DRAM suppliers' woes intensified by credit crisis

"Perhaps the only good to come out of the economic downturn is that DRAM players will lack the cash to over-invest, thus curbing supply growth," iSuppli's Nam Hyung Kim says.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 10/3/2008

Just when you thought it couldn't get any worse in DRAM market, it does.

DRAM suppliers, already suffering from a major downturn in business conditions including shrinking ASPs (average selling prices) on over supply, now face the challenge of raising money for servicing debt and for funding capital spending during a global credit crunch, according to iSuppli Corp. 

“Although the epicenter of the credit crisis is in the United States, banks from all over the world are being strained by the US housing market and by the destabilizing impact of bank failures in the nation,” said Nam Hyung Kim, director and chief analyst for iSuppli, in a statement this morning. “Even with the expected intervention by the US government, this crisis means the cost of capital will rise because cash-strapped banks will be reluctant to take on big, risky ventures. This is a particular challenge for the capital-intensive DRAM manufacturing business. DRAM suppliers that already are facing cash issues soon may not be able to service debts that are coming due soon. Furthermore, DRAM suppliers may encounter problems in trying to finance their capital expenditures.”

Kim further said that some DRAM companies will face serious liquidity issues in the near future, based on the pace of their cash burn and the maturation of their short-term debt.

“Amid weak market conditions and the credit crunch, cash management has become the most critical issue facing DRAM suppliers,” he said. “This will have the impact of reduced capital expenditures among DRAM suppliers in early 2009.”

Kim made specific note of DRAM maker Qimonda AG, which several analysts have suggested is most at risk due to the memory market current conditions.

“Qimonda actually has a relatively good cash balance and a low debt ratio for potential leverage in the future compared to many other DRAM suppliers,” Kim observed.
 
According to iSuppli, the credit crisis comes on top of rapidly deteriorating conditions in the DRAM market. The research company in September cut its rating of near-term conditions for DRAM suppliers to “Negative,” down from “Neutral," on severe oversupply, weak demand, unexpectedly sharp price declines, and the approach of a seasonally slow period for the market.

While iSuppli reported that DRAM demand had been strong until Q2, the situation changed starting late in Q3. The company pointed to Dell's warning that PC sales growth would fall short of previous expectations in Q3 and to retail outlets that reported disappointing sales forecasts for the September quarter.

ISuppli also reminded that the financial area is one of the major corporate markets for PCs, and current challenges in that industry, including large-scale layoffs and delays in purchases due to the uncertain economic situation, represent a further downside for PC sales.

On the supply side, DRAM inventories have "swelled far above nominal levels," according to iSuppli. That situation has occurred not only among memory suppliers, but also in other parts of the electronics supply chain and at OEMs. Furthermore, iSuppli said that DRAM suppliers have been aggressively releasing inventory to the spot market.

“The growing margin between spot and contract prices is a bearish sign for future DRAM pricing and demand,” Kim said. “OEM contract prices for 2-GByte PC DRAM modules will further decrease to the $20 to $25 level, down from the current $30 to $35 range, due to the flood of inventory. This level of pricing represents a ‘dead-zone’ for manufacturers, because it is less than the variable costs for the most DRAM suppliers.”

According to iSuppli, some of the DRAM suppliers will stop shipping commodity DRAMs to reduce their cash burn early in Q4. However, as the end of 2008 approaches, suppliers will be under tremendous pressure to meet their annual budgets, which will worsen market conditions further in the future, the research company noted.
 
“Perhaps the only good to come out of the economic downturn is that DRAM players will lack the cash to over-invest, thus curbing supply growth,” Kim said. “This will bring an end to the oversupply on the market, a situation that has been so disastrous for the industry in 2007 and 2008. The market eventually will turn around—although not for a few quarters at least. However, the timing of the DRAM recovery will hinge on the timing of the economic recovery, which no one can determine at this time.

“However, there is no good news in the DRAM industry right now. The DRAM crisis is continuing along with the financial crisis. Until iSuppli sees meaningful production cuts from tier-one suppliers or near term major consolidation, we will maintain our negative rating for near-term conditions for suppliers,” Kim concluded.