There are early signs that a price war is looming in the DRAM market, and it should be no surprise considering the cyclical nature of the memory device industry. DRAM prices have been steadily rising for about a year, but that upward trend may be coming to an end with planned capex and production capacity increases, which could eventually lead to lower and more stable pricing.
Faced with DRAM expansion efforts by SK Hynix, it may not be long before Samsung and Micron start to add DRAM wafer start capacity to protect their market share, according to market research firm IC Insights.
However, buyers shouldn’t expect a big change in prices and inventory in the short term.
“Even if Micron and Samsung decide today that they are going to add DRAM capacity, it won't significantly impact supplies and pricing until next year,” said Brian Matas, vice president, IC Insights. “I don't think either company has idle capacity just waiting to be turned on to make DRAM.”
Matas also noted that if either company wanted to switch their NAND flash capacity to DRAM capacity, the process takes about six months to complete. “It is rather complicated and involved to switch from making one product to the other. The companies would have to be pretty sure that's what they wanted to do.”
“It's crazy that DRAM prices continue to rise,” added Matas. “We really thought that we would see at least a plateau of pricing by now, but it continues to surprise. Our forecast expects that prices will flatten out and begin trending downward by the end of this year, but it may not happen as quickly or be as great of a decline as we initially thought.”
“Demand continues especially for higher-priced, high-performance graphics DRAM, and there has been no significant boost in industry-wide DRAM capacity,” he said. “The most meaningful way for prices to show a steeper decline is to boost capacity as SK Hynix plans to do.”
As more suppliers add capacity, the average selling prices (ASPs) should begin to fall. This is good news for buyers who have seen DRAM prices more than double in one year. According to IC Insights, the 2017 price per bit of DRAM jumped by more than 40 percent, marking the largest annual increase in the DRAM market.
Memory buyers are always on a rollercoaster ride when it comes to supply and demand. One of the key challenges they face is navigating price negotiations during undersupply and oversupply cycles.
When there is an oversupply, buyers have the upper hand and can negotiate for the best possible price, but sometimes they do it at the risk of hurting their suppliers. Industry players say this isn’t a good strategy when trying to develop long-term supply relationships.
But when it happens, suppliers don’t forget, and those buyers will hurt when there is an undersupply of inventory.
“Just one year ago, DRAM buyers took full advantage of the oversupply (excess capacity) portion of the cycle and negotiated the lowest price possible with the DRAM manufacturers, regardless of whether the DRAM suppliers lost money on the deal,” said Matas. “Now, with tight capacity in the market, DRAM suppliers are getting their ‘payback’ and charging whatever the market will bear, regardless of whether the price increases hurt the users’ electronic system sales or causes it to lose money.”
A Looming Price War?
DRAM pricing may be due for a fall as major DRAM manufacturers consider production capacity expansion and higher capex spending, which can be used to increase capacity. But it will take more than one supplier to bring down prices significantly, and it likely won’t happen for at least another 12 months.
Matas thinks DRAM supplies will loosen possibly by the end of 2017. “But we thought the same thing for 3Q and it doesn't yet appear to be taking place,” he said. “More likely, DRAM supplies will loosen in a more meaningful way in 1Q or 2Q next year.”
In addition, DRAM demand is expected to remain strong through the third quarter as system makers gear up for Christmas, said Matas. “We expect DRAM unit demand to subside a bit in 4Q and 1Q, before rebounding again in 2Q. Again, this is a pretty typical seasonal pattern.”
IC Insights recently raised its annual semiconductor capex forecast from 12 percent to 20 percent. The DRAM/SRAM segment is expected to lead in capex spending at a projected 53 percent growth rate.
Currently, only SK Hynix has announced a capacity expansion for DRAMs. During a second quarter earnings call, the company said it’s not enough to “just implement technology migration to fully meet the demand” so the company will need to increase capacity. SK Hynix also noted it is building a new DRAM facility in Wuxi, China, which is slated to be completed by the fourth quarter of 2018, at the earliest. SK Hynix said its DRAM capacity in 2017 will increase between three to five percent and it is reviewing whether it needs to adjust its capex up.
