A090 are newly added sanctioned items and chips with a total processing performance of more than 4,800 (inclusive) calculated by TOPS will be restricted. GPUs are usually used to directly assist in performing complex operations. Basically, NVIDIA’s A100 PCIe Gen4 and AMD’s MI250 OAM Module exceed the 4,800 limit. With new high computing performance products restricted in the future, development of server acceleration computing in China will take a hit.
However, the computing performance of most server CPU products is generally lower than the provisions of the ban. Only Chinese-made chips such as Tianjin Haiguang face direct restrictions and other CPUs such as Intel and AMD servers will not be subject to prohibition. At this stage, Intel and AMD will sign MOUs with relevant mainland Chinese manufacturers to ensure that related products cannot be used in military and supercomputing fields before shipment. In today’s server CPUs, the computing performance of the commonly used Intel Ice Lake CPU series does not reach the limit imposed by U.S. sanctions.
Impact analysis on the memory sector
At present, Samsung and SK hynix have also suspended their supply of product to Sugon. If Sugon can clarify procured memory is not used for supercomputing, domestic server products, etc., the parties will be able to reach a consensus for shipment. In the long run, Korean companies are evaluating whether they need a written commitment from each customer to disavow using purchasing memory products in supercomputers. Therefore, some memory shipments may be affected before documents are signed. The industry generally believes that market inventory remains relatively abundant and there will be no substantial damage to the market in the short term. As far as SSD is concerned, the greatest utilization remains in the category of AI/DL (Deep Learning), since most of the data trained from DL must be stored in faster and more convenient SSDs for use in inference scenarios. If the suspension of shipments caused by the current ban cannot be rectified by relevant buyer agreements, the development of Chinese server manufacturers in related AI/DL fields may be hamstrung and a calamitous decline in the market penetration rate of enterprise SSDs from international manufacturers cannot be ruled out.
Impact analysis on the networking sector
There are three reasons for a relatively minor impact assessment on the well-connected suppliers in the networking sector. First, there are numerous networking suppliers and many of them are in China. Since the demand for key components is relatively small, Chinese suppliers should be able to keep up. Second, the mainstream process in this field is a mature process and future expansion is less restricted. Third, from the perspective of supplier shipments, after foundry assembly, packaging, and testing, there are multiple distribution channels for the circulation of the final product and it will be difficult to determine whether terminals are military use. However, from the perspective of long-term impact, there is a high probability that Chinese manufacturers will give priority to China’s local supply chain in the future to ensure future supply. This move will undoubtedly deepen the resistance of other suppliers’ shipments to China, so it is necessary to open up multiple shipping channels to stabilize market share.
The U.S. Department of Commerce announced new semiconductor restrictions on October 7 in the United States. In addition to existing restrictions on the logic IC sector, this new update extends to the memory category. In addition to Chinese-funded enterprises, the extent of these restrictions stipulate foreign-owned production centers located in China will also need to apply for approval on a case-by-case basis in order to continue to obtain manufacturing-related equipment. In addition, the new restrictions increase the difficulty for China to obtain any chips that may be used for military purposes through imports.
According to TrendForce research, the scope of this update is primarily limited to 16nm, 14nm, or more advanced proceses for logic ICs (such as FinFET or GAAFET), 18nm or more advanced processes for DRAM, and 128-layer or higher products for NAND Flash chips.
Analysis of impact on foundry industry
In terms of foundry equipment supply, after SMIC was included on the Entity List in 2020, according to TrendForce investigations, the US Department of Commerce targeted US equipment manufacturers who wished to export equipment used for processes below 16nm (inclusive) to Chinese fabs not included on the Entity List including HuaHong Group, etc., and even foreign-owned production centers located in China, instituting a review before export can be implemented. Therefore, most Chinese fabs are currently focusing their production expansions on processes 28nm and above. As for non-Chinese wafer foundries, only TSMC Nanjing is focused on 28nm expansion and has no plan for advanced processes.
TrendForce indicates, although Chinese fabs are actively partnering with domestic Chinese, European, and Japanese equipment manufacturers in an attempt to develop non-US centric production lines and have turned to the development of 28nm and above processes, the ban is completely stifling the possibility for China to develop and expand advanced processes 16nm and below and the expansion of processes 28nm and above is also subject to a protracted review process.
In addition, the US ban will expand the scope of its restrictions following the inclusion of high-end GPUs such as NVIDIA’s A100/H100 and AMD’s MI250 in the HPC sector into the range of sanctions at the end of August. In the future, it will target US manufacturers, including HPC sector CPUs, GPUs, and AI accelerators used in datacenter, AI, and supercomputer applications, requiring review before such items can be exported to China. In addition, foundries may no longer be able to manufacture any of the above-mentioned HPC-related chips for any Chinese IC design houses. TrendForce believes, regardless of whether the client is a Chinese or American IC design house, most HPC-related chips are currently manufactured by TSMC with mainstream processes at the 7nm, 5nm, or certain 12nm nodes. In the future, whether the situation is American factories no longer being able to export to the Chinese market or Chinese factories being unable to initiate projects and mass produce wafer starts, it will all have a negative impact on the future purchase order status of TSMC’s 7nm and 5nm processes.
