RFI Report: DRAM Limbo? Blame Micron
By Robert Morgan
Earlier this month, in what can only be described as a schizophrenic reaction, Nasdaq Composite, NDX, techs, chipmakers, box makers, etc. all rallied because of renewed evidence that DRAM prices were heading higher. Micron (MU.N) "gapped up" because of that renewed evidence. Soon after, one brokerage said the spike in DRAM prices was not due to the uptick in corporate demand for DRAM and new boxes that will be coming later in the year. However, for better or worse, the "Y2K Lockdowns" in a lot of corporations, businesses, education institutions, etc. are coming to an end this month. And many analysts are expecting a robust "upgrade cycle" for both boxes and DRAM as they adopt Win2K.
Excuse me for snickering about all this, but schizophrenic it is. While higher memory prices are "good" for companies like Micron in the short term, those rises put increased pressures on box makers' margins, not to mention every product that uses memory. Furthermore, the evidence of renewed higher prices for memory is most likely ephemeral -- DRAM prices in Asia dropped after the spike. It's not lost on a lot of people that DRAM prices are about 50 percent lower than the "seasonal highs" during the fourth quarter of 1999. And Micron was trading a lot lower back then when those higher prices were extant.
Remember: Not all Taiwanese DRAM fabs are back online yet, and those that are back are not all up to full capacity. For far too many of them, the temptation to succumb to a variant strain of the "OPEC Disease" will probably prove too great. There's no price spike they are unwilling to sell into and there's no price cut they are unwilling to make, in order to move inventory, even if it impacts their margins. We've seen this all too often in the past. And we don't think that there is greater discipline in the DRAM market than in the OPEC member nations regarding the overall adherence to production quotas in order to sustain certain price levels.
Long before Priceline.com, savvy buyers were already "naming their own price" for DRAM. They either used toll free numbers or the Net to get price quotes, and then bargained between several vendors. DRAM was long ago (relatively) transformed into a commodity and "memory futures" should have already been trading on the CBOT. And it's none other than Micron that's setting up the next bungee jump in DRAM prices -- when it occurs, they'll have no one to blame but themselves. And we'll be rolling on the floor laughing if Micron makes new "anti-dumping complaints" against Asian DRAM makers.
How so? Have you seen the most recent ads in print and on television (CNBC) by Micron's (ahem!) Crucial Technology (crucial.com) "division"? Touting: "The world's largest PC makers buy our memory direct," and that you can get 64MB "as low as $78.29." Plus a 10 percent discount for ordering online. Consumers responding to the ads will expect significantly lower prices than from retailers, catalogers, memory discount wholesalers / resellers, and the like. Being 30 percent percent lower than retail won't cut it; they'll expect it to be at least 50 percent lower. After all, the Micron subsidiary is totally cutting out the "middleman."
Of course, if those Crucial Technology (should be called Micron Direct) prices do offer such savings, what's going to happen to memory prices? They'll collapse, that's what. Since Micron is now in direct competition with its channel and able to offer lower prices; the resellers will switch their purchases to other makers from Taiwan and/or South Korea, etc. to meet or beat those prices. And as soon as that starts cutting into the sales by Crucial Technology, they'll be forced to cut their prices (and margins) in order to regain, maintain or increase sales.
And while some people are willing to pay a premium for the Micron brand name, most consumers won't care as long as the DRAM "works" and is "good enough." Of course, that will cause Crucial / Micron to engage in yet another race to the bottom, just as the majority of the box makers were forced to do in relation to PC prices. Even though that race decimated their margins and sales -- not just their gravy, but their bread and butter as well.
And if PC makers see their margins squeezed even more by higher DRAM prices--and/or other component prices--they'll switch brands in order to get a better price.
We'll be brutally honest here. Because of the intense sales competition, the major advantages go to those DRAM makers who have the lowest production and distribution costs in U.S. dollars: the Taiwanese and South Koreans. And because of that advantage, Micron continually accuses them of "dumping," selling the DRAM below what it costs them to make. That's not usually true unless you use Micron's production and distribution prices and costs. Several air cargo containers, or one CONEX container stuffed to the gills, would probably meet the annual requirements of the average PC maker. Just think how many 64MB, 128MB or even 256MB DRAM chips can be packed into a 40-foot container. Beau coup mon cheris, beau coup.
Bottom line? Remember this historical fact: Every price spike in DRAM is followed by "lower lows." It might take months or quarters to happen, but it eventually occurs as the DRAM market strain of the "OPEC Disease" strikes and sends prices plunging. This happens time and again. Think back to late '95, when Win95 was launched. "Consensus" was that the rush to upgrade to at least 8 MB of DRAM would be "Bullish" for prices as demand increased. But all those new Asian fabs wanted to move their chips and prices skidded -- prices of 4MB and 1MB chips fell through the floor. As each higher level of DRAM became "standard," the prices of all those chips below it plunged. And when 1GB DRAM starts hitting the consumer markets? You'll see it again, and Micron will have to scramble once again to update its fabs. Remember, IBM already licensed its 1GB DRAM technologies to the South Koreans and they were available starting in 1999.
Case in point. Before last year's "Taiwan Quake Price Spike," we made several large DRAM buys at "name your own price" levels. We mostly ordered "Generic DRAM." Interestingly enough, most order fulfillment centers were "out of the generic chips" so we wound up getting either Apple or other "Brand Name" DRAM in their place. Pleasant surprises to be sure, but it just goes to show that unless a specific brand is ordered by the customer, the packers at the fulfillment centers see all DRAM as being equal. "Pack it, ship it and get it out before they change their mind or order from someone else for a better price." They have their own variant strain of the "OPEC Disease."
Finally. When, not if, DRAM prices head south with a vengeance, don't listen to all of the reasons being tossed about or believe that "It's Different THIS Time." Since 1995, the only thing that is different is that investors listen to the "Semi Bulls & Hope Scenarists" when they lure them into stocks like Micron, only to see the "case for higher prices" fall apart and their money evaporate along with the hopes for higher and sustained DRAM prices. It's something we've been trying to get investors to listen to for years. But greed is more powerful than common sense. And no one has been able to satisfactorily answer why Micron is trading higher today than it was last December, especially since DRAM prices have fallen 50 percent since then. Perhaps they are following the dictum: "Sure we're losing money on every sale! We intend to make it up in volume!" Sorry. I couldn't help that one.
Talk to you later. Have a great week!
MacWEEK Contributing Editor Robert Morgan welcomes comments at rfireport@pelagius.com. His Web site is Apple Recon for Investors (RFI). |
