DRAMs: Historically, how bad is this downturn?

DRAMs: Another look at how bad it is: Last week, we (finally) published our summary and analysis of DRAM makers’ financial performance for the four quarters of 2008. It was the worst DRAM year ever, and remains equally dire so far into 2009. In 2008, we estimate that DRAM makers lost about $14B, on top of the estimated $5B they lost in 2007. Bad news, indeed.

In 1Q09, they can be expected to drop another $4-5B, as prices have moved up almost not at all, and we are nearly done with the quarter. It is too late for Qimonda’s PC DRAM withdrawal to stabilize the market; though having ramped down most of their production, they are still alive, and the market is no more balanced than when they filed for bankruptcy months ago. The Taiwanese government ‘industry stabilization program’ is stalled. We have already seen the full market impact of idling and decommissioning DRAM capacity by almost everyone in the business...there are almost no more 200mm lines or 90-110nm DRAMs in production...but this retreat has brought no sustainable DRAM pricing help. Supply take downs have been no match for the slowing, or reversal, of demand growth. There may also be some OPEC-like production cheating, to keep fabs full and employees happ(ier). We cannot tell for sure.

The longer-term actions...reduced CapEx for 2009 after a slowdown in 2008, are offset by the introduction of more cost-effective DRAM designs...most are about +/-50nm, which will boost production without increased wafer starts. Oops!

There is yet another historical perspective showing how bad today’s DRAM market is, which is shown in the figure below. Historically, the industry mix of DRAMs has recently sold for $3-4 per unit; better in good times, worse in bad times. Over the past two decades, the mix price has steadily declined, bubbling up in times of shortages, but otherwise trending down in both costs and prices, though profit margins have declined enough to make DRAMs a bad business for quite a while. Today the DRAM mix price is lower than ever.

Industry DRAM Mix: At any given time, a multitude of DRAMs are being produced and sold: small amounts of last generation PC DRAMs (DDR1 in today’s case), and maybe still some from the generation before that (like SDR DRAMs), all of which continue to have applications, mostly outside the PC space. The volume runner, at any point in time, is the leading PC DRAM mainstream...which today is the 1Gb DDR2 DRAM. There’s also always a growing fraction of the Next Generation PC DRAM, in this case DDR3 DRAMs, which today constitutes about 10% of total DRAM GB shipments. In the case of DRAMs, there are subsidiary roadmaps for G DRAMs (graphics DRAMs, like G DDR3, 4 and 5), used in Video Game machines like the X-Box360, and for LP DRAMs of various generations, mostly used on mobile phones. There are XDR and RDRAMs, too, though not as many as Rambus would have hoped. These side-markets to the mainstream PC DRAMs...yesterday’s, today’s and tomorrow’s...are always smaller volumes, and better priced. Today, they make up maybe 10-12% of DRAM GBs shipped, and maybe up to 20% of DRAM dollars.

At any point in time, all these groups are present in the overall DRAM mix, though their proportions and sometime their names change. There’s always the PC mainstream DRAMs, which is 60-80% of the total, and the others add to the remainder. Though rarely interchangable in applications, pricewise these markets are not independent, but more like chained together, going up and down in unison...higher overall, and in detail, in good times and lower in bad times. When PC DRAMs drop in price, everyone who can do so, makes more of the higher-margin alternatives, forcing a like competitive reduction in those products' prices, but which usually still remain more profitable; PC DRAMs take the hit hardest, always.

Today, the DRAM mix price is worse than it ever has been in nearly 20 years. Overall, 2007 was at that time, the worst we'd seen since 1990. Then, continuing in to 2008, even though 1Gb DRAMs supplanted 512M DRAMs as the highest volume runner (doubling the density per chip, or per unit), the DRAM mix price dropped another 30%. DRAM prices, locked in this 'death spiral by oversupply', left the year 2008 at an all time record low, down by another third from 2008’s yearly average, to about $1.18/unit. And here we are today.