Analysts name DRAM winners, losers in a “disastrous” 2007

by James Montgomery, News Editor, Solid State Technology

Feb. 4, 2008 – In war, most battles end with winners and losers, though in some cases the difference might be relative. So it was with the DRAM market during and at the end of 2007, according to data from iSuppli and Gartner. And unless the DRAM makers get their act together, a decade from now they could be faced with collective $100B investment requirements just to maintain growth trends.

The DRAM market conditions in 4Q07 were “far worse than predicted,” according to Nam Hyung Kim, director and chief analyst, memory ICs/storage systems for iSuppli — rivaling a punishing 2Q07 which saw revenues decline ~24% from the prior quarter. Global DRAM sales in 4Q sunk 19% Q-Q to $6.5B, and a 40% decline from 1Q06, with all of the top-10 vendors suffering sequential declines. The main culprit: a 31% sequential plunge in average selling prices (ASP), caused in part by a 17% spike in DRAM MB unit production vs. 9.7% in 3Q and the typical 10% Q-Q climb.

For a different cringe-worthy angle at the picture, in dollar terms, the DRAM market lost nearly $3B during the fourth quarter, and witnessed a breathtaking $6.4B swing in operating profits vs. a year ago (when it was in the black by $3.4B).

In a nutshell, here’s what went wrong in 2007: top-tier suppliers splayed out their massive capital spending programs in order to tighten their holds in the market and squeeze out smaller competitors. But that’s a short-term fix, because once the market swings back to profitability, newer player will chase the money right back in, Kim explained, in a statement. Top-tier DRAM makers can outpace the industry’s average profitability only when the industry is healthy with a supply/demand balance.

“In this game of upping the production ante, no supplier wins — and the entire industry loses,” he quipped. “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 said. “Until the suppliers change their ways, this naive game of scale will continue to cost the DRAM industry every year.”

The picture becomes grim for DRAM suppliers when Kim projects today’s trends into the next decade (2015-2020), where 450mm fabs costing an eye-popping (and wallet-bursting) $10B might be the reality. Unless DRAM firms change their ways, Kim projects that by 2020, just meeting current growth rates could require massive capex investments exceeding $100B/year.

4Q’s winners and losers

How tough was 4Q for DRAM suppliers? Elpida managed the best performance among top firms — with a double-digit decline in sales (~11%), passing Qimonda for the No. 3 spot on both iSuppli and Gartner lists, thanks to a savvier management of its ASPs. Gartner analyst Andrew Norwood noted in a research note that Elpida has been steadily moved up the annual ranks — from a distant six place in 2003 (4.1% share), then No. 5 for three years straight, and now fourth place in 2007 with 12.5% share.

Micron also managed to minimize its revenue decline in 2007, down just ~11%-12%, and is now within just a few $M of the No. 4 spot now occupied by Qimonda, which suffered a ~24% slide in 4Q sales. Qimonda was hurt by its exposure to the commodity PC market, where most of its additional DRAM shipments went during 4Q, and where an especially weak pricing environment more than cancelled out the company’s strong bit growth, Norwood noted. For the year, Qimonda held its No.3 spot in market share but lost points as rivals were more aggressive.

Samsung’s DRAM sales slipped ~12%, and iSuppli’s Kim wrote that the company also lost money on the DRAM side, but that was more than offset by the company’s profitable NAND business for a net profit for the company’s memory sales. The company’s marketshare dipped to a six-year low early in 2007, noted Gartner’s Norwood, and it ended up losing share for the full year despite production increases and better financials in the second half.

Hynix snapped a string of 17 consecutive profitable quarters with a >30% plunge in sales, the largest of the top suppliers, iSuppli noted. Like Qimonda, Hynix’s exposure to “brutal” commodity PC pricing was its downfall in 4Q, and it watched Samsung again increase its marketshare lead to 10%, added Gartner’s Norwood. Still, he noted, a 150% increase in bit shipments during 2007 pushed Hynix’s total marketshare to a record 21.3%, beating the 19.3% it achieved in 1999 when it merged with LG Semicon.

Also burned by the commodity market were Taiwan’s top three DRAM vendors (Nanya, Powerchip, ProMOS, excluding their foundry sales), which all lost share due to exposure to the weak spot market, Gartner noted.

“A year to forget”

So, poring over the charred DRAM landscape in 2007 (total sales down ~7%-8% to ~$31B), can anyone be declared a winner? Gartner’s Norwood says it’s Hynix, which gained nearly five points of marketshare due to its massive Y-Y bit growth. iSuppli’s Kim seems to agree — even with a tough 4Q, Hynix managed the best sales growth for the full year (~19%), with Elpida (~8%) the only other company among the top group to equal or better 2006’s sales, he noted.

Victory in the current DRAM environment is a relative term, though. “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,” iSuppli’s Kim said. Gartner’s Norwood noted that overall DRAM vendors’ losses tallied nearly $4B in the past three quarters — not nearly as bad as the $5.6B in 2001, but he cautions that losses will continue into 1H08. Still, Kim remains optimistic that companies will rebalance supply/demand 2008, and industry profitability “will be better later this year” — but not as soon as had been hoped in early 2007 when they first started ramping unit production.


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