Memory semiconductor vendors have engineered the seemingly impossible. Prices are rising, inventories are tighter, there’s even talk of shortages in certain product areas due to a fire that halted production at a major facility and overall, the fundamentals of the memory market are seen as much better today than they have been in years. How did the survivors of the memory wars achieve such a feat and what does the firmer supply and pricing conditions mean for OEM customers?
For vendors who have seen their ranks whittled down by years of corrosive pricing declines despite rising unit shipments, the recent increase in average selling prices announced by major suppliers like Micron Technology Inc. is no doubt good news. For procurement and purchasing professionals at OEMs and contract manufacturers, though, the era of below-cost pricing (for vendors) is grinding to an end. Finally, memory components vendors are salivating at the prospects of higher prices while OEM customers are bracing for the possibility of higher costs and a squeeze on gross profit margins.
“OEM contract pricing, while increasing, continues to lag the rising spot market,” said Mark Adams, president of Micron during a conference call on Oct. 10 to discuss the company’s fiscal fourth quarter and 2013 financial results. “The DRAM market remains tight, inventories appears extremely low across both our OEM customer base and at distribution channel. We are on allocation with customers in multiple segments.”
Allocation and higher prices? The DRAM and most segments of the memory market have not experienced anything remotely like these in a long while but these terms are coming back into the industry lexicon. And, while nobody is yet to press the panic button, supply chain managers and profit watchers at OEMs and electronics manufacturing services (EMS) providers need to keep an eye on the situation because further tightening in supply and higher prices will crimp margins eventually.
Not only is this development a negative for margins at OEMs it also points to tougher negotiations ahead with vendors. Further complicating the situation is the specter of tighter supply following a fire at one of SK Hynix’s facilities in Wuxi, China. (See: Update 2: Plant Fire at SK Hynix May Impact Supply, Pricing & Avnet’s Fay: Hynix Fire Exposes Supply Chain Vulnerability).
“Conditions remained favorable for strong memory industry fundamentals. In NAND, we're projecting industry supply this year up in the low 40% range with next year very similar,” said Mark Durcan, Micron’s CEO, during the meeting with analysts referenced above. “For DRAM, we expect to see declining industry wafers over the next 12 months with a recent fire at one of our competitor’s fabs amplifying this effect. Clearly, the fire is impacting and will continue to impact supply in the market. Without making any major assumptions for the impact of the fire, we are projecting DRAM industry supply up in the mid-20% range this year and a similar range next year.”
America II first mentioned the dreaded “allocation” word following the SK Hynix fire in August but signs are cropping up across the industry that prices are inching up overall in the memory semiconductor market with the likelihood that suppliers will most likely close 2013 with recognizable margin improvements on their income statements. (See: Memory on Allocation at America II).
Allocation Genie is back but for how Long?
Micron, one of the top DRAM suppliers globally is only the latest company to admit having put some of its inventory on “allocation,” which essentially implies tightly managing supply and giving preference to long-term customers and contract-based purchases. DRAM per bit average selling prices rose 5 percent during the company’s fiscal 2013 fourth quarter ended August 29 on a 42 percent hike in shipment, helping to boost sales of the product 50 percent at Micron, according to CFO Ronald Foster.
It helped that Micron closed the previously announced acquisition of Elpida Memory during the same quarter. In addition to buying Elpida, the Boise, Ohio, company also gained majority control (89 percent) of Rexchip and relieved Powerchip of its 24 percent stake in Rexchip. Micron is also on track to halt production of DRAM at a fab in Singapore, swapping this for NAND instead, a move that will further clamp down on supply.
What this means for Micron is an improvement in average selling prices and better margin, Foster said, adding: “Using quarter-to-date selling prices and projected product mix effects for the quarter, DRAM average selling prices will be up mid-single digits compared to the fourth quarter average as a result of market increases.”
Memory manufacturers, while quietly celebrating the improving market conditions, continue to be wary, though, and this is reflected in their actions. At Micron, plans to transition the Singapore plant from DRAM production to NAND memory aren’t being rushed. Rather, Micron is weighing the demand-supply situation carefully and tailoring the DRAM-to-NAND transition accordingly. The goal is to continue squeezing out the highest profit margins from all segments of the market,” company executives said.
“We haven't changed our trajectory yet. What we said in the past is we want to maintain a high degree of flexibility and be reactive to our customer needs and what's going on in the marketplace, so we can optimize margins,” said CEO Mark Durcan. “We're going to continue to watch the market pretty carefully and do what we need to do for Micron and our customers.”
Many customers, OEMs, EMS providers and retail customers may not exactly like what’s coming down the pike. Prices are firming steadily even in the PC-sensitive DRAM market. In other segments of the memory market, supplies are finally in better sync with demand, which is returning pricing leverage to suppliers and slowly away from purchasers. There isn’t a tsunami of pricing shift, though. Buyers are still enjoying relatively good pricing condition and this may not change for the foreseeable future. What they shouldn’t expect, however, is a return to plunging prices.