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DRAM turmoil Reverberations will be felt throughout the chip industry
IF PRICES for memory chips continue to slide, it may be good news for consumers but bad news for the semiconductor industry. Intense competition and fragile economies in South Korea and Japan, which produce three-quarters of the world's DRAM, has sent the market reeling. One projection has downsized chip-industry growth from 17 to 7 percent for 1998.
sjmercury.com
Posted at 5:04 p.m. PST Sunday, February 15, 1998
DRAM Downfall
Asian crisis undercuts memory-chip makers already reeling from falling
prices
Graphic: Worldwide market share by country and company
BY K. OANH HA
Mercury News Staff Writer
PERHAPS nowhere has the Asian financial crisis had more immediate and pronounced
effects than in the market for a $3 sliver of silicon known as the DRAM.
For much of the past year, the mostly Asian manufacturers of DRAMs -- the memory
chips that store programs while a computer is using them -- have been barely surviving
amid intense competition that has cut prices for their products by 90 percent since 1995.
But since late last year, the troubles of the South Korean and Japanese economies have
shattered their fragile status quo -- with ramifications that could go far beyond their slice
of the semiconductor industry.
Enormous conglomerates like Samsung, Hyundai and Hitachi are slashing production,
canceling capital investments, even abandoning the business altogether. Memory chip
prices suddenly surged, ending a steep nose dive, then edged down and bounced up
again. DRAM production has even become a U.S. political issue, with one of the three
remaining U.S. manufacturers protesting the proposed international bailout of South
Korea.
And when things will stabilize is anyone's guess.
''No one's a genius in this one,'' says Jack Geraghty, a semiconductor analyst at CS
First Boston Corp. ''It's a crazy situation.''
But it's a situation with enormous implications. The plunge in DRAM prices since the
mid-'90s is a primary reason today's personal computers deliver so much performance
for so little money. If DRAM prices stay low, consumers will continue to benefit. But
the spillover effects of a market collapse could hold back the chip industry overall.
Indeed, last week a leading market research firm reduced its projections for chip industry
growth in 1998 from 17 percent to 7 percent, citing the DRAM turmoil. And Fremont
chip-equipment maker Lam Research Corp. announced it would lay off 700 people -- 14
percent of its workforce -- for much the same reason.
Critical part
To understand where the DRAM market is now, it's necessary to know a little about the
technology and the market's history.
Of the many components in a typical PC, DRAM (an acronym for dynamic random
access memory, pronounced ''dee-ram'') is a key in determining the performance that a
user experiences.
DRAM chips temporarily store the information and programs that the computer is
currently using; in general, the more memory a PC has, the more sophisticated programs
it can run. Most of today's computers are equipped with 32 megabytes of memory (it
takes 16 chips of 16 megabit DRAM to get that configuration). DRAM accounts for as
much as 20 percent of the price of a PC.
Today, Korean and Japanese suppliers dominate the DRAM landscape. But prior to a
decade ago, computer memory was an American stronghold -- until the Japanese blew
many U.S. companies out of the business with better manufacturing technology and
lower prices. The Japanese, in turn, fell on hard times with the bursting of the country's
''bubble economy'' in 1992.
Korea's move
That left an opening for the South Koreans, who poured huge sums into capital
investments, and lowered chip prices. As of 1996, when the most recent market share
study was done, three South Korean memory chip makers controlled roughly 34 percent
of the DRAM business while nine Japanese producers held 42 percent, according to
International Data Corp. Texas Instruments Inc., Micron Technology Inc. and
International Business Machines Corp., the only American companies still in the
business, together share 17 percent of the market.
Regardless of which country dominates the industry, the computer memory market is
notoriously cyclical. Periods of oversupply and accompanying low prices are often
followed by a spate of shortages and higher prices. The shortages, in turn, lead
companies to expand production beyond what the market can bear, taking them back to
square one. In addition, memory technology advances rapidly, forcing regular,
billion-dollar investments that companies are anxious to recoup.
''It's difficult'' to gauge capital investment, said Julie Nash, a spokeswoman for Boise,
Idaho-based Micron. ''You want to be the first to make the move and to expand if you
think the market is moving.''
