Analysis: Who'd be a memory maker?

The malaise that laid DRAM manufacturers low in 2007 looks set to spread.

The companies making the memories used in personal computers and other consumer products had a terrible year in 2007 and many are facing an equally difficult 2008 as the malaise spreads to flash memory. After a strong 2006, dynamic random-access memory (DRAM) sales revenues plummeted, thanks to a 39 per cent fall in average selling price, according to analyst firm IC Insights.

Although Brian Matas, IC Insights' vice president of market research, expects prices to stabilise during 2008, the overall DRAM market could still shrink by 7 per cent this year even though the rest of the chip business is set for modest growth.

In previous cycles, such a calamitous year for DRAM would have spelled disaster for everyone else in the semiconductor business. "Electronics always went through eight stages," claims Bill McClean, president of IC Insights.

McClean's eight stages start with a strong market, which encourages the players to spend big on production equipment to take advantage of demand. Once the capacity is added, people find that demand has weakened and the price softens, leading to a weak market where little capacity is added. As demand builds up, the price firms.

However, now that many of the big semiconductor companies have chosen to split their memory operations from their logic and mixed-signal divisions, there is less coupling between the different markets.

"[The eight-stage] model works up to 2004. But, since that time, we believe that the industry has split into four, maybe five, sub-cycles," says McClean.

As with previous DRAM price collapses, this latest recession comes as the result of a massive increase in production capacity. "There was heavy investment in production among the DRAM makers in anticipation of Microsoft's Vista shipping," says Matas. But the boom did not materialise. "Inventory was built up and then sold at a loss.
It is making the DRAM manufacturers think twice about what they want to do with their businesses. Will these companies form joint ventures with each other?"

Malcolm Penn, president of Future Horizons, says: "If they continue on this death curve, one of them will die. But the sooner that happens, the better it is for everybody else." It is likely to be one of smaller players that winds up being pushed out of the market. "We are already seeing Qimonda cut back, but that is the kiss of death."

The problem, Penn explains, is that memory makers have to keep investing to keep ahead of the competition. Once the pace of development slows down, it is very hard to maintain profitability as the price-per-bit spirals down. "It is a slow death by strangulation," he says.

In attempts to reduce their dependence on the vagaries of the market some of the big DRAM makers have diversified into NAND flash, with some seeing it as potentially bigger than DRAM in the long term. Matas disagrees: "The closest that these two markets get is in 2008. Some say flash will surpass DRAM but we think DRAM will continue to be the main driver [in memories] out through 2012."

Steve Appleton, chairman of Micron Technology, sees the attraction of flash being a highly elastic market - much more so than DRAM. Whereas the market for DRAM is dominated by sales to OEMs, flash has a much bigger potential aftermarket through add-on cards. However, it is a market that, as Appleton acknowledges, will see huge peaks and troughs in pricing and demand.

One of the lean years is likely to be 2008, according to iSuppli, which has slashed a former forecast of almost 30 per cent growth year on year to single-digit as gadget-makers themselves prepare for a slowdown in their business.

"Unless the economy recovers vigorously later this year, last year's DRAM market disaster could be repeated in NAND this year," says Nam Hyung Kim, director and chief analyst, memory, for iSuppli.

One effect of the DRAM crunch that may favour PC buyers over the coming year is that the memory suppliers are accelerating their move to the third generation of double-datarate (DDR3) interfaces, promising higher-speed machines. "They are starting to ramp up DDR3 now,"says Kim, "largely because there is 30 per cent better revenue on DDR3 versus DDR2. So there is more emphasis from manufacturers to get that up and running."

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