DRAM market proves 'miserable' in Q4 as suppliers wage war, force ASPs down
Research from iSuppli warns that because of its self-sabotaging nature, the DRAM industry is headed for at least two more quarters of major losses.
By Suzanne Deffree, Managing Editor, News -- EDN, February 6, 2008
The phrase "united we stand, divided we fall" could be applied to the DRAM industry, as iSuppli this week reported that the memory market recorded a dismal Q4 2007 in part due to the market-share war DRAM suppliers have waged amongst themselves.
According to data from the research company, the final quarter of last year was “miserable” for DRAM suppliers as global revenue declined by 19% to $6.5 billion, down from $7.97 billion in Q3; sales dropped by 40% year over year; and all of the top 10 DRAM makers tracked by iSuppli suffered sequential declines in revenue.
Indeed, the company reported that DRAM market conditions in Q4 were far worse than predicted, and could be compared to Q2, when global revenue declined by 24.1% on a sequential basis. ISuppli attributed the substantial revenue drops to a 31% plunge in average selling prices (ASP) quarter over quarter. The ASP drop was partly the result of a 17% increase in megabyte DRAM unit production, which contributed to a glut in the market. As a comparison, DRAM unit production rose by only 9.7% in Q3 and typically increases by 10% on a sequential quarterly basis, iSuppli said.
Excess DRAM inventory also helped to drive down pricing in Q4, when the drop in market revenue resulted in an industry-wide operating loss of nearly $3 billion. According to iSuppli, that represents a $6.4 billion turn in operating profitability compared to the $3.4 billion profit the DRAM industry saw in Q4 2006.
“There’s a lesson to be learned from the fourth-quarter DRAM disaster: In this game of upping the production ante, no supplier wins—and the entire industry loses,” said Nam Hyung Kim, director and chief analyst, memory ICs/storage systems for iSuppli, in a statement.
“Tier-one DRAM makers can generate profits more than the industry average when the industry is healthy—and only when supply and demand are in a reasonable state of balance. Rather than pursuing a scorched-earth policy of ramping up production to gain market share, tier-one DRAM suppliers should try to return to profitability by rationalizing supply growth,” he continued.
Instead, top-tier DRAM suppliers launched “massive” capital spending programs last year, hoping to corner the market and drive smaller competitors out of the industry, according to Kim.
“Until the suppliers change their ways, this naïve game of scale will continue to cost the DRAM industry every year,” Kim said, warning that even if this strategy had succeeded, it would have yielded short-term benefits as new competitors always appear when profitability returns.
“ISuppli believes that the memory industry by 2020 will need to spend more than $100 billion per year just to maintain present rates of growth,” Kim said. “This is because the new generation of 18-inch wafer fabs beyond 2015 will cost a fortune—at $10 billion per fab. The industry needs to consider how to shift its competitive strategies in order to generate sufficient profitability to support this kind of growth.”
ISuppli warned of such a DRAM market situation in December, when it lowered its 2008 forecast based in part on concerns of memory oversupply. Indeed, the company in November had cautiously said the DRAM market could recovery in Q2 2008, if suppliers acted rationally and stayed away from “any massive production increases that could send DRAM pricing into a new dive.” This week, however, iSuppli said that because of its self-sabotaging nature, the DRAM industry is headed for at least two more quarters of major losses.
“No matter how you look at it, 2007 was a disastrous year for the DRAM business, due to suppliers’ market-share and capital-spending games,” Kim said. “However, the industry now is undergoing a rebalance of supply and demand. iSuppli believes industry profitability will be better later this year. However, this will take more time than suppliers anticipated early in 2007, when they started boosting their unit production.”
