DRAM Suppliers Become Casualties of Their Own Market-Share War

By Julio Franco
Feb 4, 2008
  1. El Segundo, Calif., Feb. 4, 2008—It says a lot about conditions in the global DRAM market when the industry’s most notable performance in the fourth quarter was posted by Elpida Memory Inc., whose sales declined by a double-digit percentage during the period.
    Indeed, the fourth quarter of 2007 was miserable for DRAM suppliers on a number of counts, including:

    • Global revenue declined by 19 percent to $6.5 billion, down from $7.97 billion in the third quarter.
    • Sales dropped by 40 percent compared to the fourth quarter of 2006.
    • All of the Top-10 DRAM makers tracked by iSuppli suffered sequential declines in revenue.

    DRAM market conditions in the fourth quarter were far worse than predicted, and rivaled the debacle of the second quarter of 2007, when global revenue declined by 24.1 percent on a sequential basis.
    The main culprit behind the fourth-quarter revenue dive was a 31 percent plunge in Average Selling Prices (ASPs) compared to the third quarter. The ASP drop was partly the result of a 17 percent increase in megabyte DRAM unit production, which contributed to a glut in the market. In contrast, DRAM unit production rose by only 9.7 percent in the third quarter, and typically increases by 10 percent on a sequential quarterly basis.
    The DRAM industry also continues to struggle with excess inventory, which is helping to drive down pricing.

    Sense of loss
    The drop in market revenue resulted in an industry-wide operating loss of nearly $3 billion in the fourth quarter. This represents a $6.4 billion swing in operating profitability compared to one year earlier, when the DRAM industry was in the black to the tune of $3.4 billion.
    “There’s a lesson to be learned from the fourth-quarter DRAM disaster: In this game of upping the production ante, no supplier wins—and the entire industry loses,” said Nam Hyung Kim, director and chief analyst, memory ICs/storage systems for iSuppli.
    “Tier-one DRAM makers can generate profits more than the industry average when the industry is healthy—and only when supply and demand are in a reasonable state of balance. Rather than pursuing a scorched-earth policy of ramping up production to gain market share, tier-one DRAM suppliers should try to return to profitability by rationalizing supply growth.”
    Top-tier DRAM suppliers in 2007 engaged in massive capital spending programs, with the goal of cornering the market and driving smaller competitors out of the industry, Kim observed. However, even if this strategy succeeds, it will yield only short-term benefits. When profitability returns to the market, new competitors will come flooding in again.
    “Until the suppliers change their ways, this naïve game of scale will continue to cost the DRAM industry every year,” Kim said.

    Good money after bad
    The issue of profitability is becoming even more critical in the DRAM market as capital expenditure requirements grow.
    “iSuppli believes that the memory industry by 2020 will need to spend more than $100 billion per year just to maintain present rates of growth,” Kim said. “This is because the new generation of 18-inch wafer fabs beyond 2015 will cost a fortune—at $10 billion per fab. The industry needs to consider how to shift its competitive strategies in order to generate sufficient profitability to support this kind of growth.”
    Unfortunately, the DRAM industry is headed for at least two more quarters of major losses, Kim warned, making for some perilous times ahead.

    Supplier struggles
    Elpida was the best performer among the top-tier DRAM suppliers in the fourth quarter, with its revenue declining by 10.8 percent to $830 million, down from $930 million in the third quarter. This allowed Elpida to the take the third rank in the global DRAM market, up from fourth place in the third quarter. The Japan-based company managed its ASPs deftly, allowing it to avoid a more severe drop in revenue.
    Number-five ranked Micron Technology Inc. of the United States also managed to contain its revenue decline, with sales declining by only 12.6 percent sequentially. With number-four ranked Qimonda AG of Germany experiencing a 23.6 percent drop in revenue, Micron is within striking range of the fourth-place position.
    No.-2 Hynix Semiconductor Inc. of South Korea reached a dubious milestone in the fourth quarter, posting a loss that marked the end of 17 consecutive quarters of profitability. Hynix’s revenue fell 33.2 percent sequentially, the largest decrease among the Top-10 DRAM suppliers.
    Leading DRAM supplier Samsung Electronics Co. Ltd. of South Korea experienced a 12.3 percent decline in revenue. Samsung also is believed to have lost money in DRAM in the fourth quarter, although the company’s profitable NAND business offset its DRAM loss, resulting in a net profit for its memory sales.

    A year to forget
    On an annual basis, DRAM revenue in 2007 declined to $31.5 billion, down from $34 billion in 2006.
    Despite its fourth-quarter troubles, Hynix achieved the strongest sales growth of the Top-8 DRAM suppliers in 2007, with its revenue rising by an impressive 19 percent. The next best performance was posted by Elpida, which increased its revenue by 8.5 percent. Every other member of the Top-8 rankings, from Samsung on down, suffered a decline in DRAM revenue in 2007.
    “No matter how you look at it, 2007 was a disastrous year for the DRAM business, due to suppliers’ market-share and capital-spending games,” Kim said. “However, the industry now is undergoing a rebalance of supply and demand. iSuppli believes industry profitability will be better later this year. However, this will take more time than suppliers anticipated early in 2007, when they started boosting their unit production.”
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