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Spot prices for DRAMs have shot up 19 percent since a recent fire at a SK Hynix plant in China halted production at the industry’s second-largest memory supplier’s facility but fears of “allocation” – one of the most dreaded words in the purchasing community – will eventually prove unfounded.
The SK Hynix plant shutdown sparked concerns about potential supply shortages. However, it is far from developing into a crisis and probably won’t unless the incident is used to twist the demand-supply equation into severe imbalance to further jack up prices. First, the current DRAM demand situation doesn’t support the likelihood of severe shortages that could result in supply restrictions; Demand for DRAMs was not much higher than seasonal norms prior to the Hynix fire and nobody should expect a sudden jump in the next few weeks.
True, electronic companies, PC vendors and other DRAM buyers are ramping for the traditionally strong end-of-year season and fears that supplies may be inadequate could result in double-ordering and higher prices. Even so, this isn’t your grandpa’s DRAM market. Sales of PCs, the primary end-market for DRAMs, have been falling for quite a while, and with it the strong demand for components used in the sector. All of the major OEMs are tamping down on their DRAM usage and experimenting with other storage solutions. Furthermore, the news from the PC market does not support the idea that DRAM vendors will be unable to meet demand. Here’s a sampling:
Global PC shipments to Drop -9.7% in 2013
Hewlett-Packard Sales Drop as PC Demand Wanes
Nvidia Revenue Forecast Misses Estimates on PC Demand Slump (2)
PC shipments may fall by 9.7%: IDC
MEA tablet market surpasses portable PC market
Just-in-time (JIT) inventory management practices have led to lower stocks at all levels of the supply chain – even suppliers prefer nowadays to hold either limited finished inventories or keep stocks in die forms – but the industry has also learned to look deeper into the supply chain to get better and more accurate forecasts from end-users. Manufacturers all along the supply chain continuum don’t wants to sit on inventories or have less than they might need, which means parts suppliers and OEMs are constantly juggling demand and supply. The lessons learned in the past will be applied here too. Allocations often result in double-ordering, higher pricing and eventually overproduction, which in turn leads to over-supply and thence depressed pricing. You get the picture?
This is why SK Hynix was quick to inform the industry that it is racing to clean up the affected plant to ensure adequate supply. The company reportedly said: “Currently, there is no material damage to the fab equipment in the clean room, thus we expect to resume operations in a short time period so that overall production and supply volume would not be materially affected.”
And if Allocation Occurs, Who Will Hurt Most?
If Hynix successful restarts production at the plant and other suppliers pick up the slack most OEMs shouldn’t have any problems getting adequate supply. Independent distributor America II, however, has announced it had put “all memory inventory on allocation.”
“Over the past several months, we’ve seen a significant increase in our OEM base,” said Brian Ellison, President of America II Electronics in a statement. “We’re committed to each and every one of those customers, and will stay focused on delivering the best solutions and services. To do that, we needed to take a preemptive approach to our inventory position. The supply chain has been disrupted. In reaction to the tragic fire that recently took place at the SK Hynix manufacturing facility, we felt the need to protect those customers by placing all DRAM and NAND flash inventory on allocation.”
America II said it took the step to “assure its customers that they will have priority access to America II’s inventory.” Other component distributors have probably quietly similarly assured their biggest customers but the big DRAM buyers won’t be fazed anyway by the Hynix fire because they and their key suppliers have enough redundancies built into the system. But which companies will suffer most if DRAM allocation grows beyond America II as a result of the SK Hynix fire?
The answer is simple. It’s not going to be Apple Inc. or Samsung Electronics Inc., two of the world’s biggest smartphone and PC vendors, or many of the other big electronic equipment manufacturers that purchase DRAM under contract agreement with suppliers. They are the biggest users of DRAM and they are also the companies that have been experimenting with other storage formats to get away from this component.
Other companies in the top-tier OEM ranking include HP, Dell and Lenovo, the Chinese equipment manufacturer that years ago acquired IBM Corp.’s personal computer division. These companies, too, will probably not feel much, if any, of the heat arising from the unexpected drop in DRAM supplies that followed the SK Hynix plant fire.
Of course, Samsung, the world’s No. 1 supplier of DRAM with about a one-third share of the market, will most likely wave off any panic buying or price increases arising from the Hynix fire. The company’s OEM business, like others of its size, buys components on long-term contract basis and has the financial muscle to withstand any short-term supply squeeze.
What this means is that the companies that may suffer most as a result of supply constraints arising from the Hynix plant fire are small and medium OEMs that often buy from the spot market or lack the purchasing power to command premium attention from suppliers. Even then, “allocation” isn’t the scary monster it used to be anymore. Veterans of the procurement community already know it’s a fragile eco-system that can be quickly disrupted. It’s also an eco-system that can be self-healing, if it’s allowed to.
