DRAM production cuts fail to raise prices

Market prices hit new all-time lows last week

Although two dynamic RAM makers cut production last week, hoping to reduce supply and spur a price recovery, the action is too little, too late, analysts said.

Tokyo-based Elpida Memory Inc. and Taiwan-based Powerchip Semiconductor Corp. both trimmed DRAM production last week as market prices plunged to new all-time lows. Although the actions slowed the pace of DRAM price declines, they didn't stop the fall.

DRAM makers have been in trouble all year because of a chip glut. They built too many new factories last year on hopes that DRAM demand would continue to rise with strong sales of new PCs and Microsoft Corp.'s Windows Vista operating system. But DRAM demand hasn't kept pace with output.

The oversupply has been a bane to suppliers, many of which are losing money on the chips they sell, but it has been a bonus for users.

DRAM is often a bottleneck for speed in computers because most vendors only add the minimum required for each system. But when DRAM prices drop, PC vendors often add a lot more DRAM. A quick look at Dell Deals, for example, shows PCs with 1GB to 3GB of mainstream DDR2 (double data rate, second generation) DRAM. For users who like to open multiple windows and use memory-intensive programs, more DRAM is better.

The production cuts by Powerchip and Elpida won't have much effect on DRAM prices because it takes months for a supply cut to take effect and because the actions represent only 2.3% of global DRAM production, according to Andrew Norwood, DRAM analyst at market research firm Gartner Inc.

Reducing DRAM production today won't affect output until November, he wrote in Gartner's "Semiconductor Monday DQ Report." "By then, the peak buying season for the holiday [PC] build will be winding down," he said.

Given current high inventory levels, the industry probably won't see any shortages for the rest of this year, he added.

Powerchip said it will reduce DRAM production by 10% to 15%, while Elpida said it will cut production by 10% at one of its main factories in Hiroshima, Japan. Elpida plans to convert some production lines to make chips used in LCD displays instead of DRAM, said Kumi Higuchi, vice president of corporate communications at the company.

The main problem for the two companies is that their rivals do not plan to follow their cuts.

Samsung Electronics Co., the world's largest maker of DRAM chips, has no plans to reduce DRAM production this year, said Eunhee Lee, a spokeswoman at the Seoul-based company. In fact, Samsung is taking advantage of the downturn to put more pressure on rivals by increasing its planned spending on new factories this year. Samsung estimates it will spend $6.32 billion on new memory-chip lines this year.

Hynix Semiconductor Inc., the second largest DRAM maker by revenue, also has no plans to cut DRAM production, said Seongae Park, a spokeswoman at the South Korea-based company. Other major DRAM makers, including Qimonda AG and Micron Technology Inc., also have no plans to trim DRAM production, representatives of the companies said.

The best hope DRAM makers have in the short run is for one company to go out of business or be taken over by a rival. In the longer term, DRAM market prices will likely remain low for at least the next four or five months, analysts said.

DRAM makers won't see better prices until next year, when the amount of new supplies coming on the market slows down, said John Lei, a chip industry analyst at iSuppli Corp. Overall, DRAM makers have reduced spending on new factories this year by about 50% compared with last year.

The capital spending cuts will boost DRAM market prices next year and in 2010, Lei said.

Copyright © 2008 IDG Communications, Inc.

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