The memory chip market, which has always been regarded as the "vane" of the semiconductor industry, recovered strongly in the first half of this year.

According to data recently released by CFM flash memory market, a professional storage market research organization, the global NANDFlash (non-volatile memory) market size increased by 18.6% quarter-on-quarter to $18.00 billion in the second quarter of 2024, and the DRAM (volatile memory) market size increased by 24.9% quarter-on-quarter to $23.42 billion. The global storage market grew 22.1% quarter-on-quarter to US$41.42 billion in the second quarter, up 108.7% year-on-year. In the first half of 2024, the global storage market size reached $75.33 billion, a year-on-year increase of 97.7%.

The reasons driving the recovery of the storage market include the recovery and return of the excessive market decline in the past two years, as well as the efforts of storage OEMs to actively reduce production and cut capital expenditures to promote the return of market supply and demand to balance. More importantly, the soaring demand for AI (artificial intelligence) computing infrastructure has brought new growth momentum to the storage industry.

Zhang Chi, chairman of Beijing Xinding Rongsheng Capital Management Co., Ltd., told the Economic Observer: "The integration of storage and computing is the optimal solution for computing in the AI era, and the increasing demand for computing power construction will definitely drive the growth of the storage market demand, and the demand for AI servers is the main driving force of the current storage market." ”

However, in recent times, the strong recovery of the memory market has also begun to show uncertainties: TrendForce, a well-known research institute in the semiconductor industry, recently released a research report that the shipments of memory module manufacturers in the consumer NANDFlash retail channel have dropped by 40% year-on-year in the second quarter of 2024, reflecting that the global consumer memory market is facing severe challenges and demand will not recover significantly in the second half of the year.

The

consumer memory market is facing serious challenges because PCs (personal computers) and mobile phones, which account for the majority of demand for memory chips, are growing far short of market expectations. Yang Yiting, an analyst at CFM flash memory market, said: "The storage market in the third quarter has stood at a crossroads, the server storage market is stable as a whole, and the consumer storage market is obviously under pressure. ”

The

marketing manager of a storage manufacturer in South China said: "Now, we are only cautious about the market outlook, not optimistic or pessimistic, and AI may not be the savior of storage for the time being." ”

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Since the beginning of this year, the strong recovery of the memory chip market is first due to the "low starting point".

Since the second half of 2022, consumer electronics demand has continued to weaken, leaving the storage market in a "quagmire" of imbalance between supply and demand. The price of NANDFlash and DRAM has fallen for four consecutive quarters since the third quarter of 2022, leaving many storage companies with huge financial losses between 2022 and 2023. "Sluggish terminal demand" is the common reason for the losses mentioned by these companies on the earnings call.

In the storage adjustment cycle that will start in the second half of 2022, the demand for consumer electronics is weak, and the oversupply market situation has caused storage prices to fall endlessly, and the original storage factory is facing the dual pressure of continuous losses and capacity idling.

Yang Yiting said: "The original storage factory tried to rebalance the relationship between supply and demand by reducing production, but the production reduction was time-limited and could not quickly alleviate the imbalance between supply and demand. As a result, the original storage manufacturers have changed their attitudes, are unwilling to ship at low prices, and tighten supply, strongly raising prices, and the market pattern has changed from competing for market share to restoring profitability as the first priority. ”

Therefore, after a series of "self-help" measures such as cutting capital expenditures, continuing to reduce production, raising prices and clearing inventory, the market of memory chips has begun to pick up since the third quarter of 2023.

"In the first half of this year, the price of memory chips has risen by more than 40%, which shows that suppliers are strongly pushing up prices and intending to reverse the loss situation." Ao Guofeng, senior analyst at TrendForce, said.

Yang Yiting also said: "In the first half of 2024, the stocking enthusiasm of terminals such as mobile phones, PCs and servers is high, the upstream storage original factories optimize inventory to improve profitability, and the overall market supply and demand are in a tight balance, so the storage market has seen a comprehensive increase in volume and price in the first half of the year." ”

She said that the current new storage demand driven by AI is mainly from the field of AI servers, which need to be equipped with high-performance and high-capacity HBM, DDR5 and eSSD (enterprise solid state drives). For example, the B200 (AI training chip launched by NVIDIA) is equipped with 8 24GB HBM3E, with a total capacity of 192GB, which is 36% higher than the 141GB capacity of the previous generation H200. In addition, AI servers are also actively replacing HDDs (hard disk drives) with QLCeSSD acceleration to optimize the total cost and operational efficiency of AI servers.

"As the adoption of SSDs by AI expands, orders for enterprise-class SSDs are in short supply, with prices increasing by more than 20% on average in the first three quarters of this year." Ao Guofeng said.

