Are Memory Chips Commodities? (Part 1)

Photo of an old financial document bearing the title Commodity ExchangeThis post is the first of a two-part series explaining commodities, and especially how they relate to memory chips.  Part 1 defines a commodity and explains its attributes.  Part 2 explains the commodity cycle.

Often in my presentations The Memory Guy will refer to memory chips, particularly DRAM and NAND flash, as “Commodities”.  Lots of people take exception to this, usually by asking: “How can anything as high-tech as memory be a commodity?  After all, most commodities are like grain, or concrete, or metals, or petroleum!”

They are right to name those as commodities, but you will soon see that there is a very broad definition of “Commodity” that does encompass memory chips and a lot of other things that most people wouldn’t think of, including some soft drinks.

I really hate articles and blog posts that start off with a definition pulled from a dictionary.  These always tell me that the author was having a hard time getting started.  But I thought that might be in order here since there might be some contention about the meaning of “Commodity”, so I did a web search for the definition of the word, and found that the respected Merriam-Webster dictionary actually includes “Memory Chips” in its definition!

Of course, the Internet being what it is, I also found a number of definitions that limited the term to raw materials or agricultural products.  None of these were from sources with as high of a reputation as Merriam-Webster.

I explain commodities a couple of ways that are aligned with the Merriam-Webster definition, although they don’t use the dictionary’s phrasing.  I usually say that a commodity is something that you can buy from any of a number of sources interchangeably.  It doesn’t really matter whose product you use, since they are all essentially the same.  The customer typically makes a sourcing decision based on little more than price.  Most memory chips fit that category.

If you’d like a college textbook explanation, there’s a good one HERE by Professor Emeritus Craig Kirkwood of Arizona State University.  Interestingly enough, it’s in a chapter about Commodity Cycles, which I’ll get to in Part 2.  That chapter is a part of his text called Business Process Analysis Workshops: System Dynamics Models.  Prof. Kirkwood tells us that a commodity is undifferentiable, has higher fixed than variable costs, and is relatively price inelastic in the short run.  That definition fits memory chips extremely well!

Chips that are NOT Commodities

This might be a good place to explain what kinds of chips are not commodities.  These would be anything that cannot be switched out easily with a competing product.  Lots of linear chips are very unique, as are FPGAs and most MCUs and MPUs.  There are also lots of “Specialty” memory chips, like FIFOs, dual-port SRAMs, emerging memories (MRAM, ReRAM, etc.), and those blazing fast parts sold by smaller companies like GSI Technology.  If a customer wants to stop buying from a certain supplier of one of these chips, that customer will probably have to redesign their system.  These chips are called “Differentiated” or “Proprietary” products.

I often say that the difference between a commodity and a differentiated product determines where the purchase decision is made — at the engineer’s office or the buyer’s desk.  When a differentiated chip has been designed into a system by the engineer then the buyer for that system’s chips has no choice but to purchase it from the specified vendor at that vendor’s price.  But when the engineer designs in a commodity chip then the buyer has the power to change vendors without notice, and this gives that buyer the power to negotiate a good price.

The entire structure of a company’s sales force and marketing department depends on whether the chips a company sells are commodities or proprietary products.  For a proprietary product most of the sales effort is aimed at the customer’s design engineers.  For a commodity that’s nowhere near as important, but you had better have a sales team with excellent negotiating skills that gets along well with the buyer.

Of course, there are always exceptions.  Intel is the sole source of Optane DIMMs and SSDs, based on their 3D XPoint memory, yet Optane only fits into the memory/storage hierarchy if its price remains below that of DRAM.  This gives Optane the odd distinction of being a proprietary product with commodity pricing!

More Soon

In Part 2 we will examine Commodity Cycles and how different commodities parallel DRAM and NAND flash.

Make this Work for You

When you put both Part 1 and Part 2 of this series together it becomes relatively easy to understand the more volatile parts of the chip market, and to accurately predict what will happen next.  This is part of the reason that the Objective Analysis forecast has been so consistently accurate for more than a decade.

We can use our understanding and experience to help your company develop a sound semiconductor strategy.  Please contact Objective Analysis to explore ways that we can work together to benefit your company’s strategic plan.

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