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DRAM suppliers become victims of their own market share war

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 whose sales declined by a double digit.

Indeed, the fourth quarter of 2007 was miserable for DRAM suppliers on a number of counts. 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 rivalled 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. 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 rationalising 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.

The issue of profitability is becoming even more critical in the DRAM market as capital expenditure requirements grow.

Unfortunately, the DRAM industry is headed for at least two more quarters of major losses, Kim warned.

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