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Memory makers should consolidate, drop bailouts

Posted: 22 Jan 2009 ?? ?Print Version ?Bookmark and Share

Keywords:memory market? vendor consolidation? government bailout? DRAM?

Semiconductor analysts at the Industry Strategy Symposium (ISS) urged memory makers to consolidate!and forget about the proposed bailouts!in an effort to restore profitability and sanity in the sector.

The memory market needs to "rationalize the number of suppliers," said G. Dan Hutcheson, CEO of VLSI Research Inc., in a presentation at ISS. "Memory suppliers (can also) restore profitability by bringing down capex."

The memory market must not only consolidate down to two or so suppliers in each segment, but they must also change their reckless behavior. For example, memory vendors must refrain from making "undisciplined investments" in the sector, thereby ensuring "profitability and positive cash flow," said Bob Johnson, an analyst with Gartner Inc., during a presentation at the event.

Vendors must also take a more rational approach to scaling and product pricing. Hutcheson directly!or indirectly!blamed Samsung Electronics Co. Ltd for driving down the prices too fast for NAND, thereby turning the once-booming market into a complete mess.

Flash has been the fastest growth market in the history of semiconductors, "but it's been squandered," he said. "What about Hwang's train wreck?"

He was referring to Hwang Chang-gyu, formerly the head of Samsung's chip unit, who devised something called "Hwang's Law." The axiom implied that NAND transistor count would double every year in leading-edge devices, thereby driving down prices by some 40 percent a year as means as to enable new applications.

The idea worked!and backfired. Prices for NAND have fallen like a rock, enabling new applications like MP3 players, solid-state drives and others. But too many vendors followed the same path, creating excess supply and falling average selling prices.

Now, NAND vendors are losing money. Even Samsung is reeling due to the glut and Hwang has apparently paid the price. In recent times, Hwang was demoted to chief technology officer and president of the corporate technology unit. Last week, he apparently left Samsung, according to reports.

As part of the changes in a major shake-up, Samsung has consolidated its business divisions from four to two, in an effort to jumpstart demand. The four divisions were semiconductors, LCDs, mobile phones and televisions. The new Device Solution division, which includes ICs and LCDs, will be run by Lee Yoon-woo, vice chairman and CEO of Samsung.

Even before the current economic downturn hit the marketplace in September or so, the non-memory sectors were seeing decent growth. But during the same period, memory!including DRAM, NAND and NOR!was mired in overcapacity and lackluster demand. In fact, after a boom cycle in 2007, memory makers hill the wall in early 2008, as too many vendors expanded their fabs too fast in anticipation for endless demand.

Analysts blame the memory downturn on excess capacity, slow demand and even on Taiwan's DRAM makers, many of which expanded even during the down cycle. In the current cycle, VLSI's Hutcheson said memory vendors failed to follow a simple lesson: "Capacity does not drive revenue. Capacity drives prices."

Many of the anticipated growth drivers for memory have also been a bust. For example, DRAM makers were banking on PCs based on Microsoft Inc.'s Vista OS software. But much to the chagrin of memory makers, Vista has not been an engine of growth, as previously thought. Some say Vista is a bust.

For NAND, vendors are looking for solid-state drives for growth, but this storage market is still in the embryonic stages of development. In general, vendors are still looking for a new killer application to sop up excess NAND capacity.

In any case, there is a crisis in the memory sector. With the exception of possibly Samsung, most vendors are losing huge sums of money and facing a new round of layoffs. In addition, Qimonda AG and the Taiwan DRAM vendors are seeking bailouts. And NOR giant Spansion Inc. is seeking a buyer amid losses.

Bailout plans
To revive the industry, many vendors are seeking bailouts. Taiwan's Ministry of Economic Affairs has earmarked NT$200 billion ($6 billion) in aid for ailing companies, including the island's struggling DRAM makers, such as Nanya, Powerchip and ProMOS, according to reports.

Struggling memory maker Qimonda recently announced that is has arranged a 325 million euro ($450 million) financing package. In return, Qimonda has promised to continue to develop its R&D and manufacturing sites in Porto, Portugal and Dresden, Germany.

To maintain its operations in the form of a rescue package, Hynix will obtain 800 billion won ($598 million) in bank loans from its shareholders.

One analyst warned against such measures. "News continues to show the dire financial situation that most of the vendors are in, with speculation that governments will step in to support the manufacturers," said Andrew Norwood, research VP at Gartner, in a recent report.

"Widespread government support for the industry would be a disaster: It would just prolong the current downturn rather than forcing the vendors to further reduce production or causing consolidation," he said.

Consolidation is key
Gartner's Johnson proposes other solutions for the ailing segment: consolidation; instill discipline in fab investments; and invest in leading-edge capacity.

For NAND, consolidation must take place in the sector, which was an $11.8 billion market in 2008, according to VLSI Research. That figure is "hardly enough to support two $6 billion megafabs," VLSI's Hutcheson said. "At the nodal clock rate of every two years, the market can only afford one competitor."

Worldwide NAND flash memory revenue, which routinely expanded by triple-digit percentages in the late 1990s and early 2000s, will fall by 14 percent in 2008 and decline another 15 percent in 2009, according to a revised forecast recently issued by market research firm iSuppli Corp.

NAND revenue will decline to $12 billion in 2008 from $13.9 billion in 2007 and fall further to $10.2 billion in 2009, according to the revised forecast. iSuppli had previously called for a 3 percent decline in 2008 and 12 percent growth in 2009.

The picture is worse for DRAMs, which was a $25 billion industry in 2008, according to VLSI Research. At those revenues, the nine vendors in the overall DRAM business must "consolidate," Hutcheson said. There is only room for "two megafab suppliers."

Some believe that Taiwan's loss-ridden DRAM makers should throw in the towel and sell themselves to rival firms. Others say that Taiwan's egos will get into the way and the island's suppliers won't give up so easily.

By now, Taiwan's DRAM makers "should be gone," said Bill McClean, president of chip market research firm IC Insights Inc., but "nobody gives up for the good of the group."

Global DRAM revenue fell by 19.8 percent in 2008 to $25.2 billion, down from $31.5 billion in 2007, according to iSuppli's estimates. This will mark a second year of decline following the 7 percent drop in 2007, the firm said. DRAM revenue is projected to drop by another 4 percent in 2009 due to global economic uncertainty, iSuppli said.

NOR is also in bad shape. Spansion is on the block, while Numonyx, Samsung and others are struggling in the sector.

Regarding the overall IC business, Jim Feldhan, president of Semico Research Corp., is bearish. "2009 will be a horrible year," he said.

In 2009, the IC industry will fall 5.9 percent, he said. On the other hand, the industry could see select "shortages" this year.

Going forward, there is expected to be a "mild recovery" in 2010, he added. In 2010, Semico projects that the IC industry will grow 7 percent.

- Mark LaPedus
EE Times

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