A domestic semiconductor company that was once on the brink of bankruptcy has emerged as a major beneficiary of the artificial intelligence (AI) revolution. SK Hynix, which had long been in Samsung Electronics' shadow as the 'perennial second place,' has solidified its position as the world's leading supplier of high-bandwidth memory (HBM), a key component in AI semiconductors, transforming the global semiconductor landscape.
According to a recent report by The Economist, SK Hynix now faces its true test. While the company is enjoying unprecedented success fueled by a surge in AI investments, the cyclical nature of the memory industry, characterized by oversupply and plummeting prices, could resurface at any time.
Some securities firms have pointed out that if big tech companies struggle to secure funding for AI investments after next year, SK Hynix's revenue could be halved, leading to a sharp decline in profitability. There are also concerns that increased production from emerging Chinese memory companies could exacerbate the risk of oversupply.
Political pressure for investment is intensifying both domestically and internationally. U.S. Secretary of Commerce Gina Raimondo publicly urged Samsung and Hynix to build factories in the U.S. during a groundbreaking ceremony for Micron's facility in New York earlier this month. South Korean President Yoon Suk Yeol has requested the expansion of production facilities in the relatively underdeveloped southwestern region of the country.
In the early 2000s, the memory semiconductor market faced severe downturns, pushing the company, then known as Hynix Semiconductor, to the brink of bankruptcy. Revenue plummeted to half its previous levels, and its market capitalization fell to around $500 million. Over the next decade, Hynix underwent rigorous restructuring, narrowly avoiding a takeover attempt by U.S. memory firm Micron.
The turning point came in 2012 when SK Group acquired Hynix, allowing it to rise to a level of parity with its long-time rival Samsung Electronics, even briefly surpassing it in market capitalization in June. In the HBM sector, a critical product in the AI era, Hynix has taken the lead over Samsung.
The AI boom has dramatically increased Hynix's corporate value, with its market capitalization surpassing $1 trillion in May. On July 10, the company went public on the Nasdaq, raising $26.5 billion, the largest amount ever for a foreign company.
However, the stock price fell slightly the day after the listing due to investor concerns over the high valuations of semiconductor companies. Nevertheless, compared to early last year, the stock price has increased tenfold (1,000%). The funds raised from the IPO, along with cash generated from operations over the past year, will be invested in expanding production capacity.
SK Group Chairman Chey Tae-won announced last month that the company plans to double its overall production capacity over the next five years, reflecting explosive market demand. Recent quarterly revenue has tripled compared to the same period last year.
While Hynix did not create the AI boom, The Economist notes that the company's ability to seize the opportunity for revival is remarkable. The semiconductor industry requires massive capital and cutting-edge technology, making it difficult for latecomers to surpass established leaders.
What is the secret behind Hynix's turnaround? The Economist attributes it to agility. In the early 2010s, Samsung held about 40% of the memory market, while Hynix's share was around 25%. The second-place company, overshadowed by Samsung, began seeking new breakthroughs to surpass its competitor.
Hynix recognized that merely shrinking semiconductors would limit performance improvements. Instead of further miniaturizing chips, the company focused on developing new technologies that could bypass physical limitations, as reflected in the recollections of former CEO Park Sung-wook, who led the company from 2013 to 2018.
The Economist identifies 2008 as a turning point when AMD, then trailing Intel, proposed developing stacked memory for graphics processing units (GPUs) in collaboration with Hynix. The two companies had previously succeeded in developing earlier generations of graphics memory products together.
Hynix's first HBM product, launched in 2013, was too expensive to achieve significant commercial success. However, it proved that vertically stacking memory chips could deliver speeds far superior to existing products.
Rival missteps provided opportunities for further advancement. In 2019, Samsung reduced its HBM team to invest in other types of chips, prompting engineers who believed in the technology's future to leave for Hynix. Intel engineers, struggling with product delays, also joined Hynix.
Corporate culture has played a crucial role as well. While Samsung is known for its harsh meritocracy that fosters internal competition, Hynix embraces collaboration, allowing engineers to research without fear of failure. Failed projects are treated as 'case studies' to learn from, leading to innovations like the 'mass reflow molded underfill (MR-MUF)' technology that fills gaps between stacked chips with molding liquid to dissipate heat.
In 2022, Hynix became the first to launch the fourth-generation HBM3, establishing itself as the sole supplier of advanced memory for NVIDIA, the king of AI chips.
Can Hynix continue its upward trajectory? The company has never led a booming market before. Competition is intensifying, with Samsung and Micron set to supply HBM for NVIDIA's next-generation AI server platform, 'Vera Rubin.' Samsung is also regaining competitiveness in the existing memory market with its general-purpose DRAM.
Global memory market leaders Samsung, Hynix, and Micron have all announced astronomical investment plans. Samsung and Hynix plan to invest over $2 trillion by 2040 to create the world's largest semiconductor mega-cluster in Yongin.
However, The Economist warns that explosive demand and fierce competition heighten the risk of over-investment, a phenomenon that has recurred during boom periods in the highly volatile memory semiconductor industry.
During the last memory boom in 2018, Hynix invested 40% of its revenue in facilities, but the following year, as server market growth slowed, memory prices plummeted by half. Hynix's revenue also fell by 33%, and operating profit dropped by 87% due to the industry's high fixed costs.
Hynix has stated it will limit capital expenditures to one-third of its revenue, demonstrating its commitment to avoid repeating past mistakes. In fact, over the past year, the ratio of capital investment to revenue has averaged around 22%. Hynix has also secured long-term supply contracts under much stricter conditions, allowing for better sales forecasts over the coming years.
Nonetheless, risks remain, according to The Economist. Memory prices, which have nearly increased tenfold over the past year, are likely to peak next year. There are concerns that Hynix's revenue could decrease by 45% by 2028 as Chinese memory companies like CXMT and YMTC grow, potentially exacerbating oversupply.
Hynix has announced plans to invest over $260 billion to establish new semiconductor clusters in Honam, but The Economist cautions that dispersing production facilities while top talent and partners are concentrated in the capital region could pose risks. The pressure and responsibility that come with significant success are also increasing.
* This article has been translated by AI.
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