Memory semiconductor manufacturers are honing strategies to protect recently won margin gains, forcing the largest OEMs and EMS companies to take extraordinary steps to insulate their supply chain against price fluctuations in a market that was once characterized by downward pricing pressures. Despite continued weakness in PC demand, DRAM prices are unlikely to drop to historical lows in the near future due to rising demand from other high-tech segments, industry sources said.
A major OEM recently ponied up hundreds of millions of dollars to secure DRAM supply at favorable -- and guaranteed -- pricing, according to Micron, the world's second biggest memory supplier. The unidentified OEM isn't alone, though. Other large buyers of DRAM components have since fall 2013 been implementing price protective measures to avoid unpleasant hiccups should supply come under pressure , according to industry executives.
DRAM buyers have been feeling the pinch for a while. Indications from manufacturers point to tight inventories across the supply chain and at least one supplier has acknowledged it is putting buyers on allocation. Micron Technology Inc. (NASDAQ: MU), the second biggest memory IC vendor, noted while presenting its latest quarterly results that DRAM supplies are currently constrained and warned the situation will most likely continue for a while longer., Micron
“In terms of DRAM, the fire at Hynix Wuxi fab last fall coupled with what was a healthy supply demand situation from beforehand is resulting in significant reduction in inventory across the DRAM supply chain, in particular for the PC and mobile segments,” said Mark Durcan, CEO of Micron during the conference call. “Our belief is that this tight and further declining inventory situation coupled with balanced long-term production and demand to continue to drive healthy market conditions.”
DRAM buyers at the largest OEMs and EMS companies want to avoid inventory uncertainties and have moved to lock up supply for 2014, according to industry executives. Memory suppliers are benefitting from this development with some receiving payments ahead for guaranteed supply. Micron has informed analysts, for example, that an unidentified OEM gave it a deposit of $250 million for DRAM supply in 2014. The semiconductor manufacturer did not identify the buyer but some analysts said it could be Apple Inc. (NASDAQ: AAPL). “This [$250 million] supply agreement provides for current market pricing at the time products are sold,” said Ron Foster, Micron’s CFO, in a presentation to analysts.
Micron’s president Mark Adams expanded further on the DRAM demand-supply situation while answering questions related to the company’s performance: “A number of our largest OEM customers communicated shortages in DRAM, and are looking for more supply in the calendar first quarter,” he said. “We continue to see strong demand signals from our computing, mobile, networking and embedded customers and thus expect a healthy DRAM business throughout the remainder of our second quarter. As customers look for 2014 sourcing, as they think about when Hynix’s Wuxi plant may come online, they are trying to lock up capacity and commitment to make it through calendar 2014.”
Manufacturers aren’t in a hurry to add new production capacity, which means DRAM supply would remain constrained at a time of rising demand from old and new market segments. Hynix, which has tried to bring production back to full capacity at the DRAM plant in Wuxi, China, hasn’t quite achieved that goal. In public statements, Hynix has said it would be at pre-fire production levels at the Wuxi plant by the middle of January but some analysts believe even the achievement of this goal would not immediately drive down DRAM prices that have risen as much as 20 percent for commodity products since last September.
“As TrendForce previously estimated, the recovery will take 3 to 6 months. If capacity is fully restored by mid-January, output from the Wuxi fab will return to normal levels in early March, during the traditional slow season,” said DRAMeXchange, a division of research firm TrendForce, in a report last month. “Thus, DRAM market prices are expected to fall in the end of first quarter 2014, and TrendForce projects DDR3 4GB price will drop to a low of $22 to $24 [in 2014].”
There are indications, though, that the market is beginning to feel the impact of Hynix’s quick action to bring the Wuxi plant back online. TrendForce said in another report this month that the shortage that followed the Wuxi fire had begun to ease although it still expects supply to remain slightly constrained. The price change could intensify in the first half of 2014 due to continuing weak demand in the PC market, according to the TrendForce report.
“The DRAM contract prices have gradually begun to decline due to the increased production at SK Hynix's Wuxi Plant and the industry's eased shortage situation,” DRAMeXchange said. “The highest price for mainstream 4GB modules has already fallen from $35 to $34, and is perceived to be a leading indicator of the impending price changes within the market. “Avril Wu, TrendForce’s assistant vice president, projects that the DRAM contract prices will first converge with the market spot prices by the end of the first quarter, and then begin to fall during second quarter 2014.”
DRAM manufacturers will try to avoid actions that might reverse the pricing leverage they’ve gained over the course of the last six months; Micron has already said it intends to tamp down on production to avoid oversupply. Micron estimates “DRAM industry wafer production will be down about 5 percent in 2014 with total DRAM industry bit supply up in the mid-20 percent range, according to Durcan. “Beyond 2014, we expect industry capacity to remain relatively stable.”
Of course, memory suppliers have made similar promises in the past only to jack up production under competitive pressure and in a bid to protect their market share. The difference this time, though, is that the number of manufacturers has fallen sharply since the industry went through a round of consolidation over the last five years. Micron, for example, has seen its capacity jump by more than 90 percent in just the last 18 months as a result of its mergers and acquisition activities and is more interested in tightly managing and possibly reducing this production capacity, according to Adams.
While the company is not aiming to crimp inventory, it does not want to unnecessarily weaken its profit margins by boosting production, either, Adams noted during the conference call.