>> But for a commodity product like DRAM and wheat, normally prices trend downward
And that is the problem. It has been different so far. But it may not remain different in the future :)
Your observation falls in the context of the axiom the price of a commodity will equal its cost of production in the long run [the second part of this axiom is at the end of this post]. The key is the time horizon. As it turns out, for the first 7 or 8 years of PC revolution, the price of a PC that you wanted to own was $5000. In the next 5 years that price fell to $3500~$2500. Recently, this trend has accelerated and now seems to be under $900. This is what the bears are relying on; the fall in ASP from $5000 to $3500 was small enough to make up for it in volume growth. But the market is maturing (has matured) and you no longer need to upgrade your PC as fast. This becomes clearer when you look at Intel's main CPUs: 8080?, 8088, 80286, 80386, 80486, P, PII, PIII. For the first few CPUs, the improvements were large enough that you could not afford not to upgrade, the last 3 however are more or less the same. I have not designed silicon for a some time, but in those days, we got the latest and greatest hardware regardless of cost. Somehow I doubt this is still the case.
So what does all this have to do with DRAM and SemiCaps? Well, in case of DRAM I have not been able to justify using more than 256MB in my machine since 1994. Granted, it cost me a lot more to put all that memory in my Sun workstation in '94 than it does today, but that is exactly the problem for DRAM makers; I need the same amount of DRAM, but now I pay less. As for the semicaps, you can't really justify new purchases to your customers if they are not making any money. So far the commodity chip makers are in a self destructive upgrade cycle. Eventually (soon?) there will be only 3~5 players in each category.
What companies like Linear Tech, Dallas Semi, and TI realized few years ago, was that the semiconductor business as it had been for the past 20 years is dead. So each of them left the party while the going was good and moved on to other areas. The future of this industry lies with new products and new applications, but the transition will be very painful.
JMO
Sun Tzu
P.S. When a commodity goes into a bear market, its price falls below its production cost until supply drops below demand for a few months. Ponder on this a bit. |
