The technology leader in the DRAM industry has a greater advantage in terms of market share and profit.

BY HEISEUNG KIM and HEESANG LEE, Management of Technology Department at Sungkyunkwan University, Suwon, South Korea

This paper presents an empirical study that links between firms’ technological leadership and the firms’ sustainability. While extant studies focused on the effect of incremental or radical innovation on the firm, a few researches have been carried out on the other types of innovation. In this study, architecture innovation in the DRAM industry is used to analyze how the continuous archi- tecture innovation of scaling affects firms’ performance. We compared the historical technology roadmap of each firm with their market share and profit data and concluded that continuous architecture innovation would positively affects the performance of a firm as well as its chance of survival. This study suggests that continuous architecture innovations are required in order to stay competitive in DRAM industry.

Introduction

Invented by Robert Dennard at IBM in 1966, Dynamic Random Access Memory (DRAM) is one of the major types of semiconductor products. Since then, the DRAM market has grown significantly, accounting for $45.1 billion in sales in 2015 [1]. The DRAM industry has three main and crucial industry characteristics: product life cycle is short, it is technology driven, and it requires a huge investment [2]. The average DRAM product life cycle is about two to three years and the capacity ranges increased from 4K DRAM in 1974 to 2G DRAM in 2010. The implication of the short product life cycle is that the DRAM manufacturer with technology leadership will be able to recover their initial investment and gain more profit; therefore, the DRAM industry is highly driven by technology [3]. The technology leader can earn premium profit at the initial stage of a new product and benefit from additional profit by sustainability in the grown market. However, technology followers can suffer from price reduction when they launch a new product due to the mature state of a product life cycle, and it might thus be difficult to recover their initial investment [4]. The production of DRAM requires numerous steps with very expensive equipment; the cost of a new semiconductor fab is billions of dollars; a proper analysis and suitable strategy is therefore needed in order to compete with other comparative companies in the industry. In 1991, there were more than dozen DRAM production firms. However, by 2012, only four major companies survived: Samsung, SK Hynix, Elpida, and Micron [1].

The well-known scaling law of semiconductors, known as Moore’s Law, was used to review the technology development process in the semiconductor industry [5]. Recently, many researchers, including Mack and Kim, have argued that, even though Moore’s Law provided considerable insight into the semiconductor industry, it is no longer valid; they added that the physical and technical limitation will slow down the innovation and breakthrough technologies are necessary in the semiconductor industry [3-4,6]. Therefore, many companies and researchers are focusing on developing new memory devices, such as Magnetic RAM (MRAM) and Phase-change RAM (PRAM), to replace current DRAM memory. However, it is not clear how and when are the right time to replace the current DRAM memory with new memory devices and how it might affects the firms’ business performance [5,7-8]. In this paper, we will discuss how continuous architecture innovation affects the performance of DRAM companies in terms of market share and profit.

Innovation types

In the long run, technological innovation capabilities are the major source of competitive advantage and many companies are pursuing extensive research activities in order to stay competitive in the market [9]. The ability to develop and introduce new products or processes in shorter time periods is inevitable and has become the major competence for firms [10].

Henderson and his colleagues defined the types of innovation as four categories: incremental, archi- tecture, modular, and radical innovation [11], defined as follows:
• Incremental innovation: innovation with no change in architecture and concept.
• Architecture innovation: innovation with new archi- tecture but without change in concept.
• Modular innovation: fundamental change of techno- logical concept without change in architecture.
• Radical innovation: new architecture and new concept.
ByusingHenderson’sdefinition,thetypesofinnovation in the DRAM industry can be defined as shown in TABLE 1. In this paper, we will focus on the archi- tecture innovation which is the major innovation in DRAM industry [3,5].

Market leadership and profit relationship

Many firms attempt to improve their performance through innovation and according to recent study by Bowen and his colleagues the relationship between innovation and the future performance of the firm is positive [12]. For many firms, including DRAM manufactures, maintaining a leadership position in the industry is a major goal because the duration of the stay at the top of the market reflects the length of time they might be able to enjoy the benefits as a market leader [13]. Therefore, a study is needed on the relationship between the market leader and the followers in terms of profits. In the case of the DRAM industry, the forces of competition are high and there are no room for slow followers to stay profitable; winner takes it all.

Continuous development

Van Valen introduced a theory known as the Red Queen Effect which states that competition will eliminate less fit organizations and stimulate organizational learning [14]. Therefore, continuous innovation is needed in order to maintain fitness relative to the system [15]. This theory explains the continuation of the never ending arms race which is due to the initial innovation of a firm which not only increases its competitiveness, but also decreases the competitiveness of its rivals. The rivals are threatened by an increased competitive pressure, and will respond to a competitor’s innovation with their own innovation, which then increases the competitive pressures in the market, creating a continual cycle of competitiveness [16]. The same theory is valid when assessing competitiveness in the DRAM industry. In 2007, the production by firms in the DRAM industry greatly increased, initiating a price war between the companies, known as the Chicken Game. After 2007, the price of DRAM dropped and DRAM manufacturers underwent a severe decrease in profits [1]. Those who prepared for this race were able to endure the race. However, those who were not prepared and decided to cut production could not withstand the massive supply of DRAM; such companies included Elpida, which lost its position as a leader in the more advanced technology. Their economies of scale reduced and due to the severe deficit, they lost their business and merged with Micron in 2013.

