According to DRAMeXchange, a research division of TrendForce, DRAM contract price continued on a downtrend in 1HAug. As the industry enters the middle of August, the DRAM contract price decline is becoming steeper. As overall demand is sluggish and PC OEMs’ inventory levels remain high, DRAM makers are lowering prices to stimulate demand. However, the move did not help close deals any faster; orders were not placed until after August 16. Currently, average 4GB module price falls around US$18.75, a 5% decrease compared to 2HJul., while lowest price at US$18.50. DRAM contract price is expected to see an 8% monthly decline for the month of August; suppliers’ losses are increasing as price approaches the US$18 mark. The average 2GB module price trend is showing a decline as well, falling to US$10.50.
From the price perspective, it is clear that 4GB is gradually replacing 2GB as the mainstream density. Thus, since price decline has always been the most severe for mainstream products, the 4GB price trend is showing a greater decline than the 2GB trend. When demand is weak, suppliers have no choice but to lower prices; however, the biggest issue for the DRAM industry is the fact that there is no demand to stimulate when it comes to PC DRAM. In the absence of capacity withdrawal or reallocation, the majority of DRAM makers have been experiencing losses for several quarters now. TrendForce indicates, based on the current supply-demand curve, unless a total capacity of 80-100K wafers per month is removed from the market, it will be difficult for DRAM price to return to healthy levels.
DRAM Industry Oversupply Continues, Capacity Cuts Sole Hope for Survival
To stay competitive, in addition to gathering funds and expending capex on technology migration, major DRAM manufacturers have been transitioning to 4Gb instead of 2Gb chip production. Production technology is advancing from the 30nm to the 20nm process, which makers hope will make the rate of cost reduction faster than that of price decline. However, looking at financial reports for 2Q12, the only manufacturers that saw profits for the quarter were Korean suppliers Samsung and SK Hynix. As the remaining DRAM makers continue to show negative margins, it is difficult for them to spend any large amount of capex; thus, their cost competitiveness is declining, in the formation of a vicious cycle.
TrendForce indicates, the DRAM industry is facing rapid change in its demand ecosystem: PC and NB shipment growth is not performing as well as in previous years, and content per unit has not been increasing as DRAM price drops. The DRAM industry is seeing stagnating demand; although total DRAM bit output continues to grow, industry revenue is decreasing every year. Although in recent years DRAM makers have been reallocating excess PC DRAM capacity to non-commodity DRAM production in a bid for self-preservation, there is a large gap in terms of profitability for different products: the mobile and server DRAM markets are more or less monopolized by the Korean suppliers, as they hold over 70% of the market together. As the majority of Taiwanese manufacturers’ production is focused on commodity DRAM and they do not have proprietary technology, they are at a disadvantage when it comes to both spot market fluctuations and contract price negotiations. As Nanya is the sole remaining DRAM brand manufacturer in Taiwan, Taiwanese market share currently accounts for less than 10% of the global market.
As high capital investment is required in the DRAM industry, cutting production to help ease oversupply is a difficult choice, as investments previously made in manufacturing equipment will see less return. Unfortunately, capacity cuts are currently the only solution to remedying industry oversupply. If losses continue to increase, exceeding cash cost, makes will face problems with operating cash flow. Currently one supplier has made a small capacity cut of 40K wafers per month, beginning in August. However, TrendForce indicates that with high PC OEM inventory levels, such a small reduction will not benefit the supply-demand balance much. As module contract price continues to fall rapidly, manufacturers with weaker finances will have to initiate a round of capacity cuts, or likely be faced with a DRAM price collapse.