The global memory chip business has always been known for its boom-and-bust cycles. This has made life difficult in the past for manufacturers such as Samsung Electronics, the world's biggest maker of memory devices. But Samsung Electronics President Hwang Chang Gyu insists the industry dynamics have changed dramatically.
Samsung and others no longer rely so much on laptop and desktop computers for sales, thanks to the recent arrival of an array of digital products. "Now, accelerating memory need in mobile and consumer products fuels the growth," says Hwang.
In this digital era, gizmos such as Apple Computer's (AAPL) iPods and other music players, cameras, video recorders, game consoles, and cellular phones all require huge amounts of data for high-quality audio and video entertainment. They require NAND flash chips to store them and Dynamic Random Access Memory, or DRAM, to process them quickly into sound and moving pictures.
ALMOST SURE THING.
No other company is better placed than Samsung to benefit from the trend. That's because the Korean heavyweight controls nearly a third of the world's DRAM market and about half of the NAND market (see BusinessWeek.com, 3/23/06, "Samsung's Flash of Inspiration").
The growth dynamics for both types of memory chips looks tip-top. Researcher Gartner Dataquest expects global DRAM sales this year to rise 14% to $28.7 billion and NAND sales 29% to $15.4 billion. It puts DRAM revenues at $37.8 billion in 2008 and NAND revenues that year at $21.2 billion. Of course, memory chips will never be entirely free from price fluctuations. Gartner forecasts average selling prices of NAND flash, which holds data even when power is switched off, will fall 56% each this year and next year. Yet demand is forecast by Gartner to more than double every year between 2005 and 2010.
To survive in this game, companies need to keep slashing production costs fast enough to make up for price plunges. The conventional rule is that DRAM makers should be able to continue cutting costs by 30% a year to maintain their profit margin. For NAND chips, although they are still at a nascent stage, costs should almost halve every year. "We are not unhappy with NAND price falls because we need to lower prices to create new markets," says one Samsung executive.
"ABSURDLY PLEASANT SURPRISE."
Samsung has excelled in the high-stake competition by investing billions into new and advanced chip-making equipment and research. This year alone, it is spending nearly $6 billion in equipment and $2.8 billion in R&D, although minor portions are for non-memory logic chips. Such spending helped Samsung maintain its memory chip margin at around 30%. In the past three years, its chip business reported a profit of at least $4 billion every year and analysts say the company is expected to repeat the performance over the next three years as well.
Now imagine the boon to DRAM makers' profits when prices actually rise. That's exactly what has happened in the first eight months of 2006. "This is an absurdly pleasant surprise to memory makers," says semiconductor analyst Michael Min at Korea Investment & Securities in Seoul. The first sign of firmer prices came in the first quarter of this year.
The average selling price for DRAM, a key memory for computers, fell only 3.9% in the first quarter compared with the last three months of 2005. Historically, it has fallen by an average of 9.2% every quarter.
If you look at the trend from the start of this year, DRAM prices are actually rising. The average price for a 512-megabit DRAM chip rose to $4.90 in August from $4 in January. It's hovering around $5 in September. The price reversal is partly linked to the much-publicized deal between Samsung and Apple last year that led to the creation of iPod nano (see BusinessWeek.com, 8/26/05, "A Memorable Deal for Apple and Samsung?").
The Apple music player that uses the NAND chip instead of a hard disk drive for storing music files popularized the flash chip. This secured volume for NAND, which uses less power than the hard drive, to push costs down dramatically, thereby creating a virtuous circle of more application and lower prices.
This prompted memory chip makers to switch part of their DRAM production lines over to NAND. The flash chip market was, until two years ago, dominated by Samsung and Japan's Toshiba (TOSBF). They have now been joined by Hynix Semiconductor (HXSCF) of Korea, and Boise (Idaho)-based Micron Technology (MU), which runs a $2.4 billion joint venture with Intel (INTC) (see BusinessWeek.com, 9/7/06, "Hynix: Chipping Away and Making Good").
"In the memory card game, the production switch between DRAM and NAND will remain a joker," predicts Kim Soo Kyoum, semiconductor program director at researcher IDC.
Industry analysts note that memory chip makers will likely switch their production capacity back and forth between DRAM and NAND once the profitability gap widens. "This will certainly have a mitigating effect in price fluctuations of DRAM chips," Kim says. "I don't think the DRAM market will experience wild annual revenue falls of some 20% to 30% in the foreseeable future."
Adding to a tight DRAM supply is the chip's application in new devices. Traditionally, DRAM chips were used mostly in computers to keep complex programs and large data in cache memory. Says Samsung's Hwang, "The expansion in DRAM demand is so robust that we are only meeting 70% of our clients' needs."
PRESSURE TO KEEP UP.
One major driver of growth is game consoles. As they process increasingly high-definition graphics and images, Samsung's graphic chip sales will top $1 billion for the first time this year. Samsung, which already supplies the bulk of memory chips for Sony's (SNEE) PlayStation 3 and Microsoft's (MSFT) XBox 360, has also agreed to ship DRAM to Nintendo (NTDOY) for its Wii game machine. Hwang figures game-related DRAM will account for about 10% of global DRAM sales this year and between 15% to 20% next year vs. just 3% last year.
Yet not all DRAM makers are benefiting equally from the current boom. Only those with leading-edge technology and capacity can deliver custom-made memory devices for game consoles, mobile phones, and high-end servers that promise fatter profits. The profit margin for Samsung's memory chip business in the second quarter of this year topped 32%, against 23.2% for Hynix, 3.6% for Micron, 9.9% for Japan's Elpida (ELPDF), and 10.2% for Qimonda (QI), a memory chip specialist recently spun off from Germany's Infineon Technologies (IFX), according to Merrill Lynch (MER).
To underline its leadership, Samsung on Sept. 11 rolled out a new 32-gigabit NAND using so-called Charge Trap Flash architecture, a technology enabling chipmakers to print circuits in lines 1/3000 the width of a human hair. "It is a significant breakthrough that has potential to give Samsung additional profits from patent royalties," says Min at Korea Investment.
KEEP IT GOING.
The memory chip industry has had difficulty trimming lines on the most advanced chips beyond 50 nanometers, but the new technology allowed Samsung to push it to 40 nm. Using thinner processing technology means individual chips can shrink. In other words, more chips can be cut from each wafer, pushing chip costs lower.
The question remains if the optimistic outlook will prevail in years to come. Gartner cautions that a number of uncertainties lie ahead. A further delay in the introduction of Microsoft's Windows Vista operating system next year, already rescheduled from this year, will throw the DRAM industry into oversupply. Unless mobile electronics keep creating new NAND demand, memory chip vendors are likely to switch NAND production back towards DRAM, to detrimental effect, it says.
Hwang remains bullish. With the popularity of games, mobile TVs, and other portable mobile entertainment picking up pace, he doesn't expect NAND makers to revert back to DRAM in any significant way. His company managed to double the capacity of NAND annually in the past seven years to halve the chip's price every year and lead its popularization. If things turn out as he plans, the fever line of memory chip sales should be redrawn to point just one direction: up.