Analysis of impact on memory industry
TrendForce indicates, according to the new specifications announced by the U.S. Department of Commerce, the DRAM portion of sanctions will be limited to the 18nm process (inclusive) and equipment must be reviewed by the Department before import. This move will greatly restrict or delay the sustainable development of China’s DRAM sector. CXMT possesses the largest memory market share for a Chinese company in the domestic Chinese market. Since 2Q22, the company has been committed to moving from the 19nm process into the 17nm process. Although the purchase of machinery to fulfill future needs had been accelerated before the ban, volume is still insufficient. CXMT continues to build new plants, including Phase 2 in Hefei and SMBC (SMIC Jingcheng), which is in discussion with SMIC. All of these projects will face difficulties in obtaining equipment in the future.
In addition to CXMT, the C2 plant of SK hynix’s DRAM production center in Wuxi is also affected by the restriction order. The factory accounts for approximately 13% of the world’s total DRAM production capacity and its process has evolved to 1Ynm and more advanced nodes, which means that subsequent continuous addition of equipment required for production requires approval on a case-by-case basis.
TrendForce has also observed, considering geopolitics, although current market demand is sluggish and supply and demand are seriously imbalanced, the three major manufacturers in the DRAM market still plan to increase production capacity in their home countries in the next 10 years and continue to reduce the proportion of production in China.
In terms of NAND Flash, TrendForce indicates that the import of NAND production equipment into China will be further restricted in the future, especially for equipment used in the manufacture of product of 128 layers and above (inclusive), requiring prior approval before import. It is estimated that this ban will significantly impact the long-term plans of China’s YMTC to upgrade its factory campuses as well as Samsung’s Xi’an plant and Solidigm’s process migration plan in Dalian.
TrendForce indicates that this ban will restrict YMTC from further expanding its customer base. At this stage, YMTC has been aggressively sending SSD products out for verification, hoping to successfully infiltrate the supply chain of non-Chinese customers in 2023. In the future, as the impact of the ban materializes, the US government will impose stricter restrictions on the development of China’s memory industry which will greatly limit non-Chinese customers’ adoption and consideration of YMTC.
According to TrendForce forecasts, average overall DRAM pricing in 2Q22 will drop by approximately 0~5%, due to marginally higher buyer and seller inventories coupled with the demand for products such as PCs, laptops, and smartphones being influenced in the short-term by the Russian-Ukrainian war and high inflation weakening consumer purchasing power. At present, the only remaining source of demand is on the server-side, so overall DRAM stocks will remain oversupplied in 2Q22.
In terms of PC DRAM, PC OEMs are adopting a conservative stocking strategy for orders in 2Q22 due to the Russian-Ukrainian war, which may continue affecting orders during peak season in 2H22, and revising 2022 shipment targets downwards. Additionally, the overall supply of bits is still growing, so the PC DRAM price slump in 2Q22 will further expand to 3~8% and may continue to deteriorate.
In terms of server DRAM, the current server DRAM inventory level held by cloud service providers and enterprise clients is roughly the same as the amount held in 1Q22, and this relatively high inventory level is not enough to support a price reversal. The supply rate of server DRAM, of which there is still an oversupply, remains higher than 100% and this situation will continue into 2Q22. However, a price decline in 2Q22 is expected to converge at 0~5%, coinciding with the peak seasonal stocking surge.
In terms of Mobile DRAM, due to a number of factors such as high inflation, changes in the pandemic situation in various countries, and the Russian-Ukrainian war, it cannot be ruled out that the production volume of smartphones may continue to decline while smartphone brands will surely be more careful when planning production and material preparation. On the supply side, technology migration in manufacturing has offset the shift of DRAM production to the server DRAM field beginning in 2H21, maintaining the level of the mobile DRAM bit supply. For this reason, since the production targets of smartphone brands have fallen and the average memory capacity of a single device has not significantly improved, oversupply is forecast to continue in 2Q22, with pricing set to decline approximately 0~5%.
In terms of Graphics DRAM, the demand side has been affected by weak virtual currency prices in recent months which has gradually started to assuage demand for graphics cards. The supply side is facing supply constraints and a vendor shortage since Micron will withdraw from the GDDR6 8Gb supply in 2Q22. This will cause a temporary supply-demand imbalance for Graphics DRAM as the capacity allocation of Korean manufacturers fail to immediately fill the above-mentioned shortfall. Even if terminal demand slows down, considering GDDR6 8Gb remains mainstream in the current market, it will take time for manufacturers to convert specifications to 16Gb. Pricing is forecast to increase by 0~5% in 2Q22.
In terms of consumer DRAM, demand for DDR3 from specific products such as WiFi 6 and 5G base stations remains robust. The quantity of DRAM supplied to the market varies from manufacturer to manufacturer. Samsung and SK Hynix have gradually reduced production of DDR3, while Taiwanese firm Nanya Tech has recently shifted production to DDR3, owing to DDR3’s higher gross profit margin. Due to relatively stable demand and limited shipments from Korean manufacturers, the price of DDR3 will increase by 3~8% in 2Q22 with DDR4 maintaining a downward price trend.