Opinion

posted on 21 July 2008 16:47

Despite significant quality differences between memory components traded around the world, DRAM (Dynamic Random Access Memory) chips are very often considered commodities.

The price fluctuations are recorded daily and watched by many people in the IT industry as they offer indicators of when to possibly buy chips and make fast money, or when to stay away and watch those foolish enough to deal in this commodity loose their shirts. Unfortunately, for those who build PCs, servers or notebooks, memory is a necessity and no matter whether prices are up or down, they need the components.

After the free falling prices throughout 2007, for the most commonly traded components (512Mbit 64Mx8 DDR2), prices have somewhat recovered in the first two quarters of 2008 by approx. 15% and have then shown a remarkable stability.

At the beginning of July 2008, the market for memory chips is entering an interesting quarter. It looks like the Contract Price negotiations between Chip manufacturers and PC OEMs for July take a little bit longer than expected. Feedback from those involved so far, indicates that the question is still whether or not yet another increase can be agreed on. At worst the contract market will remain stable, it seems. Only the spot market dares to discuss some price drops on days where demand from traders is low. Remember that prices are a result of demand and supply, so let’s take a look at what might influence them in the next few months.

On the demand side, the summer / vacation period affects business in some regions more than in others. Being a global market, the fact that French, Italians and Spaniards flee to the beaches in August, while China (a huge DRAM consumer these days) and the world in general will watch the Olympics, before the Islamic world (where many component traders are located) observes Ramadan for the whole month of September, will not go without having an effect on trading volumes. More demand dampening impact is likely to come from a general gloomy economic climate and budgets being used up by higher-than-anticipated elsewhere, especially in the energy sector.

This however, could turn into an opportunity for some players in the memory market. When money is tight, extending the use of existing hardware by upgrading (instead of replacing) makes even more economic sense than it does at other times.

In some segments, this development is being further supported by a general trend to squeeze more performance out of existing hardware: Think virtualisation! While you might be able to run several virtual machines on one server instead of ten physical boxes, these VM hardware requires very high amounts of installed memory. Even the rising energy prices can bring a positive effect to the demand on the memory market in the end: Switching to low power server memory might require an initial investment in new modules but the energy savings achievable over the lifetime of the more efficient box help, paying off the purchasing price before long. And while some pundits have discounted the effect of MS Vista on the memory market since its launch, let’s not forget that Microsoft has terminated retail sales of Windows XP as of June 30, 2008: Vista not only requires a higher memory base than XP to run smoothly, it will probably draw more memory hungry software onto our machines and in its 64-bit version it “blows off the ceiling” for installed memory, as for the first time you can go beyond 3GB of RAM.

Before the quarter is over, system builders and OEMs will start looking for memory in preparation for their year-end needs and could trigger a significant increase in demand.

On the supply side, this could be met by some developments that industry insiders will watch in nail-biting suspense. After the horrific price declines of 2007, all chip manufacturers found themselves in a situation where selling prices did not cover production costs. The only way to improve this painful situation (bar a miracle price recovery beyond what we have seen so far) is to aggressively reduce production costs per unit. This, however, is a very expensive endeavour as new processes and technologies require multi-billion dollar investments, which are not easy to pull off (did anyone say credit crunch?). While a few chip manufacturers have made announcements about new lines going live or about technology roadmaps that will give them an edge over the competition by 2012 (sic!), there doesn’t seem to be a single one that has not postponed, cut-back or called-off either construction of new plants, or other capacity expansion projects. Combine this with several announcements regarding older lines being retired, as they are not efficient enough to run at current price levels, and you come to the conclusion that this is where the real thriller is going to be: Will supply be falling short of demand before the end of the year?

On the so-called 3rd Party market, where companies who do not have their own semiconductor manufacturing but buy chips and build modules with it, additional weeding is likely to happen: An industry analyst recently remarked: “When the DRAM market sneezes, the third-party DRAM module market gets pneumonia.”

According to market chatter, some of the 3rd Party companies are simply struggling to buy chips as the semiconductor vendors have concerns that these customers will still be around when the invoices are due. Earlier this year, one Taiwanese vendor who recorded sales of $300 to $400 million in the previous two years, simply closed shop. Other 3rd Party vendors are looking for private investors as they seem to struggle to obtain funding from banks or the stock market to pay back loans they took up for previous investments or future upgrades they need to make to stay competitive.

It will remain important for people in the channel to partner up with strong and healthy vendors.

^{[Market Update July 2008 - Bernd Dombrowsky, Inside Sales Director - EMEA]}