AFTER HAVING LISTENED to a presentation by Frank Wang – an executive director at Morgan Stanley – earlier today at Semicon Taiwan it looks like the DRAM makers in Taiwan will be having a very tough time in the next few years. In fact, if his predictions prove to be true, we’d expect several casualties over the next three years or so.
Mr Wang’s presentation was based on current facts, including market demand, manufacturing technology, cost and market development. Today there is less than half the amount of DRAM manufacturers compared to 1996 and it seems like the ranks will be thinned further, unless something drastically changes. Mr Wang didn’t offer any real solutions, but it’s clear that with the changes in terms of how much memory is being used per device as well as changes in manufacturing technology, DRAM is a commodity item that needs to be manufactured cheaply in large quantities for a DRAM manufacturer to stay competitive. In fact, Mr Wang made a comparison with the price of rice and proclaimed that if rice keep increasing in price at its current rate, it will become a more expensive commodity than DRAM in the future.
This year there’s a growth in DRAM demand after three fairly slow years, although Mr Wang predicted that the demand will be fairly flat next year. We’re also at a stage where DRAM manufacturers need to transition to more advanced manufacturing technologies to be able to keep up with the competition and this puts further pressure on the companies that aren’t doing so well. Currently Samung and Hynix are together accounting for 53 percent of the DRAM production in the world, with the Taiwanese companies producing 22 percent, Japan 14 percent and the US 11 percent (the figures are rounded to even percentages).
Samsung accounts for 32 percent on its own with Hynix coming in at 21 percent, Elpida at 12 percent, Micron at nine percent and Inotera at eight percent, while smaller manufacturers such as Winbond, Nanya, ProMOS, Powerchip and SMIC making up the rest. Some 58 percent of the DRAM output is currently ending up with PC manufacturers while other big markets include upgrade modules at 15 percent, automotive systems at 11 percent and graphics cards at a mere six percent followed by mobile communications at five percent. The mobile communications market is set to take a larger share of the DRAM output in the future, but due to the fairly low amount of DRAM being fitted to this type of product, it still won’t have a big impact in terms of revenue for the DRAM manufacturers.
In fact one of the slides carried the title of “iPad cannibalization impact” and it suggested that due to mobile devices often replacing a notebook, there’s less demand for DRAM in the entry level mobile computing market space. A typical mobile ARM device will have 256-512MB of RAM compared to at least 1GB in a netbook and 2GB or more in a notebook. This is one of many things that are a cause of concern for the DRAM manufacturers.
As manufacturing technology improves and shrinks, the cost of DRAM is also declining, and according to Mr Wang we should see pricing of 2Gbit DRAM chips below $1.50 once 40nm manufacturing technology becomes the industry norm. Those manufacturers that can’t keep up will be struggling if they can’t transition quickly enough to 40nm which Mr Wang suggested would become the industry standard for DRAM by next year. Considering that a cutting edge DRAM manufacturing plant costs a fair bit of money to build, the smaller players are unlikely to be able to afford to transition to the latest manufacturing technology as quickly as say Samsung or Hynix.
With many of the Taiwanese companies having lost a lot of money during last year’s economic downturn and already owing significant money to investors and banks, Mr Wang predicted that unless something changes, we’ll be looking at far fewer DRAM manufacturers as soon as the investors and banks call in the debts owed. He also suggested that some of the DRAM manufacturers will be paying back as much as $3 billion a year to creditors and as such won’t have enough cash on hand to keep up with the latest manufacturing processes.
This is indeed a bleak future, but it’s important to bear in mind that this is the view of an analyst and not necessarily how things will play out. With a move towards 450mm wafers and more advanced manufacturing processes one thing is certain, DRAM is a commodity product that needs to be manufactured as cheaply as possible and in as large quantities as possible with the technology available. A DRAM maker that won’t be able to meet these requirements is unlikely to be able to compete with the large players who are likely to be the winners in the end.S|A
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