Friday, April 07, 2000
"Memory price has been dropping for the last three years. The memory industry has gone through a lot of consolidation. Many memory suppliers are no longer in business. As a dealer, a user, how should you ride this wave?"
Semi-conductor memory (DRAM) is a very cyclical business. I remember the first wave hit as early as 1985 when the industry was changing from the 64kbit chips to the 256kbit chips. Memory price shoot up to a premium. The second wave was in 1988 during the change from the 256kbit to the 1mbit chips. At time, you might be able to conclude that every time the chip size changes, there would be a transition shortage when the demand exceeds supply. Wrong! The next DRAM chip size transition turned out to be non-eventful. In 1993, the industry seemed to have learned the lesson and positioned itself for a non-panicky change over from the 1Mbit to the 4Mbit era. By that time, all DRAM manufacturers seemed to have confidence that they can handle the future DRAM generation changes. Due to the PC bloom in 1994, manufacturers are pouring huge amount of money into building new modern DRAM factories. Seventeen new memory plants were announced within a matter of months.
In 1995, the fire at the Sumimoto Plant (a semi-conductor material factory) caused DRAM price to skyrocket in a matter of days. Price stayed up for the rest of the year and made many companies rich. A DRAM company paid their employees 59 times salary as bonus for the year. Semiconductor companies' stock went up by multiples. Time was good and every DRAM factory announced their expansion plan.
By the summer 1996, the bubble finally burst. As DRAM technology was changing from Fast Page Mode to EDO and to SDRAM, manufacturers had hard time keeping up with the change. Major computer OEM found themselves with the wrong kind of memories on hand. Inventory adjustment put a lot of DRAM surplus into the gray market. Price tremble overnight and it went without stop for the next 3 years.
From summer of 1996 to summer of 1999, price on DRAM continued to drop. By June 1999, the same 16Mbit DRAM that sold for $35 in 1996 had dropped below $0.85. It became very difficult for manufacturers and memory dealers to survive. Looking back at the drop, we can account for many concurrent events and the adjustment people made.
- No memory distributor stocks DRAM overnight for the fear that the value might change.
- Several key "retail pack" memory distributor lost big money for inventory at retail shelf.
- Most memory chips were bought on OEM contract with price protection.
- Due to the Far East manufacturer tuning up for the new SDRAM, downgrade memory chips are plentiful, further depressed the market price.
During this prolong period of price depression, many companies had to trim down or simply go out of business. Consolidation and re-alignment have taken place. The remaining companies became leaner and meaner. Let us examine what did these companies do and what have they done right?
- The two largest memory module companies had change direction from being a distributor to being assembly manufacturers utilizing DRAM under consignment.
- Most memory module distributors had setup surface mount production and went into sub-contract manufacturing business.
- Most memory distributors in Southern California turned away from commodity memory modules and concentrated on the high dollar proprietary modules for workstations and servers.
- A few companies were successful specializing on stack chip technology bringing extra high-density modules to the higher end computer market.
- Yet another memory module manufacturer took this opportunity to invest into the flip-chip and Micro BGA module assembly technology.
- One major memory chip manufacturer went into memory module manufacturing and distribution itself bypassing the middleman.
Many people in the memory industry have been telling me that they are waiting for the next wave. They see that the next generation memories are coming right around the corner and will be their salvation. PC133, Rambus, DDR all seemed to be new enough to start a new life of profit for the memory sellers. However, I think that can be an illusion like the mirage in the desert. We can never predict when it's coming and when will it disappear. Any die shrinking or technology advance will take that advantage away in a hurry.
My advice to you during this era would be:
As a memory dealer, the days of the high margin and markup on memory products are gone. The key word is "value added". Dealers will have to be knowledgeable on the memory and act as a consultant on all the memory problems. You will have to broaden your customer base by going online. Make online selling your key mission. Make yourself a source of memory information. Be ready to help and teach your customers on anything about memory. Put your advertising money online. Be creative, always look for new ways to serve your customer. One area is to recycle obsolete memories for more fundamental applications like answering machine, voice mail system, games and set tops.
For the IT manager, take advantage of the low price of memory to optimize your computer system performance. Understand and choose stable memories for best performance. Take advantage of the world-wide-web to compare, to learn, and to obtain the best value for your money. Generally, be knowledgeable, be alert and be willing to learn.
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