Overbuilding to keep memory chips cheap

Several memory chip makers are scrambling to increase spending on new factories even as chip prices remain in the doldrums. Users stand to benefit most because as the new factories ramp up production, the fresh output should keep chip prices down.

An uptick in NAND flash memory prices and the belief that DRAM (dynamic RAM) chip prices are on the mend have combined with good old fashioned competition to send memory chip makers on a production line buying spree. What's strange is that the new spending is counter-intuitive to signals the market has sent out so far this year. Price fluctuations point to a maturing NAND flash memory market, and DRAM makers have yet to see the strong demand for Microsoft Corp.'s Windows Vista that they expected would push the need for more DRAM in PCs.

"Prices will probably tick up a bit in the third quarter, but the fourth quarter and the first quarter next year are more dangerous. The first quarter could be bloody," said Rick Hsu, chip analyst at Nomura Securities in Taipei. DRAM prices are rising now because PC makers are filling PCs with 2G bytes of DRAM per system, he said.

Vista requires more DRAM than older Windows products, such as XP. A buying spree of PCs equipped with Vista would go a long way to fix the current DRAM glut. But so far, the OS hasn't been as popular as hoped, and DRAM price increases in the third quarter will be met by output from several new memory chip factories in the fourth quarter.

The new output should cap price gains, said Hsu. By the time the first quarter rolls around, DRAM prices will likely tank as the post-holiday lull in PC sales combines with a steady increase in DRAM supply to flood the market.

As usual, what's bad for memory chip makers is great for users. Falling DRAM prices will mean users can expect bargains on the chips, and incentives such as PCs with extra memory. A weak DRAM market can also hurt NAND prices because some of the biggest DRAM makers, including global market leader Samsung Electronics Co. Ltd. and Hynix Semiconductor Inc., can shift production back and forth between the two products. Shifting production to NAND increases the supply, and tames prices.

Memory chip prices have fallen substantially since the beginning of the year. Contract prices of the most widely used DRAM chips, 512M bit, DDR2 (double data rate, second generation) chips that run at 667MHz have fallen 65 percent so far this year to US$2.06 each as of Wednesday, according to DRAMeXchange Technology Inc., which runs an online trading site for the chips. The price is below the cost of production for most manufacturers.

NAND flash prices have fared much better than DRAM recently. Contract prices of 8G byte chips are down just 11.7 percent so far this year, and 4G byte chips are off 16.5 percent, according to DRAMeXchange. But prices of the chips have risen from year-lows in March and relatively weak pricing in April and part of May.

The low prices have been painful for memory chip makers. Qimonda AG, Europe's largest DRAM maker, posted an

Copyright © 2007 IDG Communications, Inc.

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