Low Prices for Memory Chips
Means 'Disaster' for Producers
By TERHO UIMONEN
Staff Reporter of THE WALL STREET JOURNAL
July 5, 2001
Memory isn't what it used to be.
Last July, prices for standard computer memory chips peaked at highs of around $18 (21 euros); one year later, they are trolling lows of less than $2 apiece. While the situation marks a boon for consumers, it is a big bust for the memory makers, mainly based in Asia. Facing an inventory glut and weak demand, some manufacturers are taking a loss with every chip they ship.
"It's kind of a disaster," said Donald Floyd, a semiconductor analyst for Asia at Lehman Brothers. "The only good news is that the bad news is so bad that something has to break, but it's not really clear what."
Although the memory chip sector is notoriously cyclical and has weathered downturns as much as it has celebrated upturns, the slump is unprecedented in terms of the speed and degree to which prices plummeted. Memory chips store temporary data and their sales shortfall comes alongside a downturn in the broader semiconductor industry, which includes microprocessor chips that handle such functions as running spreadsheets or crunching numbers.
Spot-market prices for 128-megabit dynamic random access memory, or DRAM chips, the benchmark density for memory chips used in personal computers, have fallen 90% to around $1.75 over the past 12 months. For the bulk of DRAM sales, which are funneled into direct accounts with PC makers, contract prices have dropped to around $2 per chip.
The industry has "never come so low in price versus cost ever before in the history of DRAM production," said Jonathan Ross, the head of Asia technology research at Goldman Sachs in Hong Kong.
That makes 2001 likely to be the worst year in the industry's history, with global DRAM sales projected to tumble 56% to $14 billion from last year's $31.5 billion, according to Dataquest Inc., a unit of market research company Gartner Inc.
Industry executives and analysts expect an uptick in DRAM sales and a small rebound in prices later this year, especially if PC makers double the amount of memory in each machine to handle Microsoft Corp.'s coming Windows XP operating system upgrade. Yet a full recovery isn't likely to take place until 2003, according to Dataquest.
How did the memory makers find themselves in such a deep hole? The short answer is that the bottom fell out on the demand side, in tandem with a global economic slowdown. Exacerbating the situation was the DRAM industry's relentless drive to expand production even as prices plummeted further. And despite their woes, none of the biggest manufacturers appear ready to cut back on production to ease the supply glut, which analysts say would be the fastest way to reverse their fortunes. "Nobody likes to do it alone, because they would be giving up market share," said Mr. Ross of Goldman Sachs.
Although South Korea's Hynix Semiconductor Inc., the world's third-biggest DRAM maker, has said it is mulling cutbacks, its manufacturing lines are still cranking out chips at full speed. "We haven't decided anything yet" about decreasing output, said Kang In Young, a Hynix spokeswoman.
The sector's financial misfortunes hit particularly hard in Asia, home to eight of the world's top 10 DRAM companies as well as to many smaller makers. Most of the manufacturers, battling it out in the generic DRAM chips market, have recently posted losses owing to the fall in prices.
For instance, Hynix's net loss for the quarter ended March 31 widened to 539 billion won (491.6 million euros or $651.2 million), from 49 billion won a year earlier. And Micron Technology Inc., the world's second-biggest DRAM maker and one of the industry's lowest-cost manufacturers, has also slipped into the red in recent months. For its third quarter, ended May 31, the U.S. company posted a net loss of $313 million -- one of the largest losses in its history.
For smaller makers, many of which are based in Taiwan, the situation is no better.
"I believe every DRAM company in Taiwan is under water now," said Eric Tang, vice president at Powerchip Semiconductor Corp. in Hsinchu, Taiwan. To improve its own situation, Powerchip is aggressively trying to expand production of other memory-chip products to lessen the company's exposure to the DRAM sector, Mr. Tang said.
Although companies that rely on DRAM sales for the bulk of their revenue, such as Hynix and Micron Technology, are hit the hardest, those with less exposure to the sector are only marginally better off. Germany's Infineon Technologies AG, for example, said it expects to post a pretax loss of as much as 600 million euros for its third quarter, ended June 30. A year earlier Infineon reported pretax earnings of 366 million euros. While DRAM sales make up about 40% of semiconductor revenue at Infineon, there are few places to hide in the chip industry.
"Unfortunately for them, the rest of the semiconductor market is in almost as bad a situation as DRAM," said Andrew Norwood, a senior analyst in Gartner Dataquest's world-wide semiconductor group.
For now, at least, the only major participant still in the black is Samsung Electronics, the world's largest DRAM maker. The South Korean company remains profitable mainly because it has lessened its reliance on standard DRAM chips. It is rapidly expanding production of specially engineered memory chips, which it sells at a healthy profit, based on technology developed by Rambus Inc. and backed by Intel Corp.
With no easy way out on the horizon, some smaller makers are looking to emulate Samsung Electronics' strategy to improve their positions. Winbond Electronics Corp. in Taiwan plans to start volume production of next-generation 256-megabit chips based on Rambus technology by the end of the year.
"Samsung will be seen as pretty smart or pretty lucky in 2001," said Richard Gordon, principal analyst covering semiconductor memories at Gartner Dataquest. |