Both Samsung and Micron didn’t share their future DRAM production capacity plans during their second quarter earnings calls. Samsung noted that the industry can infer from its first half expenditures that annual capex is expected to increase significantly year-over-year but it cannot provide a 2017 annual capex plan at this time.
IC Insights believes both companies will eventually add DRAM wafer start capacity to protect their market share.
However, Samsung made it clear during its second quarter earnings call that it doesn’t chase market share. The company also said it needs “to add new DRAM capacity to remedy the capacity loss that resulted from technology migration.”
Se Won Chun, senior vice president of Samsung’s Memory Marketing group, said during the conference call: “Despite the increase in 2017 capex for the memory business, our memory supply guidance for this year remains unchanged.”
“Next year, we are considering possibly converting some of the NAND capacity to DRAM, but the actual timing or size of that will depend on the market situation that unfolds next year,” he added. “As we have always emphasized in the conference calls, we will refrain from, for example, increasing market share, fighting on volume. We manage our business with a profitability focus. And so, we will flexibly manage our capacity by very closely monitoring the market situation, as well as the supply and demand balance.”
Matas believes Samsung will build new fabs. “Samsung spent $11 billion on capital spending in the first half of 2017. Even if they did half that or little more than half for the year they’d be at a $15 or $17 billion run rate, which is significantly more than what Micron and Hynix are spending," he said.
“While they aren’t saying they are building more fabs, something is going on," he continued. "They’re not talking about how much they are going to spend and where they are going to spend it. They aren’t as open about it these days as they were in the past.”
Samsung is the number one DRAM supplier and holds about 45 percent market share, added Matas. “If they lose a couple of those points it’s not going to be taken lightly. If they do, they have a plan to come back and increase that output to maintain their share. I don’t think any of the DRAM suppliers like to see their market share slip.”
As for Micron, the company said it doesn’t have plans to increase DRAM production capacity.
“Micron said they aren’t going to build any more DRAM fabs regardless of the market,” said Matas. He believes the company will try to increase DRAM output by reducing feature size which, in turn, reduces die size.
Here’s why Micron may be reluctant to jump on the capacity bandwagon. Profitability. IC Insights reported that Micron posted a net income of $1.65 billion on $5.57 billion in sales—a 30 percent profit margin—in its fiscal 3Q17 (ending in May 2017). This is in comparison to a $170-million loss in fiscal Q416, ended August 2016.
SK Hynix experienced a similar turnaround. In 2Q17, the company recorded a net profit of $2.19 billion on sales of $5.94 billion—a 37 percent profit margin, said IC Insights. It reported a net profit of only $246 million on $3.39 billion in sales one year ago in 2Q16.
“Previously, when DRAM capacity was tight and suppliers were enjoying record profits, one or more suppliers eventually would break rank and begin adding additional DRAM capacity to capture additional sales and market share. At that time, there were six, eight, or a dozen DRAM suppliers,” said Matas. “If the supplier was equipping an existing fab shell, new capacity could be brought on-line relatively quickly (i.e., six months). A greenfield wafer fab—one constructed on a new site—took about two years to reach high-volume production.”
So it begs the question with only three major DRAM suppliers, will the same thing happen? It only takes two to engage in a price war, said Matas. “Our forecast expects it to happen. Look for it in 12 to 18 months after one DRAM supplier decides to add more capacity.”
“In true cyclical fashion, one DRAM supplier will decide to add more capacity to meet customer demand. Not wanting to be left behind or lose market share, other DRAM suppliers respond by adding capacity as well,” he added. “Soon, with all of the added capacity, the industry produces more DRAM than OEMs need and inventory rises. DRAM makers offer lower prices in order to sell everything they are producing. System OEMs then gain the upper hand in negotiating to get the lowest possible price and it sets off another price war.”
“I don’t think a significant price war will take place if only Hynix jumps into the game, said Matas. “But I don’t think it will be long before Samsung and Micron see what they’re doing and if they start to lose market share they aren’t going to sit idly by.”