Supply shortages drive up memory prices, boosting semiconductor earnings
Growing use of price-capped long-term contracts expected to slow profit growth
Uncertain demand and competition raise questions about the boom’s sustainability

Questions have emerged over the sustainability of the semiconductor boom underpinning South Korea’s economy. Memory shortages and surging prices have sent exports and corporate profits soaring, but it remains unclear whether earnings can continue to rise at the same pace. Growing use of long-term supply contracts with price caps has also prompted forecasts that memory price increases will be limited. Combined with the possibility of slowing artificial intelligence (AI) investment and China’s technological advances, these concerns have dampened optimism about a prolonged boom.

Weakening Industrial Competitiveness Masked by Semiconductor Earnings

At an economic policy roundtable jointly hosted on the 12th by the NEAR Foundation, the Korea Development Institute (KDI), and the Korean Economic Association, participants argued that this year’s improvements in exports and corporate earnings driven by the AI semiconductor boom should not be viewed as a recovery in competitiveness across South Korean industry. Kwon Nam-hoon, president of the Korea Institute for Industrial Economics and Trade, warned against overlooking weakening industrial competitiveness masked by semiconductor-driven gains in aggregate indicators. The analysis is that South Korea’s long-term growth engines are weakening as growth in total factor productivity—the ability to generate more value added with the same labor and capital inputs—slows. Kim Mi-ru, head of KDI’s Department of Macroeconomic and Financial Policy, warned that growth could nearly stagnate around 2029–2030 if the long-term growth rate continues to decline by approximately 1 percentage point every 5 years. The concern is that complacency about a short-term, semiconductor-led boom could lead to neglect of structural vulnerabilities and slowing growth across industry.

Indeed, exports are becoming increasingly dependent on semiconductors. Last month, semiconductor exports totaled USD 60.3 billion (approximately USD 62.0 billion), accounting for half of total exports of USD 120.94 billion (approximately USD 124 billion). Expanding AI infrastructure investment and rising memory prices are concentrating export performance in a single product category. Meanwhile, traditional core industries such as petrochemicals, steel, and batteries have seen their production bases lose momentum, with capacity utilization declining over the past several years. Slowing global demand and excessive production capacity expansion in China are cited as factors weakening these industries’ competitiveness. Intensifying supply competition amid insufficient demand growth is squeezing domestic companies’ profitability.

“Beware of a Semiconductor-Driven Illusion; a 10-Year Boom Is No Guarantee”

Uncertainty also remains over the sustainability of the semiconductor boom that has driven South Korea’s economic growth. Former Bank of Korea Governor Rhee Chang-yong said on the 10th, “People say the semiconductor cycle will last 10 years, but I worry that it could end after just a few years.” He argued that domestic semiconductor companies’ current earnings also reflect restrictions on China’s access to advanced equipment stemming from US-China tensions. If export restrictions are eased or China develops its own lithography equipment, Samsung Electronics and SK hynix could struggle to maintain high profit margins.

This uncertainty also weighs on fiscal management. In its economic survey of South Korea released in July, the Organisation for Economic Co-operation and Development (OECD) noted that the country is heavily exposed to the semiconductor cycle because corporate income tax accounts for a large share of total tax revenue. In particular, it identified the practice of using revenue gains during economic upturns to fund sustained spending increases as a risk. Indeed, in 2021–2022, when the semiconductor cycle peaked, surging tax revenues were quickly incorporated into supplementary budgets. When revenues subsequently fell in 2023–2024, however, spending proved difficult to cut. During this process, the government also failed to meet its self-imposed target of keeping the managed fiscal deficit within 3% of gross domestic product (GDP). With welfare spending rising as the population ages, a semiconductor downturn could further constrain the government’s ability to respond to economic conditions and support vulnerable groups.

Concerns have also been raised that financial difficulties in vulnerable industries could spill over into the financial sector as bad loans. According to “The Shadow of Growth Polarization: Corporate Lending Risks in Vulnerable Industries,” released by the Korea Institute of Finance on the 12th, the construction and real estate industries face earnings pressure from troubled real estate project financing (PF), completed but unsold properties, and rising construction costs. Wholesale and retail businesses face both a shift toward online distribution and weak domestic demand. In particular, real estate and wholesale and retail account for 36.5% and 23.9%, respectively, of total corporate lending across the financial sector, concentrating 60.4% of loans in the two industries. These industries also have high proportions of loans from higher-interest nonbank lenders and loans to small and medium-sized enterprises, making them vulnerable to interest burdens. The institute warned that prolonged high inflation and interest rates could weaken borrowers’ repayment capacity and increase delinquencies, undermining the financial soundness of some nonbank financial institutions.

