Already jostled by turbulence in the dynamic RAM market, memory chip makers are cinching down their seat belts for an even rougher ride over the next few months. With prices of dynamic RAM chips in a freefall, so are the hopes for profits at many of the world's largest semiconductor makers.
Naoki Sato, industry analyst at Merrill Lynch Japan, expects pretax profits at Japanese DRAM makers this fiscal year to drop between 20 per cent and 30 per cent, while other less bullish analysts say profits might fall twice that much.
The drop wasn't supposed to happen. Fuelled mainly by a steady growth in the world's PC industry, the DRAM bonanza seemed likely to continue until the year 2000, in a major break with the semiconductor industry's cyclical history, analysts had predicted.
But spot market prices have hit new lows - below cost levels - with 4Mbit DRAM selling for approximately $US3 and 16Mbit DRAM at about $US10. DRAM has been the main profit generators for the past two years at many of the world's largest semiconductor makers, mainly in Japan and South Korea.
Since the DRAM chip is one basic building block of the IT industry, showing up as the main memory in PCs and a range of other electronics products, the falling prices promise to have far-reaching side effects.
Third-ranked DRAM maker NEC has announced its plans for a merger with US PC vendor Packard Bell Electronics, in which NEC currently owns 19.99 per cent. The tightening ties with Packard Bell are rooted in NEC's need to squeeze revenues and profits from other areas of business, now that its DRAM fortunes are flagging, the official said.
Top-rankedÊDRAMÊmakerÊSamsung Electronics, meanwhile, is cutting back on its DRAM production after three years of breakneck expansion and two years in which, analysts say, it raked in more than $US4 billion in DRAM profits.
Until this month, Samsung's DRAM lines had been churning out chips around the clock, 365 days a year. However, in an effort to fight the current oversupply of DRAM, the Seoul-based company this month will begin closing its 16Mbit DRAM plants two days a month to cut output from 14 million to 12 million chips per month.
In Japan, meanwhile, rumours abound that several top makers are planning similar cutbacks. "So far no-one has cancelled any investment, but we're waiting to see who blinks first," said an official at Fujitsu.
It may be that governmental pressures could force the hands of at least some chip makers. On May 31, one of the few remaining US-based DRAM makers, Micron Technology, announced that it has filed a dumping complaint with the US Department of Commerce against South Korea's Hyundai Electronics Industries and LG Semicon.
"Prices of DRAM have been dropping very rapidly, and we have asked the Department of Commerce to take immediate and decisive action by doing a quick review of the amount of dumping now occurring," said Steve Appleton, Micron's chairman, CEO and president, in a statement. "We have strong evidence that Hyundai and LG Semicon have once again chosen to sell well below production costs," he added.
As the largest single consumer of memory chips, the US has considerable pull on the industry as a whole. Chip vendors are required to charge a "fair market value" for their goods and cannot sell them below cost.
Nevertheless, large Japanese vendors may see US government intervention as the only way to stabilise prices, said Merrill Lynch's Sato. "I think they're hoping for it in their hearts."
Things will get worse before they get better. Hyundai Electronics and LG Semicon both responded to the Samsung cutback announcement by restating their determination to aggressively expand production of 16Mbit DRAM by year's end.
Sources in Seoul said that Hyundai is now the most aggressive price buster in the spot market, offering 16Mbit parts for as low as $US9.50 late last week, bringing the cost for the silicon portion of 1Mb of DRAM to below $US5.
In addition to pricing pressure from Korean makers, several Taiwan-based DRAM upstarts, including Nan Ya Technology and Powerchip Semiconductor, are also scheduled to start volume production of 16Mbit DRAM later this year, officials said.
With such additional capacity steadily coming online, analysts now expect the DRAM pricing slump to continue well into next year, and most probably into 1998.
"We might have decent DRAM market strength in the second half of 1997, if we see things like telecom taking up a lot of silicon," said Matt Cleary, Seoul-based semiconductor analyst at HG Asia. "But at this point I really think that the first half of 1997 is going to look terrible" for the DRAM makers, he added.
For PC users, however, the makers' headaches are good news. Cheaper silicon prices translate into ever cheaper DRAM modules. In Taiwan, for example, the street price for 8Mb single in-line memory modules (SIMMs) already has fallen below $US100.