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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 {complink 3421|Micron Technology Inc.}. 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.

19 comments on “DRAM Is Saved by Elpida’s Bankruptcy, but Only Temporarily

  1. Barbara Jorgensen
    May 17, 2012

    Bolaji: DRAM is a product that always seems to be in oversupply or undersupply. You outline most of the reasons for that. You'd think that after enough boom and bust cycles, DRAM makers would move toward some kind of self-regulation (although that may border on anti-trust–not sure.) At any rate, I think it will happen exactly as you and IHS predict: the relief will be short lived and there will be no actual progress made on moving toward a more rational response to demand.

  2. any1
    May 17, 2012

    You're probably right, but I think there is hope based on the fact that the industry seems to be maturing.  I don't think we will see any new entrants – the cost barrier for a new state of the art fab, or even adding leading edge capacity is high.  So we will see even more consolidation of the few real players left.  After Samsung, Hynix, and now Micron the rest of the industry combined doesn't have much market share.   And I think that DRAM demand is more predictable than in the past since PCs are also a muturing industry. 

  3. stochastic excursion
    May 18, 2012

    Another dramatic blow signifying the downturn of the Japanese semiconductor industry.  An overview of the cultural angle can be found here.

  4. mfbertozzi
    May 18, 2012

    “…The market suffers from too many structural problems…”

    I am fully aligned; in my eyes, one of the problems is related to a real alternative, in terms of material, for producing DRAM in allowing savings and reaction to up & down market. Despite several years spent in DRAM light-speed replacement, producers are still away for evolving components towards that trend. It seems like green for oil; some good steps have been done, of course, but when will be available a full green-engine for cars?

  5. elctrnx_lyf
    May 18, 2012

    The memory market is so much depend on all kinds of electronic products made in the over the world. So any major problem with certain class of products would hamper the sales of DRAM. At the same time DRAM is more like a commodity item these days just lika diode/mosfet. There is not much innovation or any new features are added to these products. 

  6. Barbara Jorgensen
    May 18, 2012

    mfb: The DRAM market is exactly like oil. In fact, ENRON at one point considered entering the DRAM market because of that similarity. That scared the pants off of the online trading sites that had been springing up during the dotcom boom. It wasn't too long after that ENRON fell apart–but at least you couldn't blame DRAM for that!

  7. mfbertozzi
    May 18, 2012

    I have heard some stories about these events in the early 2000, a decade is gone and if you google just for a bit some keys as “trading derivates”, the engine search provides several reports from auditors related to what happened. Then once again, the sector is impacted by structural problems, who knows if exists a real will to solve them.

  8. Wale Bakare
    May 18, 2012

    Demand for high performance devices (mobile) with relative to: 1 – Low power consumption 2 – Higher memory capacity 3 – Speed ( frequency clocks at GHz/THz) are the major factors. And we need to blame market for that.

  9. FLYINGSCOT
    May 21, 2012

    I wonder what market share Elpida had as this will tell us a lot about the impact its bankruptcy is likely to have.

  10. Ashu001
    May 21, 2012

    Any1,

    Barbara points out some very good reasons why there won't be consolidation on the level you want(and will make the industry sustainable) here.

    Anti-Trust actions are a serious barrier to futher consolidation in any industry(incl.the DRAM industry).

    In the name of Protecting consumers;Governments set up a serious Roadblock to companies setting up Sustainable Businesses.

    There is something else that nobody here seems to mention-The problem of Safeguarding Jobs.

    The chances of a production cut are minimal as long as Short-term populism dominate the way Politicians think and act.

    Regards

    Ashish.

  11. Ashu001
    May 21, 2012

    Barbara,

    Now this is fascinating.

    I had no clue that ENRON was about to enter this Business too before they went Bust.

    That's whats so fascinating about this Site-You learn something new every single day.

    But that is the crux of the argument is'nt it? If it is a Commodity then it should trade like one.

    Regards

    Ashish.

  12. Ashu001
    May 21, 2012

    Bolaji,

    You raise some interesting points regarding the DRAM over-supply situation.

    But the problem is not just restricted to DRAM's.Its one of excessive Global Over-production of almost all Manufactured Items brought on by Cheap Credit doled out by Global Central Banks.

    Think about it practically,if an American Citizen were Getting say 5%-10% Interest in your Savings Bank Account today;would you speculate on Assets like Commodities,etc?

    No you would'nt.

    Exactly the same situation exists with the Chinese,Japanese and Taiwanese(where these DRAM guys are based).

    Interest Rates are way too low there(Below the real rate of Inflation);which forces everybody to speculate;which led most Chinese to think that Commodities can only go one way-UP.

    And that speculative bubble is now bursting.

    http://www.reuters.com/article/2012/05/21/china-coal-defaults-idUSL4E8GL1BS20120521

    You might say this situation does not explain the periodic Booms and Bursts of this industry since the 1990s.

    In fact it does,Following first the Black friday  disaster,then the Asian Financial crisis ,then the LTCM bust,then the Dotcom Bust,Then the Housing Bubble bust-The US Federal Reserve has always  cut Interest Rates and Pumped in more and more Liquidity to pump up the Global Economy;This has led directly to Speculative Bubbles of Bigger and Bigger amplitude.

    Don't worry its not just the US Federal Reserve-the ECB,the BOJ,the BoE,the PBOC everybody's doing it.

    Think about it rationally;if these Electronic Devices were priced fairly(and not be skewed by all kinds of incentives and Cheap Loans) ;How many people would be able to afford to change their Electronic Devices every Year/Two Years?

