Micron Hunkers Down
By Arik Hesseldahl
FORBES
The computer memory business has never been for the faint of heart.
It's an industry that never seems to attain a happy medium. One year there's a supply shortage that drives prices and profits skyward. Just as suddenly, supplies can stack up, driving prices down.
With such a roller-coaster cycle, it's no surprise that the number of companies making DRAM chips, or dynamic random access memory--the main memory chips used in personal computers, notebooks and servers--has declined to 14 from 28 since 1996. That number is only going to get smaller, and soon. The question for many chip investors is what happens to Idaho-based Micron (NYSE: MU - news).
It's not hard to guess the source of the market's current troubles. Slowing demand for PCs among consumers and business customers alike, coupled with the general slowing of the economy, has dashed hopes for a prolonged industry boom. As PC demand fell, supplies of memory chips have piled up.
In its most recent quarter Micron reported a $352 million profit on sales of $1.8 billion, or 58 cents a share, while analysts had been hoping for 60 cents. Among the analysts who have been cutting their earnings expectations for Micron in recent weeks is Joe Osha at Merrill Lynch, who trimmed his 2001 earnings outlook on Micron to $1.42 per share from $2.86 per share, citing inventory concerns.
Admittedly, the picture doesn't look good. Last year, worldwide DRAM revenue surged 40% to $28.9 billion. But this year the market is expected to decline by more than 11% to $25.7 billion, according to Semico Research of Scottsdale, Ariz., and that's one of the more conservative estimates out there.
Further consolidation in the DRAM industry is a near certainty. Building a new chip factory, or ``fab,'' is now a $2 billion undertaking. And shifts toward new manufacturing technologies and new types of memory require more expensive manufacturing machinery. ``It takes a lot of capital to stay in this business,'' says Sherry Garber, an analyst with Semico Research.
And a supply room stocked with antacids. As the slump persists, some companies may bow out of the business completely, or form joint ventures with others. Just last year, two Japanese companies, NEC (Nasdaq: NIPNY - news) and Hitachi (NYSE: HIT - news), soldered their respective memory divisions together to form Elpida Memory, which now ranks among the top five in the industry.
``There might only be four or five major players in the industry within a few years,'' says analyst Brian Matas of research firm IC Insights in Scottsdale, Ariz.
Micron already stands among the top five DRAM manufacturers in the industry. Collectively, Micron, Samsung, Hyundai Electronics, Elpida and Germany's Infineon (NYSE: IFX - news) control about 80% of the DRAM market.
But troubles in Korea may have a significant impact at Micron's Nampa, Idaho, headquarters. Rumors have been circulating that the two South Korean DRAM giants, Samsung and troubled Hyundai Electronics, may merge.
Hyundai is struggling to reduce some $6 billion in debt stemming in part from the bailout loans it received during the 1997 Asian financial crisis. When Hyundai revealed a staggering $1.97 billion loss for 2000, rumors spread that it might end up being taken over by Samsung at the behest of the Korean government. Such a combination would control 40% of the DRAM market.
That might force other companies, especially smaller Japanese DRAM makers like Toshiba and Fujitsu, to either bow out of the business entirely, or forge new joint ventures like Elpida. But Micron is more likely to stand pat. In 1998 it paid $800 million to acquire the memory-manufacturing assets of Texas Instruments (NYSE: TXN - news), which effectively doubled its capacity, and just last week spent $25 million to acquire KMT Semiconductor, a smaller Japanese chip firm in which it had held a stake since 1998.
But with control of about 20% of the DRAM market, and a knack for manufacturing DRAM chips at very little cost, Micron has little to fear from new DRAM dragons in the East, and little need to make any major acquisitions, analysts say. Micron did not comment for this story.
``If it ends up taking capacity out of the market, it benefits Micron,'' says analyst Jack Geraghty with Gerard Klauer Mattison in New York, who rates Micron a ``buy'' despite a share price that has fallen more than 60% from its 52-week high. ``Would they want to go out and get somebody else? Probably not. For them 20% of the market is enough.''
``This year is looking glum in DRAM, there's no doubt about it,'' says Jamie Stitt, director of business development of Toshiba America Electronics, Toshiba's U.S. unit. He says Toshiba has no plans to alter course by either exiting the DRAM business or launching a joint venture. Instead the company plans to ride out the storm, with hopes of an improvement next year. ``The name of the game this year is survival.''
If industry history is any judge, it usually takes three bad quarters before good news begins to supplant bad, and the DRAM industry is about halfway through the cycle now, says Matas of IC Insights. ``The farther the industry falls now, the better the chance for a rebound next year.'' |
