Over the past few years, DRAM makers had been expanding capacity aggressively on industries' positive estimates of how the Windows Vista operating system would stimulate market demand and buoy PC component prices. Consequently, an unexpected supply-demand imbalance is now hitting the industry amid a faltering global economy.

As fears of a long economic downturn are preventing consumers to dig into their pockets, low-cost systems with 512MB memory are estimated to be a major driver for overall PC market growth in 2009. The entry-level models, which initially targeted emerging markets, are expanding their presence in the mainstream market.

Lower product ASPs (average selling prices) are no doubt a bad sign for Taiwan's DRAM makers, which have been hit hard by persistently falling DRAM prices. For instance, the contract price of 1Gb DDR2 has dropped under US$1 and is likely to decline further.

Taiwan's major DRAM specialists are estimated to see an overall net profit margin fall of 72% in 2008. Various suggestions have been made by market watcher and industry players as to how the DRAM industry should act to recover. As a whole, can the recession be recognized as a turning point for Taiwan's DRAM makers? Many have doubts about it.

L shape or W shape?

Many have agreed that there is no further room for the DRAM industry to decline. In other words, the DRAM industry will stay in an "L-shape" trend due to an uncertain outlook. "W" shape fluctuations can now be hardly perceivable in the DRAM industry. Thus government intervention may be their last hope.

Reverse migration?

The netbook sensation have now created a low-cost trend in the PC market, one that DRAM makers find it hardly attractive. DRAM makers had expected the PC market to migrate to a trend where each systm would require 4GB DRAM modules. But that did not happen. Netbooks require only 512MB-1GB memory, and now there seems to be a reverse migration: PCs may in the future require less DRAM.

DRAM makers' capacity has ground to a halt, and worse, they are cutting back their production.

DRAM prices not expected to bounce back

The spot prices for 1Gb DDR2 have dropped to US$0.7-0.8, and DRAM player expects the price to bounce back. Wrose still, market leader Samsung Electronics reportedly is also selling DRAM at low prices as it aggressively tries to expand its market share.

In order to reduce inventory levels, DRAM makers are offering extremely low quotes, some even below their cost levels. And in order to survive, the cash-strapped DRAM makers rely in bank loans. Taiwan's major DRAM makers have taken out combined bank loans estimated at NT$420 billion.

Imposing anti-dumping tariffs may be a measure to protect the local DRAm industry. Several DRAM makers in Taiwan have urged the government to intervene so that prices may rebound.

Sustainable approach

Optimistically speaking, DRAM quotes may rebound to US$1.4-1.6, the cash cost levels, by the first quarter of 2009. To achieve this, DRAM maker must first commit themselves to better cash management amid the credit crunch. In addition to the fundamental issue that the companies encounter, rebuilding business confidence is important.

In other words, not only should the government bail out its home-grown DRAM makers, but the makers should also work out efficient solutions for sustainable business. Production cuts at each DRAM maker, on average 25%, should help stabilize DRAM quotes in the first quarter of 2009.

It remains to be seen whether the DRAM business can work out a sustainable approach amid a market trend where low-cost PCs play a prominent role.

Josephine Lien, Taipei; Jessie Shen, DIGITIMES

[Tuesday 2 December 2008]

Source: www.digitimes.com