Analysis-Chip crunch: how the AI boom is stoking prices of less trendy memory

By Hyunjoo Jin, Heekyong Yang and Wen-Yee Lee SEOUL (Reuters) -The global rush by chipmakers to produce AI chips is tightening supply of less glamorous chips used in smartphones, computers and servers, spurring panic buying by some customers and a surge in their prices, industry executives and analysts said. The unexpected ripple effect of the AI boom is giving a much-needed boost to memory chipmakers, including Samsung Electronics, which has lagged rivals in offering advanced AI chips and a rally in their share prices. Supply of the more mundane semiconductors has become so tight that the global memory chip industry is poised to head into what some analysts call a "super cycle", as device makers frantically stock up on memory chips, executives said. "Within the last month or two, there's been a huge demand surge," Tobey Gonnerman, president of semiconductor distributor Fusion Worldwide, said. "It does seem like things have happened in a fast and furious way." "There is definitely scrambling going on and more soon. And there is double/triple ordering going on, like we’ve seen in many past shortages." PRODUCTION SHIFT SPURS SUPPLY SHORTAGE Memory chip makers started allocating more of their production capacity to high-bandwidth memory (HBM) chips, used to build Nvidia's powerful AI chipsets, after ChatGPT kicked off the generative AI craze following its release in November 2022 and a global rush to build AI data centres. Rising competition from lower-end chips from Chinese rivals like CXMT also prompted South Korea's Samsung and SK Hynix, which control around 70% of the global DRAM chip market, to accelerate moves to higher-end chips. "There's just so much money floating around, driving demand," said Dan Hutcheson, San Jose-based vice chair of research firm TechInsights, referring to a flurry of recent technology deals on chips and data centres. Major tech companies including Alphabet, Amazon.com, Meta, Microsoft and CoreWeave are expected to spend $400 billion on AI infrastructure this year, according to Morgan Stanley. That boom has coincided with a replacement cycle for traditional data centres and personal computers and better-than-expected phone sales, which is what is exacerbating tight supply of non-HBM memory chips and driving up their prices, analysts said. Traditional data centre operators are starting to upgrade or replace servers they had bought during the previous boom of 2017-2018. "They all were swimming in DDR5 server memory six or eight months ago. But now the average selling price on DDR5 server modules is going through the roof. And obviously that is music to the ears of Micron, Hynix and Samsung," Gonnerman said, referring to the mainstay server chips. Similarly, spot prices of DRAM, used in various applications, nearly tripled in September from a year earlier, after growing a meager 4% in April, according to data from TechInsights provided to Reuters. The average inventory of DRAM chips fell to just eight weeks in the current quarter, from 10 weeks a year earlier and 31 weeks in early 2023. Jeff Kim, head of research at KB Securities, expects non-HBM memory chips will surpass HBMs in terms of profitability next year should the current price increases continue. In the July to September period, Samsung generated an operating margin of about 40% for commodity DRAMs, and 60% for HBMs, Kim estimated. Micron forecast last month healthy margins in both HBM and non-HBM in 2026. On the flip side, surging chip prices threaten to add margin pressure on makers of consumer electronics and servers already grappling with increasing costs due to higher U.S. tariffs and potential supply chain disruptions stemming from China's broadening curbs on rare earth exports. "Recently, with the DRAM shortage this severe, we’re becoming more concerned," said Miller Chang, president of the Embedded Sector at Advantech, a Taiwan-based industrial PC provider. Some are passing the cost pressure onto consumers. British personal computer maker Raspberry Pi, for example, announced price increases earlier this month, citing memory costs roughly 120% more than a year ago. "We’ve now reached the point where we have to pass some of this cost on," its CEO Eben Upton said. CAUTION ON "SUPER CYCLE" The improving profitability of non-HBM chips has helped fuel memory chipmakers' share price rally this year, with Samsung's stock up more than 80%, while SK Hynix and Micron shares have soared 170% and 140% respectively. Taiwan memory makers and memory module companies' stock jumped over the past month due to the shortage of DDR4. Investors are on guard for signs of an AI bubble. Hutcheson said the term "supercycle" is overdone, saying the industry is going through a classic shortage that usually lasts a year or two, and TechInsights is forecasting a chip industry downturn in 2027. Samsung is well-placed to benefit from the boom, given its heavier exposure to non-HBM chips. But investors remain cautious on how quickly it may be able to narrow a big gap with SK Hynix in HBM chips and TSMC in contract semiconductor manufacturing. "The extreme pessimism turned into extreme optimism for Samsung. We have to wait and see," Albert Yong, a managing partner at Petra Capital Management, a Seoul-based Samsung investor, said. (Reporting by Hyunjoo Jin; Editing by Miyoung Kim and Sonali Paul)

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