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Cross Currents in Memory Market Signal Changes Ahead

Comments(0)No one can say with any certainty, but...
Recent improvements in DRAM and NAND pricing, a firming of demand, and a 'the bloom is off the rose' attitude toward the 'TMC DRAM Salvation Initiative', have all pointed to perhaps a better memory future, after a 2008 loss of $20B and another $7-8B in 1Q09 by memory makers. This will not, however, happen "...in the first hundred days...", so out of kilter the sector is today, and so deeply mired in below-cost selling we are: 'Everyone has issues', and none will be resolved today or tomorrow.

However, we are moving past some of the most troublesome features of today's memory market, though even on that point there is no overwhelmeing consensus..."always read the fine print"

Prices: Since their nadir in 4Q08, DRAM prices (DDR2, 1Gb benchmark) have risen about 35%, from 80 cents to about $1.15. That is good for DRAM makers, but hardly good enough to stanch the flow of red ink for anyone. Likewise, NAND flash makers, who seem to have recognized which side their profit bread is buttered on, are fewer in number, and more able to act in silent concert with a common interest, have both decommissioned older NAND fabs and idled a considerable amount of prime capacity in an attempt to constrict supply. It has worked: prices have come up about 25-35% since late November, and been stable for the past few months. Apple's surprise order for '100M 8Gb equivalents' added to the feast, though if that amount is accurate, would only constitute an incremental 4-5% on the existing annual NAND demand level.

Capacity overhang, sustainability of upward price pressure: Due in most part to the manner in which supplies were constricted, and a close-to-market balance was achieved, there is widespread suspicion that the price ups the industry has enjoyed are transient, and that the slightest glimmer of improved financials will bring this latent production capacity out of hiding and into production...tilting the supply up, and prices back down. Some analysts are already seeing this, even with the meager DRAM price improvements in the past 60 days. This possibility is not to be ignored, being as undisciplined as DRAM and NAND makers are wont to be, and as capable they have shown themselves to be, to shoot themselves in the foot, or worse.

DDR3 progress into market is steady (today): There IS good news on the DDR3 front, as adoptions are starting to be seen around the edges of the market. DDR3 has been a force in high-end game PCs/systems for more than 6-9 months and recently have been spotted in Dell's new laptops...not so much for their DDR3 performance as for their 'free' reduced power due to DDR3's 1.5V operating voltage compared to DDR2's 1.8V. At the crossover speeds, -800 and -1066, this is almost free power down, and a nice checkoff item for laptop sellers; it is too early yet to see if this is a true kick-off for DDR3, or a weak marketing initiative that will buy you little for Dell or the consumer.

After all, even a 20% improvement in memory power in a laptop is still only about 6-8% system power reduction when laid against the power used in the MPU, HDD and graphics subsystem; laptops have never used any kind of low power DRAM before, either.

DDR3 prices are also inching closer to those of DDR2, with some of the reduction due to DDR2's price rise, some due to new generation DDR3 being more die-area-efficient (less cost penalty to build, compared to DDR2), and some to sheer Strategic Pricing initiatives: if you are going to wrap a $2 bill around a 1Gb DRAM to sell it, it might as well be a DDR3 DRAM as a DDR2 DRAM; then you'll have a leg up on the future business into that particular socket. As always, the newer generation DDR3 DRAM is the leadership part which can give market separation between the leaders...Samsung, Elpida and Micron...and the DDR3 have-nots (mostly in Taiwan) who still are mostly dependent on their Korean or Japanese technlogy partners (the dependency problem that TMC had hoped to solve).

This also is a differentiator between the Micron-led Micron-Nanya-Inotera collective, and the situation Powerchip and ProMOS find themselves in with Elpida and Hynix...the transfer of DDR3 designs and most advanced processes, as well as jumpstarting the actual design effort within the Taiwanese companies, is less developed than that of Nanya/Micron.

All that being said, the "DDR3 value proposition" for PCs does not really gain traction until DDR3-1333 (which part is still scarce in laptops and PCs today), and price parity has been achieved. So the jury is still out as to whether the industry has truly turned the DDR3 corner.

Taiwan Memory Company: Demise and Resignation?: EE Times Mark LaPedus called for Taiwan DRAM makers to throw in the towel and abandon their plans to consolidate DRAM makers, or to create some "Grand DRAM Challenge" to Samsung. (Hynix has somehow slowly faded from the 'Korean DRAM Threat' discussion, once it's own financial problems were scrutinized more carefully). After watching developments in the press and in the market for more than six months, I would have to agree.

Of course, no one wants to walk away from their investment, though most of it is already vaporized in the 'great DRAM demise' of 2007-8-9'; overall, shareholders have probably lost 90% of their value already, and crediors have started to write down their loans, too, though some are playing hardball with their distressed-DRAM-making customers. Perhaps the surviving DRAM makers could accelerate the 'demise process', buy up the shares of the 'price spoilers' DRAM operations with their improved DRAM profits as DRAM prices rise, and then liquidate the assets. "Buy and dismantle" is clearly a non-competitive act (of survival), but is also not as nefarious as 'price fixing' or 'blackmail', and may be a legitimate business strategy.

CapEx, cash flow, dire straits: CapEx for memory is down by about 80% from 24 months ago, and is now 'critical investments only' everywhere we look...something pinch-point tools, and nothing to add more wafers. No DRAM maker is flush with cash on the eve of huge investment requirements to go to the 50nm node in volume production, though of course, some are better off than others. But ProMOS and Powerchip creditors are knocking on their doors for repayment of bonds. We may be near some resolution within a few months or even weeks, as DRAM makers are still caught between negative cash flow from operations, reluctant capital markets for fresh funding, aging process technology in need of an upgrade, and hungry creditors who want ALL their money back. Spansion passed though some milestone just this week, by finally being delisted from the NASDAQ, and saw its market cap drop to about $70M.

All the DRAM leaders have their 50nm DDR3 designs done and proven out, and also have SOME production capability on these advanced designs. But there are not enough production tools to make the industry-wide transition from nom. 70nm DDR2 to advanced process DDR3...until more time passes, and prices and profits improve. Unfortunately, as Top Tier DRAM analyst Nam Hyung Kim of iSuppli has said recently, there is still way more DRAM capacity than demand can support, and recent prices going up may not be sustainable, even if ALL of Taiwan DRAM makers disappeared! After two very strong DRAM GB shipment growth, 2009 will revert to slower rates seen many years ago: from 90 and 70%/year down to 30-40%/year are good estimates...though here, too, no one knows for sure: Industry estimates run from 2-3% over 2008 up to about 40%.

This one is definitely a "stay tuned" event, so rapidly things are changing. All memory makers like rising DRAM and NAND prices, but the close availability of additional production capacity is worrisome to all, and those who see 'demand recovery' somehow lack all conviction.


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