This kind of "supply exceeds demand" brought about by AI has now been truly reflected in the financial reports of storage manufacturers. For example, Samsung Electronics' sales revenue of NANDFlash and DRAM in the second quarter of this year reached US$6.141 billion and US$9.686 billion, respectively, an increase of 13.8% and 24.7% quarter-on-quarter. "Expanding investment in AI from hyperscalers is driving strong demand not only for HBM, but also for traditional DRAM and solid-state drives (SSDs)," the company's management said during the earnings call. Sales growth in HBM, DDR5 and other AI-oriented high value-added products, coupled with improved overall pricing, drove a significant increase in earnings in the second quarter compared to the previous quarter. ”

Zhang Chi told the Economic Observer: "In the future, the size of the AI server market will be about ten times that of mobile phones and computers, and the demand for storage for the construction of data centers far exceeds that of the consumer market." A server needs to be equipped with hundreds of memory modules, which is much more than mobile phones and computers. ”

In Yang Yiting's view, the long-term driving trend of AI on the growth of storage demand is certain, there is a trend of deep integration of AI large models and cloud services, large cloud service providers are actively investing in capital expenditure to build higher cloud service barriers, and edge devices are also increasing the training and deployment of AI large models.

Ao Guofeng emphasized that the server market will become a major area for the expansion of flash applications, driven by AI applications, and this trend is expected to continue through next year.

Structural contradictions

After the active production reduction of storage manufacturers to balance supply and demand and the new growth space brought by AI, the memory chip industry has the opportunity to steadily move towards a new round of growth cycle. However, since the second half of this year, the price of the storage spot market has continued to fall, casting a "shadow" on the recovery that the whole industry has been looking forward to.

According to CFM flash market statistics, the NANDFlash and DRAM spot price indices have been falling since hitting stage highs in May this year, and are now back to late 2023 levels. According to a recent research report, spot prices of memory for consumer products have begun to weaken, with prices falling by more than 30% in the second quarter compared to the first quarter.

The marketing manager of the aforementioned storage manufacturer told the Economic Observer: "The product barriers required for AI servers are relatively high, and the 'cake' is mainly eaten by overseas head manufacturers. ”

In the process of interviewing domestic storage manufacturers, the Economic Observer learned that compared with the pursuit of the blue ocean market of AI computing infrastructure, practitioners actually pinned their hopes on the explosion of AIPC and AI mobile phones at the beginning of the year, but after the thunder of AIPC and AI mobile phones, the "rain" has not fallen, and the recovery of the consumer electronics market is far less than expected.

In Yang Yiting's view, the domestic consumer market has not yet recovered, and some smartphone brands have begun to lower their sales growth expectations in 2024. At the same time, with the rise in the price of components, the hardware cost pressure of mobile phone manufacturers is huge, and some mobile phone manufacturers have begun to downgrade the configuration of cameras, screens, and storage. In terms of capacity configuration, downgrading has become a last resort choice for major mobile phone brand manufacturers.

"DRAM is bearing the brunt, with high-end models dropping from 16GB to 12GB, low-end models withdrawing to 4GB, and the proportion of sales of low-end models has increased, and sales of high-end mobile phones have decreased, shrinking the demand for DRAM as a whole. The same is true for NAND, which has adjusted its marketing strategy to reduce the need for high-capacity provisioning. Yang Yiting further said.

Regarding the PC market, Yang Yiting analyzed that due to the slow recovery of the domestic PC market, the consumer market generally has insufficient acceptance of the rapid rise in storage prices, and downstream storage manufacturers have a large number of low-cost inventory, so the price of finished consumer storage products is difficult to reflect the changes in the price of original resources in a timely manner, and the prices of some storage products have also been inverted.

"The effect of AI on the capacity of PCs and smartphones to increase the capacity of flash memory may not be felt until 2026," Ao said. ”

But for many storage vendors, they may need to "take the risk" and wait for the day when "AI will actually pull the consumer market".

According to the financial report data, as of June 30, 2024, the domestic storage company Longsys (301308. SZ) had an inventory carrying value of RMB8.833 billion, accounting for 69.11% of current assets. BIWIN Storage(688525. SH) had an inventory carrying value of RMB3.577 billion, accounting for 51.87% of its total assets. Demingli(001309. SZ) has an inventory book value of 3.38 billion yuan, accounting for 222.58% of the company's net assets.

If the storage market does not continue to improve, these storage manufacturers with high inventories may face the danger of "overhanging" the risk of inventory price decline.

In addition, a new round of capacity "competition" for the original head storage factory has also begun. For example, Micron Technology's management said in the March-May 2024 earnings call: "We expect capital expenditures to increase significantly next year, accounting for about 30% of revenue in fiscal 2025, which will be used for the construction of HBM assembly and test equipment, fab and back-end facilities, and technology transformation investments to address increased market demand." The company plans to spend fiscal 2025 on the construction of new fabs in Idaho and New York, which will account for half or more of the expected total capex growth. ”

In this regard, Yang Yiting said that in the short and medium term, the challenge of the storage market comes from the pressure of the supply side of the production capacity, as the original storage factory to achieve profitability and begin to expand capacity, the overall capacity growth of the industry has reached a key node that cannot be ignored, and the game between the supply side and the supply side, between the supply side and the demand side is intensifying.

She said: "In the second half of the year, the structural problems of supply and demand are more obvious, which is reflected in the more stable supply of server storage, while the supply of some consumer storage is growing too fast, which will make the supply side have to make a difficult choice between profit and share." ”