Will DRAM 'futures' trading work this time? Houston firm thinks so
By Bolaji Ojo
EBN
(06/18/01 11:32 a.m. EST)
NEW YORK -- Enron Corp.'s financial muscle and risk management skills may be just what the DRAM market needs to address price and procurement imbalances.
Enron, a Houston-based energy trading and marketing company, recently deployed a service that may help reduce price fluctuations and the incidences of shortages in the DRAM sector by offering guaranteed forward contracts. But while it works for commodities such as crude oil, coffee, grains, and pork bellies, will such a service fly in a market built on technological innovation and product differentiation?
The jury is still out on that question, but one thing is certain: The hedging tools offered by Enron, a $100 billion financial juggernaut with the skill set to match, is drawing attention and forcing the electronics industry to ponder the seemingly impossible -- the potential for a higher level of price stability in a market that takes cyclicality and price turbulence for granted.
"In other industries, hedging is common, and it's something that the electronics industry has been trying to figure out for some time," said Tom Quinn, vice president of marketing at Samsung Semiconductor Inc. in San Jose. "Now that Enron is involved, everyone will sit up."
If the services take off, how do electronic component distributors fit in? Analysts and industry executives said distributors have nothing to fear if forward contracts are limited to DRAMs.
"[Enron] doesn't compete with what we do as a franchise distributor," said Robert Klatell, executive vice president and general counsel at Arrow Electronics Inc. in Melville, N.Y. "DRAMs are a relatively small product offering for a large franchise distributor like Arrow."
Enron commands respect globally and in dozens of industries where companies have used its financial tools to minimize the risks they face in procuring and managing commodities. However, by turning its attention to the semiconductor market, Enron may be attempting to ride a different kind of wild horse, according to analysts.
"It's impossible to come up with a so-called commodity DRAM with fit, form, and function that serves all memory applications," said Sherry Garber, an analyst at Semico Research Corp. in Phoenix. Opinions like this have not held Enron back from its dream of helping to reduce price volatility in the memory market, and making a bundle of money besides by offering financial hedging tools.
"In 1995, people felt the same way about the power market when Enron got in. They said we were going to get crushed, but it's a different story today," said Kenneth Wang, director of Enron Global Semiconductor Services. "What Enron wants to do is step up and take the risks off of DRAM suppliers and consumers," Wang said.
Under the service, Enron offers OEMs and suppliers a chance to secure or sell an agreed-upon volume of 128-Mbit DRAM at a definite price. If DRAM prices go above the strike price for OEMs or below the contractual price for suppliers, Enron will reimburse them, Wang said.
Enron is offering contracts for between 25,000 and 50,000 DRAM chips and will wait to educate the market on the services before expanding it into contracts for millions of chips, he said.
Wang said, "25,000 to 50,000 may be very small but we're right now trying to teach people how the mechanism works as a tool for risk management. I don't want to have CFOs saying, 'You just made a killing on me.' My intent is to have people saying, 'This is a great tool.' "
It may be some time before the electronics industry gets to that stage. Similar devices have been considered before in the electronics industry, by the New York Mercantile Exchange and the Chicago Board of Trade, but they all failed for one simple reason: DRAMs are not gasoline.
"DRAM is not perfectly fungible," Samsung's Quinn said. "It's not like if Compaq doesn't want it, you can push it to Dell. You can push some but not all."
Even so, Samsung is talking with Enron about using its hedging tools to reduce the risks the DRAM maker faces in the market place, according to Quinn.
"There are multiple ways to mitigate risks and Enron is offering one that will catch on eventually," Quinn said. "The need for a third-party financial speculator that's willing to take the risks for others is there all along the supply chain. That's the way a mature business model works, but we're not there yet."
Enron is not the only company that's trying to introduce risk-hedging tools to the DRAM market. Since last August, Buckaroo.com in Mountain View, Calif., has been offering suppliers and OEMs an exchange that it expects to develop into a futures exchange.
Next month, Buckaroo plans to unveil its Buckaroo 128Mbit SDRAM Index, a pricing mechanism it hopes the industry will use as the precursor to a futures exchange.
"Once you have established an index, you've established a basis to create a futures market," said Erik Solderberg, head of marketing at Buckaroo. "There's no doubt that high-value commodities can be hedged, [but] all forward transactions have to be matched against an index, a neutral market place to eliminate the distrust that's been built up."
That's good news to Enron's Wang. His company has no plans to establish a separate DRAM pricing index, yet it needs one that's acceptable to both OEMs and DRAM manufacturers. Solderberg said his company is holding discussions with Enron on "developing an index that the entire industry can trust." |
