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Memory's Recession: Actions and Realities

Comments(0)Now is the Winter of our Discontent: Five months into a memory industry recession of unknown depth and duration, we have seen as many different strategies in action as there are companies.

Some companies instantly anticipated the worst, and laid off substantial fractions of their workforce; others came to mostly the same conclusion after one or two months, but waited (considerately) until after the holidays to reduce headcount. Some companies, uncertain about how deep and how long this ‘business reversal’ would be, are trying NOT to cut staff until the picture becomes more clear. They are using forced time off, either with accrued vacation days or unpaid days, or extended holiday shutdowns to match production and output to sales, and selling from inventory at the same time, to rebalance the business. Some, those few with nice bank accounts, like Intel, are watching carefully but making no severe cutbacks past normal attrition and the human consequences of shuttering older fabs.

NAND and DRAM makers, in an unusual show of solidarity and common interest (this one allowed by law, unlike 2001’s price fixing.), have idled top-flight 300mm wafer capacity for extended periods, which, it is hoped, will act to reduce supply growth and halt or reverse the price erosion. But the meter is running and the equipment is still depreciating, so production costs will rise. NAND and DRAM makers have also taken down fully functional (but not cost competitive) 200mm fabs, and either sold them off wholesale or piecemeal, raising equipment inventory levels in the aftermarket...to the chagrin of Applied Materials, among others. Since “Cash is King”, too, equipment purchases, often involving tens of millions of dollars for a process tool suite, are being postponed, causing trouble for lithography leader ASML. Sales of semiconductor equipment are expected to be down close to 50% in 2009. Significant node migrations, famously the DRAM move to nom. 50nm designs that usually need expensive new lithographic process tools (“immersion lithography”), are being undertaken cautiously, with only enough tooling to prove out designs...and the Big Build-out being delayed until sunnier days, and more profit.

Significant, costly and diverse actions in response to the economic outlook have been taken already.

While everyone is short of cash flow, significant memory players are within a few months of totally running out of money: Qimonda and Spansion, whose 2008 sales totaled more than $6B, are now at their children’s change jars, plus all of the actions above, to make ends meet long enough to NOT have to sell the farm.

There is a lot of business pain; there are a lot of industry actions being taken to survive, and there are a lot of adjustments being made. Unlike the 2001 recession, however, things were not all that good immediately before the market fell down: DRAMs have been in pain since late 2007, and never really enjoyed a perdio of huge profits in the 2004-5- upturn; NAND was right behind, went weak in 1Q08, and never got back on its feet (as it did for 2Q and 3Q in 2007), it has been suffering greatly since mid-'08. End markets were tepid since early in 2008, were slowing as we rolled past the end of summer, then positivley tanked in October. For most companies, the business shift from 2008 into 2009 went from ”pretty tough” to “unbelievably tough.”

As always, different men can look at the same data, see different things and draw different conclusions. Thus we see the diverse actions taken. In general, significant NAND actions were delayed about six months from the first DRAM actions in early 2008...now everyone is in trouble, and we're not at all sure that the cutbacks and slowdowns are sufficient to match supplies up to demand, which is still weakening almost daily.

Another “Consensus" is building, too: This downturn will be very, very bad: There is now, however, an increasingly strong correlation between the date of all industry 2009 and 2010 forecasts, and the degree of severity they see: more recent forecasts are considerably more negative. These forecasts are also more supported by contemporaneous hard data on sale levels, new orders, still-increasing inventory levels, unrelenting price pressures and weak end markets. Recent DRAM and NAND price improvements may last for a while, but most observers are suspicious that, with capacity in place but NOT being used, production will not stay low enough...and, that there is way still too much inventory. Improved productivity is always driving costs down, and driving net die per wafer up; within the past week, Samsung, Hynix and Qimonda have all made significant technology or production announcements of ~45nm process-node DRAMs, which mean huge productivity improvements and higher output once ramped. In 2009, some vendors' output can grow 40-50% without adding a single wafer start. For the year, it does not look good, or even tolerable. Almost every day brings a darker view into focus, and that view is probably running ahead of actions the industry has taken so far.

The latest set of semiconductor industry forecasts was recently summarized in article in Electronics Weekly, precipitated by a significant reversal of viewpoint by Forward Horizons’ always well-informed and perpetual optimist, Malcolm Penn, who lowered his 2009 outlook to -28% compared to 2008’s sales levels; The WSTS/SIA has just now reported that their estimates for 2008 itself was down by 2.6% from 2007 (all the shortfall, incidentally, was in the last quarter). TSMC, the world's leading foundry, is also suffering mightily, and its CEO, Rick Tsai, added in his expectaton of -30% for the industry for 2009. The #2 leading foundry, UMC, is expected to be running only at 30% capacity in 1Q09. In many instances, foundry business has come to a complete halt, as demand for their major accounts' products...Xilinx, Altera, NVidia...is now supported by sales from excess inventories. The notion that “2H09 will see some or all markets recover” is now discredited; no one says that, or believes that, any more.

Take a deep breath. The chip industry employees more than 1.5M souls worldwide, with probably just as many ‘dependents’ in ancillary industries...equipment and materials, semiconductor packaging and test, subcontractors at all levels, and system assembly. No wonder the Taiwanese government wants to keep its DRAM makers afloat and competitive, as the island is host to tens of thousands of fab employees, and all the back-end processes of assembly and test, packaging and system assembly for PC makers, cards and all manner of electronic equipment, subcontractors for the world. Electronics are Taiwan’s #1 Export, by a wide margin, as well.

To wit, if the industry goes down anywhere near 25-30% in sales in 2009, layoffs-to-date are only the tip of the iceberg; hundreds of thousands of jobs will be shed, worldwide, before the bottom is reached.

Now, the RIF (Reduction in Force) Dilemma: The memory business is hugely capital intensive; about 70% of COGS is depreciation for state-of-the-art fabs. But after you have sold off your excess capacity (= "depreciation"), or written it down, the way to reduce overall costs is reducing headcount: SG& A, cutbacks in R& D, holidays which reduce accrued funds, or imposed ones which cost nothing. But if these jobs are NOT cut back in line with shrinking revenue streams, or the RIFs are done piecemeal and after the fact, the industry will continue to carry labor costs well in excess of what is needed to build the product that the market is taking. Corporate profits will continue to suffer, and corporate futures may be put at risk. Running too fat for too long is death.

No one wants to lay someone off, only to rehire them two months later when the industry turns back on. But the writing is increasingly and unambiguously on the wall: this is going to be a long and deep business reversal. No one can say with any authority much more than that, about how deep and how long, or about what the world will look like when demand is restored. But far lesser recessions than where this one appears headed... the inflation-busting take-down of 1981-82, the mini-recession of the early 1990s, the net.com bust in 2001..took huge tolls on the semiconductor industry, which, in the last two cases, took years of bouncing along the bottom before a real recovery took hold and lifted the industry up. By that time, market forces, product opportunities, and technology had moved new companies to the forefront, and ‘evaporated’ or ‘disabled’ those companies that merely THOUGHT they were running a tight ship, only to discover one day that they did not have what the future demanded and, then, did not have enough time or money to make amends.

Six or eight weeks ago, one could still ‘imagine’ that this might be a ‘down and back’ recession, and we would be off and running full tilt as we moved into 2010. Today, that is an impossible viewpoint, and the pundit and analyst opinion battle today is over ‘How dark is dark?’ or ‘How long is long?’

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