DRAM Is Saved by Elpida's Bankruptcy, but Only Temporarily

DRAM makers are a hardy bunch, but there's only so much pummeling even they can take, as evidenced by the recent bankruptcy filing of Elpida Memory Inc. IHS Corp. says the bankruptcy proceeding will give other memory makers a new lease on life, but I am convinced even this won't last. The market suffers from too many structural problems, and DRAM makers will slide back into the swamp within a few quarters.

IHS said in a research report that the DRAM market foundered in 2011 on sluggish demand and oversupply. Acting as if they had learned nothing from years of ruinous pricing wars, manufacturers cranked up production while demand was slumping. A mountain of unsold inventory put the squeeze on cash-starved suppliers.

2011 was a challenging year for the DRAM industry. Revenue slipped each quarter as prices went from bad to worse. The culprit in 2011 was the lack of demand. While the Japan earthquake in first half of the year sent concern through the market and helped firm DRAM prices (if only for a moment), the floods in Thailand (and subsequent HDD shortage) suppressed demand for DRAM due to lower PC shipments. The pricing in Q4 2011 pushed many industry players to the brink of viability. Smaller players shifted product portfolios to guard against falling prices while larger players increased focus on profitable segments while squeezing out costs via die shrinks.

IHS expects DRAM sales to rebound in 2012. The research firm is projecting 2012 revenue of $30.6 billion, versus $29.6 billion in 2011, when sales crashed 25 percent from the prior year. Mike Howard, senior principal analyst for DRAM and memory research at IHS, said in an email that sales will continue to improve "over the next five years" and should exceed $40 billion by 2016.

"This year's anticipated turnaround comes as somewhat of a surprise, especially as the challenges of 2011 appeared to point to a calamitous 2012," Howard said. "Weak demand was one of the major challenges last year, when revenue slipped each quarter as prices went from bad to worse. However, the key problem was excess DRAM manufacturing capacity -- the same trouble that has bedeviled the industry for much of its history."

The turnaround expectations are being attributed to the demise of Elpida, which is in talks to sell itself to Micron Technology Inc. (Nasdaq: MU). Howard said rivals like Hynix, Micron, and Samsung will benefit directly from Elpida's bankruptcy, because extra production will be sucked out of the market. According to IHS, demand should also perk up in future on an expected surge in sales of ultrathin PCs, Apple computers, lightweight PCs based on ARM architecture, and smartphones. "In the case of smartphones, increasing shipments during the next five years coupled with growing memory content per phone suggest rosy prospects as well for DRAM."

Any early celebration should be tempered by a reality check. Memory manufacturers have been known to snatch defeat repeatedly from the jaws of victory by pumping too much product into the market, thereby pushing down pricing and hurting profit margins. That same problem will rear its head again. Elpida's bankruptcy and potential absorption by Micron will reduce the overcapacity, but only temporarily. The market remains challenging. IHS has identified some key issues that demonstrate why the DRAM market seesaws from boom to burst with the growth period increasingly shrinking during each cycle. Here are some key questions IHS says memory makers must resolve:

• Will anything displace the PC as the main application driver?
• How can I avoid DRAM volatility?
• What factors will shape the development of networking solutions in the home, business, and public?
• Is there any way suppliers can improve the industry's product mix issues?
• What procurement/supply strategies should vendors and buyers pursue?

Those who can help the industry resolve these issues can pretty much name their own consulting price. The industry will gladly pay.