High inventory levels mean low DRAM tags

However, suppliers are reducing capacity in an effort to lower DRAM inventories and stop price declines

By James Carbone

01/11/2012

Overcapacity and weak demand have driven up inventory levels at DRAM suppliers, contributing to declining prices.Contract prices for 2 GB DRAMs fell 58 percent in 2011 and memory chip buyers can expect further price erosion in 2012 because of high inventory levels at DRAM suppliers.

While stockpile levels of the overall semiconductor industry are declining, inventory levels at memory IC makers continues to rise. DRAM inventories increased 31 percent in the third quarter of 2011 compared to the second quarter, according to researcher IHS.

The IHS iSuppli DRAM Inventory Index in the third quarter of 2011 stood at 12.8 weeks, up from 9.8 weeks in the second quarter and nearly double the level in the first quarter 2011. The index is a measure of the inventory value at the end of a quarter against the sales for the quarter. The index accounts for DRAM inventory held by memory suppliers and not by DRAM buyers. A rise in the index means that there is more inventory being held by DRAM producers, putting downward pressure on chip prices.

DRAM prices fell for much of 2011 and will likely continue to drop in the first quarter of 2012. In 2011, the 2 GB DRAM contract price fell 58 percent from a high of $2.13 in May to the current $0.88, according to researcher DRAMeXchange in Taiwan. The spot price decreased from $2.32 to $0.70 over the same period.

Declining prices and weaker demand means lower revenue for DRAM makers. IHS estimates that DRAM revenue slid to slightly more than $6 billion in the fourth quarter of 2011, down 11 percent from the third. Another researcher, IC Insights, reported that DRAM revenue for 2011 declined 24 percent to $31.2 billion and will fall another 3 percent in 2012.

Clifford Leimbach, analyst for memory demand forecasting at IHS, said the DRAM industry is declining because of the lack of worldwide demand, the emergence of applications that need less DRAM, and operating systems that do not require an incremental increase in DRAM as previous versions did.

New applications include media tablets, which use lower densities of DRAM and are slowing sales growth for traditional notebook PCs.

Subhead: A buyer’s market

High inventory levels and weaker demand equates to a buyer’s market for DRAM, but how long it will last remains to be seen. DRAM suppliers are cutting back capacity in an effort to reduce inventory levels and to bring it supply demand or to balance. Overall, DRAM suppliers have cut capacity by 21 percent since the beginning of 2011. Taiwanese DRAM makers have reduced capacity by 44 percent, according to DRAMeXchange.

Declining DRAM bit growth, lower prices and reduced revenue have contributed to the financial difficulties of a number of DRAM makers. Lower revenue means some DRAM suppliers are not able to make investments in advanced process node technology, which would yield higher profit margins than previous generation process technologies.

Taiwan DRAM suppliers are lagging in transitioning to more advanced process node technologies. They are cutting back on capital spending which is often used to invest in more advanced process technology.

For instance, Taiwanese suppliers including Nanya, ProMos, and Powerchip collectively will make $750 million in capital expenditures in 2012, said Brian Matas, vice president of research for IC Insights in Scottsdale, Ariz. In contrast, Samsung, the world’s largest DRAM manufacturer, will make $2.5-3 billion in investments for DRAM. Hynix and Micron are also investing more than Taiwanese suppliers.

Taiwanese suppliers are manufacturing DRAM on 40 nm and 50 nm process technologies, while Samsung is transitioning to 20 nm and Hynix and Elpida are advancing to 30 nm process technology, according to DRAMeXchange.

The lack of investment by Taiwanese suppliers is bad news for DRAM buyers because it could reduce supply, competitiveness, and the number of suppliers in the DRAM market.

“If you want to be a leading-edge player and make money in DRAM, you have to invest a lot,” Matas noted. “Those companies that can do that are getting fewer and far between, at least as standalone companies. Only the strongest will survive.”

He added that over the next five years “there may be three or four big suppliers. Maybe the Taiwan suppliers will have to join up with Elpida or do more joint ventures.”

Matas said that if the number of major suppliers is reduced, the remaining DRAM manufacturers “will have a little bit better control over how much capacity is added. I don't see these three or four companies left slaughtering each other to gain some more market share. I don't see them just bombing prices on each other.”

Jim Carbone Jim Carbone is a freelance writer covering the electronics supply chain. A veteran journalist, Jim was a writer and editor for Electronics Purchasing and Purchasing magazines for 21 years. He covered electronics distribution, semiconductors, passive components and connectors for the magazines. He also wrote extensively about the strategic purchasing strategies of electronics OEMs and electronics manufacturing services providers. Jim was a member of an editorial team that was a finalist for a Jesse Neal Award-- considered the Pulitzer Prize of business journalism-- for print and online stories in 2009 about buying during the recession. He also wrote content for Purchasing.com, which was named a Top 10 Great Website by Media Business Magazine. Before covering the electronics industry, Jim worked as a reporter and editor for United Press International for nine years. He started his career as a newspaper reporter and photographer. Jim is a graduate of the State University of New York at Albany.