    Regards

    Ashish.

  13. ahdand
    May 21, 2012

    Well I feel that no one will wonder as such in a big manner since there is a huge economic downturn everywhere and bankruptacy has become a common factor for not only small companies but for the bigger ones as well. I think the bigger ones are suffering more than the smaller ones because their expenditure is far more higher than the small or medium scaled ones.

  14. bruzzer
    May 21, 2012

    I've suggested before the DRAM, in fact memory industry generally, needs to coordinate into an association for the specific purpose of educating government oversight on the need for a DRAM and perhaps NAND Flash price floors. At the trailing edge of the CMOS cost curve moving to disruptive memory technologies, materials and structures, something has got to offset the price of development. Agreement on price floor(s) can offset development investment while deterring the collusive price fix by recognizing the actual economics of a sustainable business.   And regardless of the supply that results because it may still be excessive can stabilize procurement into future time.  This is not to suggest that end buyers should pay more.  End buyers should pay no more than an adequate competitive profit for components that support industry sustainability and reinvention required through a phase transition.  Mike Bruzzone, Camp Marketing

     

    .

     

  15. Taimoor Zubar
    May 23, 2012

    It is interesting to see that the DRAM market is fluctuating like the oil market and the volatility makes them look similar. I wonder what is the reason behind this behavior though. Is it because there's a high monopoly of a few regions that dominate in the production?

  16. Ashu001
    May 25, 2012

    Mike,

    I like your Suggestions-Price controls,et all.

    Problem is we Live in a Dog Eat Dog world today and even if you manage to Get the Western Oriented Manufacturers in on this-[Japanese,Korean,European ,Mexican and American];

    Can you guarantee that the Chinese, Taiwanese,Thai,Malay, Singaporeans,Indians and Phillipinines will follow suit???

    You can't.

    This is because these guys depend on these companies for critical manufacturing Jobs.

    If you need a clear case,I will illustrate what is happening in the Auto industry in Europe.Manufacturers based primarily in France are Struggling big-time.

    But the moment they threaten to cut production(and thus cut Jobs) ;the CEOs get summoned by the President of France and lectured on the Social Responsibility of preserving jobs in the France.

    We have tremendous over-capacity in most industries Globally-Primarily because of Cheap Credit(which I had alluded to earlier in this post).

    But the only way for this Mal-investment to clear it out is to allow the weaker firms to declare bankruptcy and leave the market;Unfortunately u cant do that in China-In the name of preserving social Stability China believes in just sweeping the problems under the rug!!!

    This is why the biggest blowout this time around will come from China.

    Its just a matter of time.

    Regards

    Ashish.

  17. Ashu001
    May 25, 2012

    Nimantha,

    Typical Bankruptcy Laws do not get followed in China.

    China believes in Sweeping its problems under a Rug.That's why the eventual Blowout and Recession coming out of China will be even bigger and more massive than what anybody can expect today.

    As for you thinking that Larger companies are more susceptible;I Disagree its going to be that those companies which are the most Inflexible and don't have Liquid Assets on Balance Sheets that will struggle to survive in the coming Recession.

    I thought I will share an interesting case with you ,I was recently at a Conference which was Hosted by a Top 5 IT Vendor and a Top 5 IT Analyst firm.

    The IT Analyst firm was Super Gung-Ho on Global IT Spending for the next Year-7%(based on the fact that IT spending grew by more than 5% in 2010 and 2011!!!);not just that he said that the bulk(70%) of IT Spending will come from Emerging Economies-Particularly the BRICS!!!And by 2020,Total IT spending will be double what it is today!!!

    I asked him,Do you know that -Australia,China,India and Brazil are slowing very sharply and so what happens if Spending gets cut by 50%?

    He was like,”Impossible” IT spending cannot slowdown .

    Then I asked him-Did you forget what Happened in 2008-9???

    He said,no Problem-Governments will continue to spend Money-I told Him-Dude,Govts are all Bankrupt Globally,Where is the Money gonna come from????

    After all you can't eat IT!!!

    He had no answers to any of my Questions.

    regards

    Ashish.

  18. Ashu001
    May 25, 2012

    Taimoor,

    Its because of Excessive Liquidity dumped by Global Central Banks.

    I already explained that previously HERE

    http://www.ebnonline.com/messages.asp?piddl_msgthreadid=249821&piddl_msgid=649859#msg_649859

    Do you know the No.1 Reason why World Economy recovered from Crash of 2008-9?
    It was because of a US Federal Reserve (Central Bank of US)Program called Quantitative Easing(QE)-Very simply its Money Printing where the US Federal Reserve uses US Dollars to buy Assets all over the world like Euros, Pounds, Bonds,Shares and Commodities.
    So far we have had Three versions of the program-QE1(2009),QE2(2010) and QE Operation Twist(2011);now today the World's Financial System is begging them for QE3.
    Only problem is that they can only deliver QE3 before 30th June this Year.If they can't deliver that this year then it can happen only next year(2013 around March 2013 or so).
    Its still very difficult to predict if QE3 will have happen this year or not.
    All you need to do is compare the Price of Stock Markets/Commodities like Oil or DRAMs with that of US Federal Reserve Easing programs and you will see its a 100% overlap[When they pump Money in,Prices rise and when they stop printing Money,Prices Fall]
    Regards
    Ashish.
  19. ahdand
    May 30, 2012

    Well thats why Im saying you should have a common law and governed and monitored by a centralized world bank. That will make things less confusing.

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