BW/NEWS ANALYSIS: For Memory Chips, a Time to Forget
NOVEMBER 13, 2001
With too much capacity still on-line, the most popular chips are selling below cost. The upshot: Shakeout ahead
Semiconductor companies have all gotten whacked this year, but none harder than producers of memory chips. Prices of dynamic random-access memory (DRAM) chips, used to store data on personal computers, fell 80% in 2001, vs. a falloff of only about one-third for the overall chip market. With memory chips now often selling below cost, Boise (Idaho)-based Micron Technology, the only major U.S. memory-chip producer, recorded a net loss of $521 million for fiscal 2001 ended Aug. 30 -- a huge downturn, considering the company earned $1.55 billion the year before.
The bad news continues for the memory industry, which will account for about 20% of the $134 billion global semiconductor business this year. Memory prices will likely stay in their downward spiral well into 2002, analysts say. Blame slowing consumer and business spending -- and the recent government-backed bailout of South Korea's Hynix Semiconductor, the world's No. 3 memory maker, which ruined hopes that worldwide production would be cut (see BW, 10/1/01, "Hynix May Be Down to Its Last Chip").
In addition, startups in China are adding to the overproduction by continuing to ramp up output, flooding the market with cheap memory. Some chips have as much as a 30% oversupply, estimates Eric Rothdeutsch, analyst with investment bank Robertson Stephens.
HEMORRHAGING CASH. For DRAM makers, which represent the largest portion of the memory market, doing business is "like bleeding to death," says Jim Cantore, memory analyst with electronic components consultancy iSuppli. The more chips the companies sell, the more money they lose. One gigabit of DRAM, which retailed for $20 at the beginning of 2001, now sells for $1.50 -- and costs nearly $2 to produce. Prices of flash-memory chips, which are used to keep photos and digital music, and static random-access memory (SRAM), which is used in cell phones, networks, and computers, have fallen by as much as 50%, as well.
Why do companies keep selling at such a loss? It's that or pull out of the business. The next year will probably determine which companies can stay in the game and which can't. "Ultimately, somebody has got to run out of money," explains Cantore. The DRAM market will reach only $11 billion in 2001, according to consultants IC Insights, down 67% from 2000. And DRAM makers are already playing Survivor. In the semiconductor version of the popular TV show, it's about time to vote the extra players out of the market, analysts figure.
The major DRAM makers today include Micron, Samsung Semiconductor, Hynix, Infineon Technologies (IFX ), and Toshiba, among others. But only one or two of the majors are likely to remain in the market after next year, with the rest being gobbled up or pushed out of the business, predicted Bill McLean, president of IC Insights, at a Nov. 5 industry gathering in Portland, Ore. Most analysts believe that today's memory leaders Samsung Semiconductor and Micron will be the only ones to stay in this field.
RESHUFFLING THE PLAYERS. Already, Toshiba is said to be in talks to sell its DRAM operation to Infineon. Hynix, revived for now by a fresh infusion of cash from a Korean bank closely associated with the Korean government, could fold within a year unless the company gets more funds, believes Charles Boucher, analyst with investment bank Bear Stearns. To the contrary, says a Hynix spokesperson: "It will be someone else who drops out."
Micron and Samsung will likely gain a few percentage points in DRAM market share, believes Brian Matas, analyst at IC Insights. In the more stable flash-memory market, dominated by Intel (INTC ), STMicroelectronics (STM ) is gaining market share, says Rothdeutsch.
The next year could bring about a major market-share reshuffle. And these changes will be as good as permanent if the market recovers in the fourth quarter of 2002, as analysts predict. The introduction of new cell phones and the spread of Microsoft's new operating system, Windows XP, in the first half of 2002 will kick off another wave of demand for memory, says Matas. And those companies that stay in the game will benefit from the extra revenues when the good times roll, says Matas. Displacing them will be hard, as these memory makers would have the resources and the customers to push smaller entrants out of the way.
HIKING OUTPUT. The long-suffering DRAM market will likely recover before other chip sectors, believes Cantore. Flash and SRAM will follow, though SRAM will remain flat through 2005, as companies often replace it with less expensive, alternative technologies, says Steve Cullen, analyst with the tech consulting firm IDC. Flash memory, though sales won't double each year as they did earlier, will show the fastest growth in the years to come, he says.
Little surprise, then, that many memory makers are increasing production of flash chips. Samsung, for instance, will increase its production of certain types of flash memory by as much as 150% next year, says Dieter Mackowiak, the company's senior vice-president for sales and marketing.
For now, however, other indications of an impending turnaround are scarce. Sales of PCs, which consume 85% of DRAM memory chips, have been falling. Worldwide PC shipments dropped 13.7% in the third quarter of 2001 vs. that period last year, according to IDC. Moreover, "the amount of memory required for applications hasn't risen," says Cantore. "We've reached the plateau where getting more memory is not going to change the performance of the machine." And cash-strapped telecom companies, big users of SRAM chips, are projected to spend even less next year than in horrible 2001.
OVERPRICED? "We don't see that the business is going to recover in the next 12 months," says Samsung's Mackowiak. Analysts are more optimistic, but they recommend caution when it comes to investing in these companies. "The memory companies are stuck in the worst downturn in their history," says Boucher of Bear Stearns. "The stocks don't [yet] reflect that."
He believes that, even now, most memory stocks trade at a 50% to 100% premium. Thus, Micron, trading around $24.50, should be trading below $16, he contends. With that kind of pessimism, the deep troubles in the memory-chip market don't appear to be anywhere near over.
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By Olga Kharif in Portland, Ore.
Edited by Thane Peterson
Copyright 2000-2001, by The McGraw-Hill Companies Inc. All rights reserved.
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