Just another rumor-inspired twitch, a short-term correction, or the first signs that deep, long term cyclical movements are coming into play? This was the question that computer makers, chip suppliers and brokers, were trying to answer in late January as the world spot market price for dynamic random access memory, DRAM, chips sharply increased. The trigger was the announcement by Samsung Electronics Co Ltd, the Korean giant and world’s leading manufacturer of memory, that it was cutting back on production of DRAMs (CI No 3,090).
This, in these times of over-supply and low prices, was not in itself noteworthy. But shortly after, Hyundai Electronics Industrial Co Ltd and LG Semicon Co, two big Korean rivals, and partners, that together with Samsung supply 35% of the world market, announced similar moves. Meanwhile, brokers began to notice that virtually no products from these three manufacturers were to be found on the spot market. Wall Street took notice, and the stocks of US memory makers Micron Technology Inc and Texas Instruments Inc soared as the rumor spread that the South Korean Government had organized the cutback to improve its balance of payments position. But after a short frenzy of buying and selling, most of the more considered analyses reached the view that the Korean government had not intervened, and that the cutbacks would be short-term and tactical. Analysts at SoundView Financial Corp, for example, said that the Koreans would not risk such a strategy in the face of intense Japanese competition. And Dataquest Inc, the leading authority on semiconductor pricing, pointed out that such scares have occurred before. By mid- February, the picture was dramatically different. After 21 years of price erosion, memory prices have fallen as low they can, and are now set to climb rapidly and for a sustained period. At the same time, production cuts will lead to shortages and quotas. For many in the computer industry, all of this raises the specter of the last great memory chip shortage in the early 1980s – a time when suppliers were so desperate for memory they would send representatives to follow their quota of single inline memory modules, SIMMS, along the production line to ensure no-one else claimed them first. Memory prices in the 1980s were high enough to add significantly to the cost of a computer, and high prices helped to slow down sales of memory-intensive software. The crisis was serious enough to precipitate a major restructuring of the industry, helping to globalize the grey markets for memory chips and to tilt the balance of power away from Japan towards Korea – Japan still holds 45% of the market, but Korea has been closing fast. While no-one is daring to use the word ‘cartel’, many now believe the Korean government has intervened, as the Japanese government has in the past, to push up prices. This is probably being orchestrated by the Korean Government, says Gary McDonald, vice president of marketing at Kingston Technology Co. But does Korea really have sufficient share and resolve to direct the industry? In the early 1980s, notes Gordon of Dataquest, attempts by the Japanese to control chip prices allowed the Koreans to grab market share. This time, the market is far larger and more diverse. Analysts estimate that new chip plants built in the past three years have created between 15% and 20% global overcapacity. One possible answer, speculates Gordon, is that the Japanese could also be involved.
By Andrew Lawrence
Mitsubishi Electric Corp, a leading memory maker, has also announced production cuts and NEC Corp and Toshiba Corp are expected to follow suit. Suppliers from Japan and Korea control nearly 80% of the market for DRAMs. Such a pact need not be formal. The price of manufacturing a 16Mb memory chip is around seven to eight US dollars, but, in the second half of last year, prices on the spot market at one point fell to less than $6. Under these conditions, it no longer makes sense to pour money into production unless there is a guaranteed market share at the end. Samsung and Hyundai both said they want to prepare their production plants’ 64Mb parts and other more profitable specialist devices. Long-term, to run an industry below cost is bad for everybody, says McDonald of Kingston. Pact or not, the net effect is that the memory market is now preparing for a new phase of price increases after the period of price falls which has just ended. Dataquest now believes prices for 16Mb memory chips, the standard building block of SIMMS, will rise by between 50% and 75% of their current, and recently increased, price of $8. Many others believe a far larger price rise is likely – up to $20. But although this sounds dramatic, it is still far below 1995 prices, when chips cost twice as much. Perhaps more dramatically, Gordon believes there could be a serious shortage of the larger, more modern 64Mb chips during late 1997 and 1998 – partly fueled by the higher price of the 16 bit parts. Kingston Technology, among others, is in no doubt that this is at least a medium term trend. We have taken an inventory position which supports the view that prices are going up, says Mark Leatham of Kingston Technology. According to Leatham, Samsung has already visited Kingston and other manufacturers and warned of inventory reductions. Meanwhile, some memory brokers who have struggled with falling prices are facing a second problem.
Calling in favors
They can’t get hold of the parts so the biggest customers are calling in favors and claiming their quotas. Overall, Kingston Technology predicts an undercapacity of 5-10% in 1997/8. But none of the manufacturers or software suppliers contacted by Computer Business Review were concerned. The largest companies will take their supplies and, ultimately, the customer will pay. The general view is that computers and software already represent a bargain.
This article is from the March edition of our sister publication Computer Business Review.