Memory makers: Predicting future investments in a commodity world

by Matt Wickenheiser, Contributing Editor

If you haven’t been watching the memory industry closely, here’s a new flash: prices for both DRAM and NAND flash have been in a full-blown freefall. Japanese newspapers report that prices of DRAM chips sold to big users have dropped more than 50% since the start of 2007, to below the break-even point of $3 for the first time in two years, blaming the plummet in part on less-than-stellar sales of PCs running the Vista OS. Meanwhile, NAND flash prices have evaporated to a fifth of their value in just three months, according to Gartner data.

So how are memory firms reacting to the market’s plunging prices? Commodity memory firms are trying to be more efficient while keeping inventories as lean as possible, but have not cut back their capex outlays at this point, noted Gartner Dataquest analyst Jason Unsworth, in an interview with WaferNEWS.

Jim Handy at Objective Analysis agreed, noting that vendors compete on price in the commodity market and do everything they can to reduce their cost structure — “it’s like an obsession,” he said. “Having the lowest cost means that they can lower prices enough to make it painful for their competition when there’s an oversupply, and can profit more than their competition during shortages.”

Ducking and cost-cutting is the only game the firms know how to play, and there are really two ways this will all play out, Handy explained. “If you want to be a major supplier, you aggressively reduce costs through process shrinks and other means,” he told WaferNEWS. But for firms that are tired of (or unable to keep up in) the cost-cutting game, it may be time to find and service a smaller niche in which the bigger players won’t bother to wade. “These niches are small enough that the major suppliers can’t both service them and tap into economies of scale at the same time,” he explained, adding that fabless companies also can compete in some of these areas.

So what’s next? WaferNEWS asked both analysts to handicap the DRAM and NAND flash markets, and predict who might do what if declines continue.

Regarding NAND, Handy thinks Samsung has the reserves to continue pressing forward, and Toshiba and SanDisk are committed to the extent that they will find ways to continue to invest when appropriate. Hynix has found ways to “pull financial rabbits out of its hat” and is likely to continue to do so, he suggested, adding that Intel and Micron also are unlikely to reverse their direction any time soon. Other companies such as Renesas and Qimonda have determined that they cannot profit in this market and have pulled out.

Unsworth pointed out that while Toshiba and Intel have deep pockets, both firms bailed out of DRAM years ago because of the volatile nature and profitability of the market, and he expects them to similarly stay in NAND flash “until it is not consistently profitable and part of their strategic vision.”

SanDisk, which has adopted a vertically integrated strategy, has a significant partnership with Toshiba and now an alliance with Hynix, but the company will need to be extremely efficient to recoup profits “after a lean 18 months for profits, being publicly traded, an acquisition of mSystems, and huge costs for Fab 3 and Fab 4,” Unsworth said. The same applies to Micron, which Unsworth noted has “huge capex plans for NAND flash,” planning roughly a new fab every year with partner Intel, as well as several acquisitions to fund.

Looking over the DRAM landscape, Handy reiterated his take on suppliers Samsung and Hynix, and noted that Qimonda is wholly committed to the DRAM market, as is Elpida, Micron, and Nanya. It’s possible but unlikely that Powerchip and Promos would convert to a foundry model, he said. “The niche suppliers like Winbond, Etron, Oki, and others are always threatened should the major suppliers decide to move into their markets,” he pointed out, adding that although M&A activity is always a possibility, “we are nowhere near the point at which such drastic moves would become necessary.”

The huge elephant in the room regarding memory pricing is how perceived end demand will play out. Unsworth suggested that PC/Vista sales would climb later this year in a “slow burn,” but other demand drivers are still sluggish. For NAND flash, he sees demand being driven by handsets with more in-system memory, removable memory cards, and memory-thirsty video capabilities in portable media players.”

Even if demand doesn’t shake out as hoped, it’s unlikely that current pricing conditions will translate into pullback in future investments. If NAND-to-DRAM capacity transitions from companies such as Samsung and Hynix negate a DRAM market rebound in 2H07, “then perhaps we could see some reduction of future plans,” Unsworth said, but “it will have to get pretty severe for this to happen.”

On the NAND flash side, Unsworth also doesn’t expect pure-play vendors to reduce capacity plans, although some are taking advantage of the synergy between DRAM and NAND to move capacity to DRAM and sacrificing DRAM profits.

Unsworth does think more companies will enter the memory supply market, but believes any successful ventures will have to rely on outside assistance, noting Gartner predictions that by 2010, 90% of the NAND flash market will be dominated by four players. “On the DRAM side, competitive pressures will continue to intensify and the ability to leverage both DRAM and NAND flash will be essential to stay nimble,” he noted — M.W.


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