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To: DJBEINO who wrote (4932)	5/24/1999 5:07:00 PM
From: DJBEINO	Respond to of 9582

Memory cycle to turn shortly Vadim Zlotnikov; Sanford C. Bernstein & Co. Inc. The current problems in the DRAM market are transitional, and we expect a recovery in the second half of this year. In the last article, published roughly two months ago, we argued that DRAM vendors' peak margins during this cycle would be significantly below the levels enjoyed in 1995. This conclusion was driven by the emergence of a much flatter supply curve, due to industry consolidation, and lower use of memory in PCs. However, the current DRAM pricing and margin environment is anomalous, and recovery from these levels is likely. This recovery is occurring in two phases. The first phase was completed at the end of last year. As DRAM prices declined through most of 1998, the marginal, high-cost DRAM producers cut back wafer starts, but did not mothball facilities. When DRAM demand surged during the fourth quarter, it created shortages even though there was still overcapacity in the industry. The resulting shortages precipitated an increase in both spot and contract prices of DRAMs, with 64-Mbit devices peaking at $10.50. This prompted the marginal producers to re-enter the market. At the same time, rising prices forced PC vendors to limit the increase in DRAM content at each PC price point. As a result, DRAM demand during the past three months grew roughly 3%, while DRAM bit output grew close to 17%. Consequently, 64-Mbit DRAM prices plunged to the mid-$5 level for certain configurations, and inventory levels increased. At these prices, nearly 50% of production capacity is no longer viable because prices are below the variable cost of production. The marginal suppliers, which still operate at linewidths equal to or greater than 0.25 micron, have started to shut down capacity, which will limit output growth in six to eight weeks from today. Meanwhile, lower DRAM prices are prompting PC vendors to increase memory content per PC. The effects of capacity cutbacks and an increase in memory content will not be felt for another eight to 12 weeks. The delay will stem from liquidating the inventory created by the work-in-progress from several DRAM suppliers. techweb.com