Micron Technology Inc. (MU)’s takeover of Elpida Memory Inc. and the exits of Taiwanese makers could help challengers to PC memory-chip leader Samsung Electronics Co. return to profit after losing $21 billion in five years.
Prices of benchmark dynamic random-access memory chips, the most common component in personal computers, have climbed 50 percent since Nov. 30, according to TrendForce Corp.’s DRAMeXchange, which tracks the market. That rebound followed a 23 percent drop in the previous six months that pushed prices below break-even levels.
Micron, the largest U.S. maker of memory chips, agreed in July to buy bankrupt Elpida for 200 billion yen ($2.3 billion) as it seeks to compete with South Korea’s Samsung and SK Hynix (000660) Inc. Closure of that deal and moves by Taiwan-based manufacturers to leave the business would put at least 90 percent of the market under the control of three companies.
“Hynix and Micron had been making a bit of a loss at these prices, but going forward I think they are going to go into profitability by the end of the year,” said Mark C. Newman, a Hong Kong-based analyst for Sanford C. Bernstein who rates Micron and Samsung outperform and SK Hynix market perform.
DRAM chips are used in computers to temporarily store data and speed up processing. They are made according to industry standards, so products from different makers are comparable, making them a commodity. Versions of the chip used in smartphones and servers are customized for clients and less susceptible to those same market forces.
Global DRAM revenue was down 8.7 percent last year to $26.8 billion, according to data compiled by Bloomberg Industries, as demand for PCs fell amid climbing popularity of mobile devices including Apple Inc.’s iPad and Samsung’s Galaxy.
That followed a 25 percent drop the year before as competition between as many as nine DRAM makers forced manufacturers to sell chips at a loss.
Micron, based in Boise, Idaho, last month posted a wider- than-expected loss of $275 million for the quarter ending Nov. 29. Incheon, South Korea-based SK Hynix, the second-largest DRAM maker, posted a fourth operating loss in five quarters for the three months ended Sept. 30.
Industry output of DRAM may fall and prices may climb as manufacturers use factories to make other types of chips, Micron Chief Executive Officer Mark Durcan said Dec. 20.
It’s those cuts in supply, instead of increased demand, that’s driving up prices, Micron’s vice president of investor relations, Kipp Bedard, said at a Jan. 16 conference.
Prices of benchmark 2 gigabit DDR3 chips reached $1.23 today, up from 82 cents on Nov. 30, according to Bloomberg Industries data based on prices from DRAMeXchange, the largest spot market for memory chips. Global PC shipments dropped 6.4 percent in the fourth-quarter from a year earlier, researcher IDC Corp. said Jan. 10.
“I don’t think anybody in the room or any of our salespeople would sit here and try and convince you that demand has necessarily gotten better in the PC space,” Bedard said.
These higher prices should boost income at industry-leader Samsung, push SK Hynix’s DRAM business into profit and bring Micron within reach of breaking even, Bernstein’s Newman said. A “flat” PC market will help the DRAM industry this year after a decline last year, he said.
Samsung’s size and scale allows it to produce a standard 2Gb DRAM chip for about $1.05, Newman said. Hynix likely spends $1.16 each, and Micron and Elpida about $1.30, he said.
Decisions by Taiwanese makers, accounting for 10 percent of the DRAM market in 2007, to quit the business cuts supply and helps create an oligopoly comprising Micron and the two South Korean companies, DRAMeXchange analyst Avril Wu said.
“DRAM prices may be propelled back to healthy levels,” she said.
SK Hynix, Micron, Nanya Technology Corp., Powerchip Technology Co. and other Samsung rivals lost a combined $21 billion from 2008 to 2012, according to Bloomberg calculations using company financial data and analyst estimates for last year.
SK Hynix and Micron shifted capacity to NAND flash, a type of chip that stores data in smartphones and tablets.
Taiwan’s largest memory-chip suppliers, Nanya and Inotera Memories Inc. (3474), haven’t posted profits since at least 2007. Nanya plans to shift its factories to specialty memory products, Wu said. Inotera, a venture between Micron and Nanya, will become a made-to-order foundry selling its output to Micron.
Powerchip, once Taiwan’s largest DRAM maker, will focus on making chips on contract for clients instead of producing memory under its own brand name.
Micron’s takeover of Elpida will put it in second position, from fourth, with 25.2 percent of the market, based on Bloomberg Industries data. Elpida creditors will vote on the takeover next month, with a judge likely to make a ruling in March, Bedard said.
“We believe we’re entering at least a period where the next decade will be significantly better than the last decade,” Bedard said Jan. 16. “It all comes around to this arms race that’s no longer there.”
To contact the reporter on this story: Tim Culpan in Taipei at firstname.lastname@example.org.