If the "waiver period" is not extended, SK Hynix may sell the unfinished Dalian fab

South Korean memory chip giant SK Hynix is delaying the completion of its second 3D NAND Flash plant in Dalian, China, DigiTimes reported, citing South Korean media. The decision was made in response to falling demand in the storage market and the impact of the US restrictions on the export of advanced semiconductor manufacturing equipment to China in October last year, which affected SK Hynix's equipment purchases.

SK may even consider abandoning follow-up projects and selling off the infrastructure already built at the fab, sources said.

As early as October 20, 2020, SK Hynix acquired Intel's NAND flash business, including Intel's Dalian NAND flash plant, for $9 billion. However, Intel will continue to retain its unique AoTeng business.

On December 22, 2021, SK Hynix officially completed the acquisition of Intel's NAND flash memory business after obtaining the approval of the Chinese government. At present, the Intel Dalian plant has not completed delivery. According to the agreement, SK Hynix will pay the remaining $2 billion to acquire the remaining assets from Intel, including intellectual property related to the production and design of NAND flash memory wafers, research and development personnel, and employees at its Dalian plant in China, upon the final settlement in March 2025.

A groundbreaking ceremony for the non-volatile memory project of Asix Hynix Intel DMTM Semiconductor (Dalian) Co., Ltd. was held in Jinpu New District, Dalian, on May 16, 2022. The project will involve the construction of a new wafer factory for the production of non-volatile memory 3D NAND Flash chip products. This is SK Hynix's second wafer plant in Dalian, which was mentioned in the report.

It usually takes about a year to build the infrastructure for a fab. However, according to people familiar with the matter, construction of the fab is not yet in the final stages and there are no discussions with fab equipment suppliers about delivery and installation. In a worst-case scenario, SK Hynix may decide to sell the building rather than continue installing expensive equipment.

Among them, on the one hand, the current storage market demand is still declining, Kaixia, Micron, Samsung and other memory chip manufacturers have announced production reduction plans, although SK Hynix has not announced production reduction, but also drastically reduced this year's capital expenditure by 50%. This has led SK Hynix to deliberately slow down the pace of building new memory fabs to reduce capital expenditure.

The more critical reason is that last October, the US introduced new semiconductor export controls to China, which restrict the export of manufacturing equipment needed for 3D NAND Flash, 18nm half-pitch or smaller DRAM memory chips with 128 layers or more unless a special license is granted by the US Department of Commerce. At present, the Netherlands and Japan have also followed up on the new regulations of the United States on China and announced that they will launch corresponding restriction policies, which also restrict the export of more related equipment to China.

Currently, 128 layers of 3D NAND Flash are dominant, but the top memory chip vendors have moved towards higher stacking layers. Micron mass-produced 232 layers of 3D NAND Flash last year. For SK Hynix, for the fabs to be competitive in the long term, SK Hynix must target 3D NAND Flash manufacturing at 128 layers and above.

Although SK Hynix received a one-year waiver from the US Department of Commerce on October 11, 2022, to purchase the required equipment for its wafer plants on the mainland without restriction, SK Hynix did not receive the waiver from the Dutch and Japanese governments. And because some key semiconductor equipment has a lead time of more than a year (such as ASML's mainstream lithography machines, the average lead time is still as high as 18 months). As SK Hynix's exemption period is only about half a year away, SK Hynix may not be able to complete the equipment moving in before the end of the exemption period.

In addition, American engineers from companies such as Applied Materials, KLA, and Lam Research are now barred from providing services to semiconductor facilities in mainland China without a government export license, so even installing procured tools could be a problem.

Unless the United States extends the exemption period for SK Hynix and provides exemptions to American technicians of the relevant American equipment manufacturers. Failure to do so will affect not only SK Hynix's production expansion in mainland China but also the maintenance and technological upgrading of existing production lines.

SK Hynix's chief marketing officer, Kevin Noh, said on a third-quarter earnings call last year that the company's operations in Wuxi, China, would be "not unaffected" by the restrictions imposed by the new US rules.

"As a contingency plan, we may want to consider selling the fab, selling the equipment, or moving the equipment to South Korea." "This is a contingency plan and we want to [continue] to operate without facing this situation," Mr Noh stressed.

SK Hynix officials stressed that the remarks on the relocation of equipment at its Chinese plant were made in response to an extreme situation that is highly unlikely and that the company has not made any specific plans.

On whether SK Hynix will continue to receive the U.S. exemption after the one-year exemption period expires, a spokesman for SK Hynix said, "The license may be extended or reviewed on a case-by-case basis," adding, "The Korean and U.S. governments agreed to continue negotiations."

It is worth noting that at the end of February this year, US Under Secretary of Commerce Alan Estevez publicly stated at the Korea-US Economic and Security Forum organized by the Center for Strategic and International Studies (CSIS) that certain semiconductor technologies will be banned from entering the Chinese mainland after the introduction of new US semiconductor export control regulations to China. There will also be a quota for non-Chinese chipmakers (Samsung, SK Hynix, etc.) to set up factories in China, but there will be a cap on their growth in the mainland.

Asked for further clarification, Mr. Estevez said that "a certain range" would be chosen as the upper limit, based on the number of layers of NAND chips stacked by the company concerned. But that limit "will also depend on what the Chinese are doing."

In other words, there may be no unrestricted "exemptions" in the future, but the production capacity of Samsung and SK Hynix fabs in mainland China will be limited to a certain range, which may be aligned with the new US regulations.