Methodology and data

For the DRAM industry, the market share of the top four companies is about 95% of the total industry’s market share therefore the force of competitions and innovation-performance relationship are well repre- sented by these four companies. The market share and OPM data of the top four companies, Samsung, SK Hynix, Elpida, and Micron, were used in this study and the market share data was refined to represent only these four companies [1]. The data from third quarter of 2006 to 2012 is used because chicken game started at 2007 and Elpida was merged to Micron at 2013. For the companies’ historical product roadmap, development histories of different nodes were obtained from each company’s press releases. For the statistical data of the market share and the operating profit margin (OPM) was obtained from market research firm, IHS isuppli.

Results and discussions

FIGURE 1 shows the trend of the market share change in terms of companies’ historical roadmaps in the DRAM industry. The same numbers of color, 6x, 5x, 4x, 3x 2x nm, indicates the same device generations of architecture innovation and showing the technology gap among firms. For example, Samsung’s 68nm node is competing with SK Hynix’s 66nm and SK Hynix is one quarter behind than Samsung. As expected, the market share of the technology leader, Samsung, is the highest. Samsung has the highest market share of slightly above 40% and SK Hynix has about 25%. Elpida and Micron both have a market share of about 15%. Also, the market share of the technology leader increased as Samsung managed to develop next node product faster than competitors. Technology ranking exactly matches the market share ranking and Samsung was able to maintain their technology and market leadership.

FIGURE 2 shows the profit ranking among the DRAM manufactures in terms of device generations. Profit might be more important factor than market share for the firms’ sustainability since it is directly connected to the firms’ survival as seen during the chicken game. Samsung, the market and technology leader, shows the highest Operating Profit Margin (OPM). The profit ranking changed once for Samsung in the second quarter of 2007, during the chicken game. After the second quarter of 2007, Samsung retained the title of the most profitable firm in the DRAM industry. However, there were many fluctuations for the firms that ranked second and less. During 2007 to 2012, Samsung had a negative profit quarter five times [1]. This is very low compared to the 12 times shown by the second leader, SK Hynix, 16 times by Elpida, and 17 times by Micron.

A previous study by Weber and Yang suggested that in semiconductor industry while leading edge manufac- turers make large profits, but their ROI (Return On Investment) might be lower than the slow followers [17]. This might be true for logic semiconductor devices, since the logic firms produce much specified products and, most of the time, the competitiveness of such firms does not derive from the most advanced scaling node or continuous architectural innovation; rather it derives from optimization, design, and customer value. However, for the DRAM industry, the effect of logic’s competitiveness is limited since the price of DRAM, as a commodity, is determined by the market and the main competitiveness is how many bits that firms can produce in a restricted area of 300nm wafers. Therefore, slow follower probably not able to compete in the market in terms of price.

TABLE 2 shows the ranking data of Samsung from third quarter of 2006 to 2012. Samsung, the market and technology leader was able to manage to stand at the top in terms of technology and market share. In terms of profit, Samsung ranked 2nd only for one quarter in 2007 and managed to return 1st rank due to techno- logical advantage. This result suggests that Samsung was able to maintain its position even during the chicken game and was able to stay fit in the market and make profit compared to the other companies. In the case of the DRAM industry, continuous architecture innovation means that the number of chips per wafer would increase as innovation succeeded. The delayed development of the next generation device would lead to SK Hynix, Elpida, and Micron producing fewer DRAM chips per wafer than Samsung, which led to the increase of the DRAM manufacturing cost. Staying competitive in the market by continuous architecture innovation is most important for DRAM manufac- turers’ as it enables more profit to be made than the competitors; Elpida could not stand the large amount of deficit and merged to Micron.

Conclusions

In this study, the benefits of being the technology leader of architecture innovation in the DRAM industry are clearly shown, where the technology leader has a greater advantage in terms of market share and profit than the competitors. Also, the technology leader has more resilience when the industry is undergoing a difficult time, and would be able to perform better than other firms. The firms that do not continue to innovate will not survive. In 2002, 11 DRAM manufac- turers were competing intensely in the market; however currently, only 3 major DRAM manufacturers had survived. Many large firms such as Qimonda and Elpida failed to survive. The critical factor which deter- mines the ability to dominate in the DRAM industry is continuous architecture innovation. For example, EUV lithography is necessary for continuous architectural innovation since the next scaling node will require smaller patterning with multi-patterning of ArF, which needs many additional steps and processes than EUV process. However, the application of a 450mm sized wafer is not considered as an architectural innovation since the 450nm wafer does not improve the structure of the device. Therefore, it is considered an incremental innovation for the DRAM industry; the 450nm sized wafer is not urgent and not yet required. This study provides understanding for firms to suggest which technology that they need to focus on in order to stay competitive in the market in the future.

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