Constraints on data center expansion
Samsung Electronics and SK hynix are confident that strong demand for memory chips in the artificial intelligence (AI) data center market will persist, but the article's analysis suggests that several uncertainties remain.
The demand outlook has become somewhat less clear as more factors could delay major technology companies' data center expansion plans, including insufficient power grids, regulation, public opposition and financing difficulties.
On October 29, local time, the Financial Times reported that “major technology companies are facing practical constraints as they seek to implement their aggressive AI investment plans.”
The report cited Microsoft's disclosure during its third-quarter earnings conference call that capital spending totaled $45.2 billion, or about 61 trillion won. That was more than 10% below market expectations.
Microsoft explained that investment spending had temporarily declined because its data server partners had failed to meet schedules due to problems including construction and grid connection delays.
However, the Financial Times suggested that such cases could become more common across major technology companies.
With competition to invest in AI data centers continuing for years, constraints are emerging in securing sites and electricity, obtaining permits from the relevant authorities, and gaining acceptance from local communities.
According to Reuters, Microsoft and Oracle have recently been unable to start operating data centers on schedule in the United Kingdom and the United States, respectively, because of grid connection problems.
Another burden is the growing number of pledges at the state government and legislative levels to regulate data center expansion ahead of the November 3 US midterm elections. This comes as local residents increasingly oppose data center construction by major technology companies.
Financing pressures
Reuters reported signs of a cycle in which delays in establishing and operating data centers were also affecting financial markets, making investment funding harder to obtain.
As more AI data centers begin generating revenue later than scheduled because of semiconductor shortages, grid connection delays, regulations and permitting issues, interest rates on related loans are rising or lending terms are tightening.
Because major technology companies and data center operators rely on external borrowing for most of their AI infrastructure investment, difficulties securing funds could further delay construction plans.
Google parent Alphabet, Amazon and Meta all reported negative free cash flow, meaning an outflow, during their third-quarter earnings conference calls.
As competition to invest in data centers continues, rising construction and semiconductor costs have made it difficult to fund investments solely with cash generated by their businesses.
Reuters added that investors had begun focusing on major technology companies' actual ability to finance their plans and on project schedules, rather than their medium- and long-term capital spending plans.
Risks to memory chip demand
Samsung Electronics and SK hynix both forecast a prolonged boom in memory chips, including DRAM and high-bandwidth memory (HBM), during their third-quarter earnings conference calls.
Those forecasts reflected expectations that strong demand from data center customers, including major technology companies, would keep supply shortages in place for years.
However, if various factors delay actual data center construction schedules, customers' memory chip inventories could increase, leading them to postpone new orders.
The article suggests that this would also increase the likelihood of oversupply and a deterioration in market conditions, as memory chip manufacturers are already investing in capacity in anticipation of rising medium- and long-term orders from major technology and cloud companies.
According to Business Insider, Amazon is already understood to be storing large numbers of AI servers based on Nvidia chips in warehouses because of difficulties securing power grid access for data centers.
There were also indications that the servers already in storage were worth $5 billion, or about 6.7 trillion won, with a further $3 billion, or about 4 trillion won, in inventory continuing to arrive each month.
According to Reuters, Morgan Stanley forecast that delays in US data center construction could have a particularly significant adverse effect on memory chip companies.
This is because memory chips are relatively volatile depending on supply, demand and inventory conditions, and prices could fall sharply if demand from the data center sector weakens.
Investment publication FXLeaders analyzed Micron's share price weakness following earnings announcements by Alphabet and Microsoft as also reflecting market concerns about a slowdown in medium- and long-term data center investment.
The article concludes that because AI data center market conditions are also a major factor in Samsung Electronics' and SK hynix's earnings and share prices, an increase in investment delays like those now occurring could cause greater damage.
Original Korean article: businesspost.co.kr
English brief by Korea Wind Intelligence, koreawindintel.com
