- At its peak in the late 1980s the DRAM market sported 23 suppliers.
- Today there are 6 suppliers of any note: Samsung, Hynix, Micron, Elpida, Nanya, and Powerchip
- The already-depressed market is only going to worsen in 2012. Capital spending in 2010 is seeing to that. Although many believe that prices cannot get any lower, that is exactly what they will do in 2012.
- Qimonda was the first DRAM company to liquidate in the history of the semiconductor market. Prior to this DRAM makers either were acquired by more successful firms or they changed their business model.
The graphic for this post comes from a 2009 Objective Analysis Brief Why the DRAM Market MUST Consolidate, that is as true today as it was in 2009 when it first appeared. This “Brief,” an inexpensive white paper which can be purchased for immediate download, gives the history of the DRAM market and explains the exact reason that DRAM market consolidation is inevitable.
Elpida just made a statement to clarify the company’s status amid newspaper reports about a reorganization. One part of the statement reads:
…we are discussing advanced payments and capital investments with customers. Elpida also continues to discuss with its major banks the refinancing of borrowings so that company business operations can be conducted normally.
Clearly the company is in very deep trouble. Qimonda made similar statements starting in January 2009, and filed for bankruptcy three months later.
Hynix is being divested by its bankers. A mid-November press release explained Korea’s SK Telecom would purchase 15% of the Hynix’ shares to become a 20% shareholder in the company. With this transaction the company’s whopping 85% debt-to-equity ratio, although better than Elpida’s 86% number, will be cut to something around 44%, which is still far worse than Micron’s 24%. Removing the involvement of the banks also may reduce the company’s ability to bring about creative financing deals to recover from bad markets.
During the last downturn Taiwan’s government made a valiant effort to combine Taiwanese DRAM makers into a single firm, “Taiwan Memory,” that would bring new economies of scale to the country’s flagging DRAM industry. The end of the 2009 downturn removed the immediacy from this necessary evil, and the deal fell apart. During the current downturn we wonder if this effort will be resuscitated, or if it has lost its backing.
How is this consolidation likely to play out?
Samsung rarely acquires ongoing concerns, preferring to build its capabilities from within. We do not see Samsung acquiring a weak sister.
Hynix is likely to live through the 2012 downturn. This company has a remarkable penchant for surviving against the odds. This implies to Objective Analysis that Hynix will neither be acquired nor go out of business in 2012. We do not see Hynix, though, as an acquirer of other businesses during this cycle. Hynix, like Samsung, is likely to exit the 2012 market looking very similar to the way the company did when it went in.
Micron is always on the watch for a bargain, and has frequently acquired other DRAM businesses during a downturn. It would not be at all surprising to see Micron acquire Elpida, Powerchip, or Nanya in 2012. The most creative deals that Micron has consummated involve the trading of depressed Micron stock for a weak DRAM business. During subsequent industry upturns Micron does well with the added capacity, and the stockholder can sell Micron shares for a tidy profit over the acquisition price.
Elpida (the Greek word for “Hope”) is the last remaining Japanese DRAM manufacturer, having consolidated the DRAM businesses of NEC, Mitsubishi, and Hitachi. Toshiba converted its DRAM business to flash memory, and Kobe Steel Semiconductor was acquired by Micron in 2000. Although Elpida has taken over Powerchip’s PC DRAM business, it is unlikely to be able to profit from this side of the business in a depressed 2012. If Elpida does not get acquired in the coming year, we worry that the company may not be able to compete well against the remaining firms, especially in a market that is more highly consolidated than the market of 2011. Elpida is also the only DRAM company that does not yet ship NAND flash, although the company has an agreement with Spansion to produce NAND flash using Spansion’s very successful charge-trap technology. Elpida’s competition has NAND to fall back on during those times when the DRAM market is doing badly, but Elpida has only DRAM to keep itself alive.
Powerchip became a PC DRAM foundry for Elpida. This structure gives each manufacturer only a portiuon of the profit that an integrated DRAM manufacturer would get, so this means that Powerchip is likely to fare extremely badly for as long as the company remains in the DRAM business.
Nanya is loathe to lay off workers or to sell a business to another company. This old family firm is loyal to its employees to a degree that sets it apart in today’s business world. It is difficult to tell how Nanya will deal with 2012, but the company will come to a point soon in which it will question the wisdom of participating the DRAM market when the profits of the company’s other divisions will be used to offset the losses of the DRAM business. It is possible that Nanya will sell its DRAM plant and capacity and keep its workers.
Meanwhile, the DRAM market is on the verge of changes that will accelerate consolidation and that could make suppliers unprofitable for a number of years. Objective Analysis has recently produced a report that explains why the market dynamics of DRAM are going to change in the near future, with DRAM bit growth slowing, resulting in more rapid consolidation and protracted losses. This report: How PC NAND Will Undermine DRAM can be purchased for immediate download on the Objective Analysis website.