Difficult decision for DRAM makers: Shrink or die

Posted by Wolfgang Gruener

Taipei (Taiwan) – Bad news about the economy dominate the headlines today, as even companies we believed almost invulnerable are affected by the changing business climate.  The DRAM industry was in a bad shape before the downturn began and it is getting worse: A new analyst report suggests that there is little choice left for DRAM makers: Cut back production or shut down.

While most industries are still trying to figure what the generally expected economic downturn means for them and many firms are taking precautionary steps to reduce their cost, DRAM makers are already in the middle of a dramatic battle for survival, or, as Taiwan’s DRAMeXchange called it, a final death match. The industry has suffered from an imbalance of supply and demand for about 18 months, which resulted in DRAM vendor prices that are below production cost.      

According to DRAMeXchange, the DRAM vendors’ cash cost of the current main stream 70 nm technology is between $1.3 an $1.5 and is expected to drop to about $1.0 to $1.2 with the migration to the 6x nm process, which vendors mostly started in H1 08. However, the DRAM market price is ahead of the curve: In September and October, the DRAM DDR2 price plunged 20% and both October contract and spot price reached new lows of $1.3 and $1.0, DRAMeXchange said.

DRAM makers have been cutting back their production in two waves already, but the economic downturn and reduced demand appears to make the situation even worse. Banks tightened their loan policies, there is less money available to borrow and finance operations, which threatens the overall liquidity of DRAM companies. “We believe that the DRAM industry has entered the key adjusting stage of ‘reduce or retire’, DRAMeXchange stated. “The big scale reduction is now in progress and even some DRAM vendors will be out of the DRAM market in 2009. This adjusting wave will continue until the demand and supply come to balance.”

Manufacturers have been trying to get the market in balance for some time now.  In early September, Powerchip decided to cut its DRAM production by 10-15% (between 13,000 and 19,000 wafers); Elpida followed with a 10% cut (10,000 wafers) and Hynix soon thereafter announced that it would be halting production in nearly nearly all of its 8” facilities, including fabs in Oregon in the U.S., Wuxi Suzhou in China and its largest 8” facility in Korea, leaving only a single 8” facility with a 100,000 wafer/month capacity.

Total 12" wafer output in the industry was down 6% in this first wave that happened in September. The second wave brought an even heavier cutback of 10%. Inotera said it will be cutting production by 20%, Nanya will shut down its Fab3 Phase1 completely and begin its migration to Micron process in February, ProMOS announced that it will stop its 8” production facility and Powerchip announced that it may shut down another 20% of its production capacity down to 90,000 wafers. DRAMeXchange estimates that the total reduction for November, based on announcements in October, will translate into about 125,000 wafers or 10% of the total 12” wafer output.

The changing economic climate suggests that DRAM manufacturer aren’t done yet. DRAMeXchange said that it expects the industry to cut production by another 6% or 70,000 12” wafers in December, with more announcements possible in January. If these cuts are enough to bring a balance to the market and stabilize DRAM prices, the bottom production level of DRAM may be hit in Q1 2009. “We expect the oversupply situation will be eased starting from the end of Q1 2009,” DRAMeXchange said. “Therefore, the DRAM price may have a chance to rebound at the end of Q209 or in Q309 with the rising demand of PC OEMs.”

Until then, DRAM prices are likely to trend even lower than today and consumers as well as PC OEMs may be able to scoop up bargains. If PC OEMs work through their inventory in Q4, the pricing pressure on DRAM makers will increase even more and drive prices down further, the firm said. In such a case, it is likely that the DRAM industry may have a chance to rebound in Q2 or Q3 of next year. By then, it is likely that at least two DRAM vendors have gone out of business, DRAMeXchange said. However, there is another unknown variable in this game: Should the governments of Germany, Korea, Japan and Taiwan offer relief funds to DRAM companies to survive through the downturn, the downturn could be extended to 2010, DRAMeXchange believes.