Marketshare matters greatly in the semiconductor memory market. The sector is one of the most volatile in the electronics industry, and wild swings in pricing, demand, and supply have resulted in the demise of companies in Asia, Europe, and North America, including Taiwanese suppliers and Qimonda, a spinoff of Infineon Technologies AG (NYSE/Frankfurt: IFX).
Scale is also highly important in the sector. The bigger a company is, the easier it is to fund capital expenses, withstand rough cycles, and snag more marketshare. That's why the deal by Micron Technology Inc. (Nasdaq: MU) to purchase a Japanese rival, Elpida Memory Inc. , is so significant for the Boise, Idaho, company. For the first time in more than a decade, Micron stands a chance of boosting its marketshare and improving its odds of surviving another market winnowing.
The deal, announced July 2, would lift Micron to the No. 2 global position in the DRAM market, according to IHS. The research firm says Micron would command almost one-quarter of all industry sales, putting it ahead of Hynix Semiconductor Inc. of Korea. Samsung Electronics Co. Ltd. (Korea: SEC), the perennial market leader, would still have a marketshare of almost 41 percent.
Mike Howard, senior principal analyst for DRAM and memory research at IHS, wrote in an emailed research note that buying Elpida would be a huge boost for Micron's status in the DRAM sector.
Micron will see its market share and DRAM manufacturing base nearly double as a result. Furthermore, Micron is gaining access to some excellent mobile DRAM technology, which should greatly improve its product portfolio. The $2.5 billion sale price is reasonable and shouldn't impact Micron's cash position adversely. It will likely take at least six months for the deal to close, but IHS expects a very quick transition and integration once it does.
There are other benefits for Micron and other leading DRAM vendors. Elpida had previously announced bankruptcy proceedings, a move that sharply reduced plant utilization and supply, which in turn stabilized DRAM pricing. IHS said that before the Elpida bankruptcy filing, "the DRAM industry in 2011 had been bedeviled by excess DRAM manufacturing capacity, which drove down prices and caused revenue to decline." After the transaction closes, Micron is expected to further reduce Elpida's manufacturing footprint. According to IHS:
The consolidation of the DRAM market set off by Elpida's bankruptcy and the subsequent purchase by Micron is bringing new stability to DRAM pricing, helping lead renewed growth to the market.
Global DRAM industry revenue this year is forecast to reach $30.5 billion, up 3.3 percent from $29.6 billion in 2011. Although seemingly small, the revenue expansion for 2012 is a welcome development given the market's stunning 25 percent contraction last year.
Though buying Elpida is seen as a positive move for Micron, it will doubtlessly increase pressure on small players as OEMs consolidate purchases. Companies like Nanya and Windbond, each of which has a marketshare of less than 5 percent, will find it harder to compete against the established players. Even Hynix will not escape unscathed. DRAM production is highly capital intensive, and the higher up the ladder a supplier sits, the easier it is to secure financing for plants and other production activities.
The combination of Micron and Elpida would put Hynix at a slight disadvantage while it is still sorting out problems with investors and financiers. Could Hynix make a move for smaller rivals to boost marketshare? That's unlikely, and it would not dramatically change its position, because its rivals have relatively small marketshare. For now, the wind is behind Micron, and it may pull farther away from Hynix.
Catching up with Samsung is quite another matter. The Korean giant isn't letting up on strategic moves to pile pressure on rivals. It plans to increase capital expenses sharply in the year ahead. That's not a move Micron can afford to match right now, despite its relatively stable cash position. This transaction would increase its cash obligations for the next several years. For now, Micron should just savor being No. 2.