A DRAM recovery? Don’t hold your breath.

-April 28, 2009

After at least a year of holding their breath as they sold their products below cost, DRAM vendors are starting to drop. Munich, Germany-based Qimonda has keeled over, filing for insolvency in January, and a couple of Taiwanese vendors are turning very blue. Although prices are starting to rise, it may be too late for some companies. Even those that survive won’t be able to breathe easy for quite a while, some industry experts say.

Although the DRAM industry has always been cyclical, some call this downturn unprecedented. “As far as oversupply goes, this is the worst I think anyone has ever seen,” said Paul Zecher, commodity memory manager at Converge, a distributor.

It’s also the worst in terms of the amount of money lost by DRAM vendors, according to Andrew Norwood, research VP at Gartner. Between Q2 2007 to Q4 2008, the DRAM industry lost $13 billion, he reported.

iSuppli DRAM forecast
Year Revenue in millions
2007 $31,475
2008 $23,582
2009 $16,874
2010 $22,886
2011 $26,405

And the industry is setting records in terms of cuts in capital spending. According to iSuppli, DRAM manufacturers cut capital expenditures by 48% (from $21 billion to $11.5 billion) in 2008, and the market research company expects a 66% cut (to $3.7 billion) in 2009. Capacity utilization has been cut by 20% overall, Nam Hyung Kim, director and chief analyst at iSuppli, reported. Taiwan companies have cut back more, by at least 50%. And more cuts are needed. “Even if all the Taiwanese suppliers idled their fabs, which equates to 25% of global DRAM megabit production, the market would remain in a state of oversupply,” Kim wrote in a recent iSuppli report.

Perfect storm of disaster

Several factors have combined to exacerbate DRAM vendors’ troubles. For one thing, the oversupply has been prolonged because the global financial crisis stunted demand for PCs, which consume most of the DRAMs, said Jim Handy, analyst at Objective Analysis. On top of that, the global credit markets have dried up, noted Kim. That means that DRAM vendors without cash reserves or a strong financial backer have nowhere to turn for funds.

Further, even though all the DRAM vendors are selling product below cost, no one has filed a dumping complaint, noted Norwood. In the 1990s, Micron in the United States and Infineon in Europe filed complaints against Japan and Korea, which led to government investigation and the imposition of duties. Such actions imposed a floor price for DRAMs. But today, the global nature of the industry precludes any company from filing dumping charges, which are made against countries rather than individual companies. Micron, for example, manufactures some products in Taiwan. “If Micron were to call for anti-dumping duties and they were imposed . . . America would then have to impose duties against Taiwan, so that would mean Micron's own products would have duties imposed on them,” Norwood explained.

With no government action to set a floor price, DRAM prices have continued to drop. “No government intervention means that the DRAM vendors are left to their own devices,” he said. “And this is what they do for themselves.”

Government to the rescue?

It’s not that governments aren’t trying to help. In Europe, both the governments of the Portugal and the German state of Saxony had offered some funding to Qimonda. (Qimonda has an assembly plant in Portugal.) “But they were talking about it for so long that the company went bankrupt before they finally made a decision,” said Norwood.

And in Taiwan, the government has formed the Taiwan Memory Company (TMC) in an effort to save that country’s struggling DRAM industry. But TMC seems to be foundering because of confusion over its goals, said iSuppli’s Kim. Initially the government said it wanted to help struggling Taiwanese vendors by consolidating them into one entity. Then it formed TMC and sought funding from private investors, including foreign DRAM vendors Elpida Memory and Micron. Most recently, a Taiwanese legislator filed a motion asking TMC to clarify its strategy and funding needs. It has been reported the venture would cost more than $800 million.

“I don't know what they are doing,” said Kim. “I don't think they know what they are doing."

Also see " Oversupply continues to arrest memory market recovery ."

Meanwhile, prices may have hit bottom. According to Converge's Zecher, prices for 2-Gb 800 DDR2 modules, which were as low as $14.50 in mid-December, had risen to $19 to $21 in mid-April. At the chip level, the spot price for 1-Gbit DRAM had risen from 50 cents to $1, according to Kim. However, that’s still far below Taiwanese DRAM vendors’ cash cost. Kim thinks prices need to reach $3 for a 1-Gbit DRAM for Taiwan vendors to even start generating cash, much less profits. Although iSuppli expects prices to continue to rise this year, it doesn’t expect them to rise that much.

In fact, some observers fear that if prices rise too quickly, then vendors will increase capacity too soon and create another oversupply situation. “The beginnings of the recovery are actually going to be a very dangerous period for the DRAM industry,” said Norwood.

Zecher would like to see output remain at current levels for another three to four months. “Let’s see what happens with the holiday builds and the back-to-school production” in mid-August, he said.

On the other hand, the industry is likely to see some shortages as it comes out of the downturn. Given the drastic cuts in capacity, it will be hard for manufacturers to ramp up production quickly -- at least for some of the next-generation parts -- when solid demand does materialize.

ISuppli expects shortages by 2010/2011. Because it’s unlikely that the credit market will recover, Kim said, DRAM vendors will not have the access to credit that will allow them to ramp up more production.  “It’s a dangerous situation for OEMs,” he said. Although they are enjoying low prices today, he noted “they will have to pay for this later.”

And more vendors are likely to drop out of the market, or at least merge. Handy estimates that each DRAM manufacturer will need about $3 billion in sales to be able to afford to fabricate the next generation of chips. He predicted that by 2010 the top five DRAM vendors will account for more than 90% of the market.

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