Table 1. Market Warning Signs Surrounding the Semiconductor Boom

Foreign Investors Keep Selling Despite Record Earnings

Caution about the semiconductor boom is also evident in selling by foreign investors. Foreign investors, who have been reducing their stakes in Samsung Electronics this year, continued selling even after the company announced record third-quarter preliminary operating profit of USD 82.6 billion on the 8th. As sell orders poured in, Samsung Electronics and SK hynix shares both plunged more than 4% on the 12th, dragging down the KOSPI. Foreign ownership of Samsung Electronics also fell to 46.35% that day, a level last seen during the global financial crisis. With even record earnings failing to revive buying interest, the stock market rally led by semiconductor heavyweights appears to be losing steam.

Heightened earnings expectations and concerns about slowing profit growth are cited as reasons for the foreign investor retreat. With earnings forecasts repeatedly raised on surging memory prices, even record profits are seen as losing their potency as a fresh catalyst for share price gains. Expectations that memory price growth will slow reinforce these concerns. Market research firm TrendForce projected that conventional DRAM contract prices would rise 10–15% quarter on quarter in the fourth quarter of this year. Avril Wu, senior vice president at TrendForce, explained that the growing share of long-term supply contracts with price caps is limiting price increases. Investor sentiment is also being weighed down by concerns that slower AI investment growth could affect both memory demand and prices.

Capital Outflows Dim Hopes of Undervaluation

Lower price-to-earnings (P/E) ratios are also seen as reflecting this uncertainty. Samsung Electronics’ P/E ratio of 4, cited in the market, is calculated using next year’s projected earnings. Assessments of the current share price may therefore change depending on whether those earnings forecasts materialize. In industries such as semiconductors, where earnings fluctuate sharply with business conditions, P/E ratios tend to fall when profits peak. Because the ratio divides the share price by earnings per share, a surge in profits during a boom can exaggerate how undervalued a stock appears. If earnings estimates are subsequently revised downward, the P/E ratio rises even if the share price remains unchanged. The current low multiple thus reflects both expectations that high profits will continue and market doubts about their sustainability.

Market conditions that could translate expectations of undervaluation into actual buying are also weakening. Samsung Electronics effectively exhausted its USD 11.5 billion share buyback budget early this month, while SK hynix has also purchased a substantial portion of its planned volume, reducing its capacity for further buying. The two companies have spent more than USD 38.5 billion on share repurchases alone. As these large pools of buying funds were depleted, foreign investors were net sellers of domestic stocks for 5 consecutive months from May through September, with net selling reaching USD 16.6 billion in September. Individual investors also sold a net USD 10.9 billion that month, leaving a gap in domestic buying that had been absorbing foreign selling. British financial group HSBC attributed foreign capital withdrawals to profit-taking and adjustments in global asset allocation. Funds that had been expected to flow in alongside improving corporate earnings are instead leaving the domestic stock market through portfolio rebalancing.

Semiconductor Competitiveness Skewed Toward DRAM and HBM

Weakening competitiveness in non-memory businesses, masked by the memory boom, remains another burden. According to TrendForce, Samsung Electronics’ foundry, or contract chipmaking, revenue rose just 1.8% quarter on quarter in the second quarter of this year. As it failed to keep pace with market growth, its global market share fell to 5.9%, widening the gap with TSMC, which held a 72.5% share, to 66.6 percentage points. Samsung Electronics’ position is being further squeezed as latecomers step up their pursuit. SMIC, China’s largest foundry, increased revenue by 20% over the same period, lifting its market share to 5.4%. With the gap with Samsung Electronics down to just 0.5 percentage points, even its second-place position is no longer secure.

The gap is also widening in how expanding AI investment translates into orders and profits from advanced processes. As orders for AI server chips flooded in, TSMC’s 3-nanometer (nm; one-billionth of a meter) and 5- and 4-nanometer production capacity was effectively fully utilized in the second quarter, and the company generated its first revenue from its 2-nanometer process. Increased shipments of advanced products, coupled with higher average selling prices, pushed its operating profit margin to 60.3%. By contrast, Samsung Electronics’ foundry business is expected to have remained in the red in the third quarter because of low capacity utilization and fixed-cost burdens. Although expanding demand for advanced processes is expected to improve utilization going forward, a recovery in profitability is being delayed because the production volumes currently secured are insufficient to fully absorb fixed costs.