February 7, 1998
New York Times
Memory Chip Market Begins Cautious Rebound
By KEVIN JONES
There are signs that the worst may be over in the computer memory chip industry, which has been hammered by a 90 percent drop in prices in the past two years as surging supply outstripped demand.
If that's true, Micron Technology Inc., the Boise, Idaho-based company that is America's largest manufacturer, could be among the first to benefit.
On the spot market, the price of memory chips, called DRAMs, has risen in the past few weeks, to the $3 to $3.50 range, after nudging the $2 level at the beginning of the year as cash-starved Korean manufacturers reportedly flushed out their inventory backlogs.
Most analysts say the fire sale is over and Korean inventories at companies like Samsung and Hyundai are back to normal.
Micron's chairman, Steve Appleton, says Korean government policy is partly to blame for oversupply, telling the House Banking Committee this week that Korean companies are violating International Monetary Fund bailout guidelines by using IMF money to subsidize the production of more chips than the market is demanding. "These companies would not be expanding, and would, perhaps, be forced out of business, if it were not for the IMF funding," Appleton said.
"No one has a handle on whether the price rise is a positive blip or a permanent upturn," said Jeff Wier, of the Semiconductor Industry Association, a trade group of American chip makers.
Attaching more significance is John Joseph, a chip stock analyst with NationsBanc Montgomery Securities. "The current price rise signals a shift in psychology among buyers, the PC companies: a recognition that things will change and supply will tighten," he said.
Memory chips, commonly called just RAM, work in tandem with the more costly processor chips produced by companies like Intel Corp. The more memory, the more applications a computer user can have open. Demand for memory chips is expected to continue to increase at the 70 percent per year growth rate it has tracked for the past decade.
Micron's stock, which in late December hit a low of $22 a share, from a high of $60 earlier in the year, has rebounded into the $35 range. With a 10 percent market share, Micron is the third-largest producer behind Korea's Samsung and Japan's NEC Corp. Micron has remained the industry's only profitable company while its competitors lost money, but it expects in March to post its first quarterly loss (20 to 30 cents per share) in more than six years, the fallout of December's price plunge.
Forecasts of an early end to the industry's dark days may be premature; most industry analysts expect supply to exceed demand throughout 1998, with the sector moving into the profit column only next year. "It's reckless jubilation to say we've reached bottom," said Jim Handy, a memory chip industry analyst for Dataquest, a San Jose, Calif.-based technology research firm.
"The Japanese and Koreans are stuck without a source for money to upgrade their [fabrication plants].... That's got to be good news for Micron."
The fall of the Korean currency, the won, will also let Korean chip makers earn a profit by selling at a lower price than they could before, giving them an edge over American companies like Micron, said Tom Kurlak, a chip industry analyst for Merrill Lynch.
Those who look for an earlier return to profitability expect capital constraints to diminish Korean and Japanese production when the market shifts to new plants churning out the next generation - 64 megabits - of memory chips in the second half of the year.
At the end of last year, chip makers canceled or delayed $22 billion worth of previously announced factory construction and expansion, with two-thirds of the reductions coming from Korean companies and Japanese companies trimming 30 percent of their projected expansions. "It's like two cats on a string running in opposite directions; pretty soon, the string will tighten up," Joseph said.
"The Japanese and Koreans are stuck without a source for money to upgrade their fabs," said George Burns, publisher of International Wafer Fab News, a chip industry newsletter. "There's been a fundamental turn in the market, a slowdown. People are finally putting on the brakes in building. That's got to be good news for Micron."
Even more telling, Japanese DRAM makers Hitachi Ltd., Toshiba Corp. and Fujitsu Ltd. are cutting back current production of the current generation of 16-megabit chips and pinning their hopes on getting ready for 64-megabit chips.
Since a fabrication plant costs a minimum of $1.5 billion and becomes outmoded in three to four years, steep depreciation costs make shutting a plant down for even a short time a drastic step.
"It's clear the Japanese can't keep operating at a loss," said industry watcher Fred Zieber, of Pathfinder Research in San Jose, Calif.
Korean chip makers, in need of cash flow, are not likely to follow the Japanese example on their own, and that's why Appleton went to Congress. "If these were companies operating in the United States, they would have two choices -- bankruptcy or undertake a massive belt tightening by cutting capital spending and bringing output back into line with current demand," Appleton said. "Amazingly, the Korean semiconductor companies are doing neither.
"They are sticking by their original investment plans and have, at the behest of the Korean government, launched a massive export campaign to export even more semiconductors in 1998 than they did in 1997," he said. Appleton is asking Congress to demand the establishment of a monitoring team to make sure IMF funds intended to get Korean economy back on its feet are not used to prop up insolvent electronic companies.
Korean chip makers, in need of cash flow, are not likely to follow the Japanese example on their own, and that's why Appleton went to Congress. "If these were companies operating in the United States, they would have two choices -- bankruptcy or undertake a massive belt tightening by cutting capital spending and bringing output back into line with current demand," Appleton said. "Amazingly, the Korean semiconductor companies are doing neither."
"They are sticking by their original investment plans and have, at the behest of the Korean government, launched a massive export campaign to export even more semiconductors in 1998 than they did in 1997," Appleton said. Appleton is asking Congress to demand the establishment of a monitoring team to make sure IMF funds intended to get Korean economy back on its feet are not used to prop up insolvent electronic companies.
He was joined in his testimony by joining automakers and steel companies making similar pleas.
Discounting that probable political long shot, the question remains open on whether the blood letting in this market is over.
"Have we hit bottom?" asked Elizabeth Schumann, market analyst at Semiconductor Equipment and Materials International. an international chip makers trade group. "That's something you only know six months later." |
