FEER(6/21): Memory-chip Industry Mired In Pessimism
By SIMON BURNS IN TAIWAN
June 13, 2001
TIMES ARE HARD in the $30 billion-a-year memory-chip business. The main market for the chips -- personal computers -- is growing far more slowly than expected. The industry once took for granted a steady rise in the average amount of memory per PC. But a lack of attractive new, memory-hungry software has also kept the average number of chips installed in each computer more or less constant in the past year. As a result, while global memory-manufacturing capacity is expected to expand by 50% this year, actual memory-chip shipments have slipped more than 30% from last year, and prices have halved.
Observers say the most commonly used DRAM, or Dynamic Random Access Memory, chips are now often being sold at below manufacturing cost. A vicious price war is forcing the small and the weak out of the memory business, leaving rich pickings for the survivors when the market recovers. But when will that upturn come?
Manufacturers are uncharacteristically pessimistic. "The market has been terrible this year . . . I don't think there will be much change in the second half. Nobody knows when the market will rebound," says Mike Liu, a spokesman for Taiwan's largest DRAM maker, Winbond Electronics. Others echo his comments.
However, things will get better, says Steve Cullen, director and principal analyst with United States-based research organization Cahners In-Stat. The DRAM business is a cyclical one and it is currently at the bottom of a cycle. But manufacturers can't expect the heady growth of the late 1990s, when total memory capacity sold almost doubled every year.
"Revenues will begin to recover in the second half, assuming the economy doesn't go into the tank completely," Cullen explains. "But with desktop PCs . . . there is little need for more memory, and consumers value lower prices more than another few megabytes."
As a result, while memory sold will continue to rise, the growth rate will slow to "50%-60% per year for the foreseeable future," he warns.
Some manufacturers had been hoping that this year they could begin to sell new, faster memory chips for higher prices -- and make a profit. But, for a variety of reasons, few have experienced the hoped-for windfall. Intel's new Pentium 4 chip, which was expected to drive memory sales because it works best with fast-memory chips, has been priced too high for most consumers' pockets and, for contractual reasons, is designed to work with only one type of memory-chip technology -- that developed by United States-based Rambus. Meanwhile, Rambus itself has spent the year embroiled in patent-infringement battles with memory makers that it had hoped would manufacture the chips under licence. As a result of these legal problems, only a few companies, among them Samsung Electronics of South Korea, are producing and making profits from the Rambus chips. With most of the market restricted to unprofitable standard chips, memory manufacturers in South Korea, Japan, Taiwan, the U.S. and Europe are battening down the hatches and cutting costs. Many are delaying expansion plans, though they are going ahead with the introduction of new manufacturing processes that should reduce unit costs -- assuming there are no teething troubles.
Taiwan's Winbond had the most creative explanation for its change of plan. The company said had it delayed building a factory in southern Taiwan because vibrations from a new railway line nearby would have disrupted production -- a convenient excuse for an economically driven decision, several observers said. Other companies are hedging their bets, building new factories but not ordering expensive chip-making machinery until they see signs of improvement in prices, says Milton Huang, an electronics-industry analyst with National Securities in Taipei. The larger companies that are going ahead with expansion, like U.S.-based Micron and Elpida, which is a joint venture between NEC and Hitachi of Japan, are betting on a recovery in early 2002.
Indeed, analysts say the big DRAM manufacturers, like Micron, see some benefit in low prices as part of a long-term strategy to push weaker companies out of the market. "Micron is one of the few companies able to operate at close to break even in the current environment," explained Merrill Lynch analyst Joseph Osha in a report published last month. In contrast, South Korea's Hynix, previously Hyundai Electronics, is reportedly weighed down by $4.4 billion in debt. It lost more than $400 million in the first quarter and is teetering on the edge of bankruptcy. The company did not return calls from the REVIEW.
The industry's giants are having some success scaring off the smaller players, who typically have revenues well under $1 billion per year, compared with about $6 billion for Micron. To take one of several examples, Taiwan's Powerchip Semiconductor, which previously made only memory chips, is hurriedly refitting some of its plants to turn out other products. But that's not so easy, says Powerchip spokeswoman Cecilia Yang -- because a DRAM production line is good at making memory chips and not much else. Even so, by the end of the year Powerchip will have converted 40% of its production capacity to make a variety of chips -- such as image sensors for digital cameras -- that the company, which is a joint venture between Mitsubishi Electric of Japan and Umax of Taiwan, hopes will generate profits.
In spite of all this gloom there appears to be some good news on the horizon: When manufacturers are actually willing to pay to get out of DRAM manufacturing by spending money to refit production lines, it's a sure sign that prices are as low are they can go.
A recovery is difficult to predict, but there are some hopeful signs. Video-game consoles are expected to be big sellers this Christmas, with three companies -- Microsoft, Sony, and Nintendo -- all heavily promoting their own models. Every video-game console contains DRAM chips. Each unit of Microsoft's first foray into the video-game market, Xbox, for example, will require $25 worth of memory chips. Microsoft says it will make 1 million consoles in time for Christmas, after which it hopes to sell millions more. The software giant has already said that Micron will supply most of the memory it needs for its consoles.
Several factors are expected to spur demand for PC memory chips in the second half of the year. Intel is soon to cut the price of its Pentium 4 chip, bringing it into the mainstream market and make the chip work with memory formats other than the legally troubled Rambus design. In addition, Microsoft will release a new version of its Windows operating system software, Windows XP, in October. Windows XP will require more memory than any of the other versions of Windows that most people are using. But there's no firm guarantee that people will want to buy Windows XP. An earlier version of the operating system, Windows 2000, has not sold as well as expected. Some media reports have said technical problems may prevent Windows XP from being ready in time for the Christmas buying season. It had been slated for release at the end of October.
There's another factor that may delay a turnaround in the memory-chip market and make it harder to recognize, says Osha of Merrill Lynch. Almost every electronics vendor was left with excess inventory of memory chips and other components last year when the market slumped. Nobody wants to make the same error this year, so buyers are leaving orders until the last possible moment.
The DRAM makers are being similarly cautious, with a few exceptions. Most notable among these exceptions is Micron, which, ironically, rose to prominence by continuing to expand through the last industry downturn in 1995. The smallest companies, and those that are financially troubled, like Hynix, are simply happy to be hanging on. As Winbond's Liu says: "For this year, I think some of the companies in this business will just be pleased to survive."
fm: WSJ |