But ''it's a fine line between investing too much and investing too little,'' noted Jim
Handy, memory analyst at industry research firm Dataquest in San Jose. ''We're now
suffering from the overcapacity that comes from too many investments being made when
the market was profitable.''
Many American experts believe that one other factor pushed the DRAM market toward
bottom in recent years: the penchant of South Korean companies toward illegal
''dumping,'' or selling chips below cost. The companies do this, it is thought, to gain
market share and drive out competitors, with the hope of raising prices later. In 1992,
the U.S. government found the three major South Korean DRAM makers guilty of
dumping. Micron has recently filed a complaint alleging that the Koreans have been
dumping again.
Astonishing drop
Whatever the reason, the drop in DRAM prices has been astonishing.
In December 1995, the price for a 16-megabit chip was about $50 on the spot market,
which is more sensitive to supply and demand trends than the more common contract
sales. By the end of 1997, the price for the same chip was under $2, a drop of 96
percent. Market watchers were convinced that profit margins were razor-thin if not
non-existent, and foresaw a major industry shakeout.
Then Asia's economic troubles brought that turnabout -- in the last two months.
Samsung indefinitely postponed plans for a DRAM factory in Austin, Texas, and
delayed production at a planned South Korean facility until 1999. Hyundai has delayed
completion of a factory intended to make next-generation DRAM chips. And LG
Semiconductor, which had 8 percent of the world DRAM market in 1996, says it's
getting out of the business altogether.
So desperate are LG Semiconductor's straits that it is now on a cash basis with its
suppliers, admits spokesman Mark Shroeder.
Hitachi cuts production
In Japan, Hitachi announced it will cut production 20 percent at eight domestic plants to
thwart losses. Mitsubishi is closing a DRAM plant in North Carolina -- reportedly the
first-ever closure of an overseas chip factory by a Japanese company. Even NEC Corp.,
the world's second-largest chip company, said it will stop production of some chips in
Japan and England.
Then there are the spillover effects. If chip companies aren't expanding or revamping
production, they aren't buying equipment. That's a major reason why Applied Materials
Inc. of Santa Clara, the world's largest manufacturer of chip-making equipment, said
last week that it expects lower sales for the rest of the year. As Lam Research announced
its layoffs, company officials said they expect a loss of $5 million in their current
quarter.
''This is just the first announcement about reductions in the work force in the capital
equipment industry,'' said Tia-Min Pang, a semiconductor equipment analyst at Cowen
& Co. ''It's not going to be the last one.''
In a typical year, the memory market accounts for 40 percent of the capital spending in
the semiconductor industry. Citing the troubles of Asian DRAM manufactures, CS First
Boston Corp. recently projected that overall capital spending in semiconductors will
increase at anemic 2 percent this year. Memory chip companies will delay or cancel about
$14.5 billion worth of planned purchases this year, the report says.
''Usually at this time, we have a little more confidence about what the outcome is going
to be,'' says James Morgan, Applied's chairman and chief executive. ''We just can't tell
what's going to happen.''
Inevitable retrenchment
As devastating as the retrenchment may be, most observers agree it was inevitable -- and
necessary.
''Prices were so low that they had to stabilize sooner or later,'' says Linley Gwennap,
editor of the Microprocessor Report. ''Maybe the Asian crisis helped it happen sooner
rather than later.''
And at first glance, it appears there is some new stability. DRAM prices began to bump
up in January, ending a nearly nine-month-long free fall. 16 megabit DRAM chips are
now selling for about a dollar more than they were two months ago.
Nevertheless, there remains significant disagreement about where the market is headed --
and what that means for consumers and the industry as a whole.
Many analysts believe the memory market will continue to be oversupplied, even with
the scale-backs, and that prices will drop again. Currently, it cost manufacturers between
$3 and $4 to make a 16 megabit DRAM chip. But the devaluation of the Korean won
will bring down the relative cost of production for manufacturers in that country,
enabling them to cut prices in overseas markets. And as they scramble for survival,
many analysts expect Korean suppliers to sell more for less, simply to get the cash.
''The price jumps we've seen are artificial,'' says Mario Morales, manager of
semiconductor research at International Data Corp.
Story by Mercury News Staff Writer K. Oanh Ha |
