Taiwan Agonistes: Why Taiwan Should Demote DRAMs, and Agressively Expand Its Foundry Dominance Instead

Taiwan Cannot Shake Attraction for DRAMs, Marches Down Same Path as Many Others Before Them
Abstract: Taiwan wants to be a big player in DRAMs, which we believe is a losing proposition and a strategic mistake, not only for Taiwan but for all DRAM makers. They should embrace their strengths and domination of the worldwide foundry business, repurpose some of those DRAM fabs to make next generation logic, and expand their design and logic foundry franchises. They have much more to lose in foundry than they have to gain in DRAMs...in fact, DRAMs is a sinkhole for money and has been for more than a decade. In the current climate of industry consolidation, megafabs and hegemony for large markets, and the move to fablessness as a superior business model, it is not even an open question which path is better for Taiwan: Foundry logic trumps DRAMs, now and forever.

Taiwan Wants to Make DRAMs After a very tough year-long DRAM market that began in the waning days of 2007, we are now well into the next phase...a more than nine-month agony emanating from Taiwan as is searches for DRAM relief in a variety of proposed consolidation arrangements among the island's DRAM makers. The "Powers That Be" in Taiwan, want to own their own DRAM IP and designs, to consolidate operations to reduce redundancies in design and development, to gain scale, and be large enough and tough enough to compete (mainly) with the Koreans. DRAM market leader Samsung and side-kick and rival Hynix, which own about 30% and 18% of the DRAM business, respectively, each makes more than ALL of Taiwan's DRAM makers combined: Powerchip, Nanya, ProMOS, Winbond, Rexchip and Inotera, plus or minus some allowance for Taiwan-based DRAM production which is owned by and built for non-Taiwanese DRAM makers (namely, Micron (JV Inotera) and Elpida (Powerchip and JV Rexchip), now that Qimonda is out of play). Taiwan has set for itself a formibable goal, from a weak position today, in a very tough and unforgiving market.

DRAM makers, worldwide, lost about $20B in the 2001-03 aftermath of the dot.com bubble bursting, and have lost another $30B this cycle, from late 2007 though the middle of 2009.

Taiwan's DRAM makers themselves have lost about $1B per quarter for the past six quarters (see table below), and hold huge amounts of debt, said to be in the vicinity of US$14B. When the 'profit' numbers for 2Q09 are tallied, another $1B will be gone forever. And, despite a long time coming in discussion, no firm plan seems to have emerged from the Taiwan Memory Corp., except to anoint Elpida with the title of "Taiwan's DRAM IP Savior", to plan to invest about US$300M for a 10% stake in Elpida to bolster its cash position, and to merge ProMOS into the larger TMC/Elpida entity. What this may mean for long-time Elpida partner Powerchip and its Rexchip JV, is not said, but likely they are automatic members of Club Elpida.


Details in the public domain are scarce and it is truly a moving target, but clearly it is much more modest in scope than that which was proposed last fall, which had a scale that was rumored to be as high as US$6B in available funding. We will not know for sure, until there is a formal announcement, and maybe not even then, as huge uncertainties are sure to exist about the arrangement.

What we do know is that it is now about nine months since conversations began, nothing has happened except Taiwan's DRAM makers have kept capacity on line, continued to make DRAMs, and lost another $3B.

The Koreans are the dominant DRAM players today. With their unique corporate culture, with huge financial resources at their disposal and a gambler's penchant to go 'all in', alone, make them formidable. Add to this their incumbent's advantages, their market position, their product set, design skills, manufacturing capacity, technology and experience, and one can see that they are way ahead of Taiwan in many important measures of market success. If history is any guide, they would probably not be dislodged without a large and expensive fight. "Last Man Standing" takes on a whole new meaning when Koreans are in the market.

Samsung's Greatness: Samsung makes twice as many DRAMs as all of Taiwan, owns most of their own DRAM technology (self-developed since Yong Park designed their 256K on Old Ironsides Drive in Santa Clara in 1984), has many DRAM designs in production, concurrently, down to the 40nm node as technology-proving vehicles. They are the driving force in JEDEC in both the NAND flash and DRAMs standards bodies, have a broad and profit-protective portfolio of LP DRAMs (50% share), Dense Server DIMMs (80% share?), and are the G DRAM market leader (>50% share). They are the original Market Creator and Market Leader for NAND flash, with a relatively stable 40% share, and a competitive #3 (belatedly) to Spansion and Numonyx in NOR flash, which remains a $5B business even in 2008.

Samsung has led and dominated every memory market they participated in, for as long as they wanted.

Furthermore, for Samsung, it would probably be a bad business decision to chase more than ~35-40% share of these huge, highly commoditized markets, susceptible to 'price dumping' by DRAM and NAND minions at home and abroad, and general production gluts (as in 'today'). Below-cost prices may hurt Powerchip a lot, but will impact Samsung, whose share is 10x larger, way more, in absolute if not relative terms. And, there has always been a "suicide bomber" in every DRAM downturn since 1979...they kill themselves, to be sure, but take as many innocent bystanders with them, who are too close to the explosion. The recent trend to "Pure Memory Players" exacerbates this potential: "We will not exit memories gracefully, if and since that is the only thing we have." Few memory makers have ever 'reinvented themselves'; most died of low prices and high losses.

With high shares in all major memory markets, Samsung may not grow its memory share more from today, but will improve its memory profitability; for growth, they will have to find greener pastures and still-unfamiliar markets.

Now, add in Hynix, which, by itself, is also about as large as all of Taiwan DRAM makers combined, and who is forever in the thrall of its bankers, anxious to see their investment pan out. Given their apparent willingness to throw good money after bad, and firm in the belief (or so it seems) that all that money invested can again turn green...if the competition gives up first. Unlike Taiwan, as well, Hynix has some good differentiated DRAMs, used in graphics and LP Memory applications...plus NAND flash. Hynix by itself, a distant second in all things memory to Samsung, is still out of reach for Taiwan.

Taiwan, on the other hand, gets hand-me down processes from their partners, six months after development (IBM, Qimonda then Micron to Nanya, Qimonda then Hynix to ProMOS, Mitsubishi then Elpida to Powerchip, Qimonda and self-developed to Winbond), are centered in the sights of commodity DRAMs (having only a small fraction of differentiated DRAMs), and minimize their development costs by paying for technology transfers ahead of time.

We believe that Taiwan, in focusing on strengthening its DRAM capabilities to fend off Korean DRAM dominance, is placing a bad bet, and the wrong bet. The world does not need another DRAM maker, it needs some substantial DRAM capacity taken off line, and restrained DRAM investment going forward. After two strong DRAM GB growth years, of 90% and 70% Y/Y in 2007 and 2008, respectively, 2009 promises to be a bust in terms of DRAM demand growth: pundits are calling it 20-30% Y/Y, the worst in a decade. Reductions in wafer starts are the only way to keep DRAM GB growth down that low for a year, as the steady and 'inertial' yield improvements, scheduled die shrinks and winnowing out back die versions naturally leading to more than 35-40% bit growth without adding a single wafer.

Competitively, as well, Samsung is just too big, too entrenched, and too far ahead for Taiwan to compete with head on. Samsung Electronics is a huge $60B/year electronics business, with high market share and profitable positions in mobile phones and LCD panels, both of which can feed their chip business with whatever it takes to dominate the business. Rightly or wrongly, 'fairly' or 'unfairly', this is an important aspect of Korean corporate culture that must be reckoned with. Hynix' 'family and sponsors' will stop at nothing to stay afloat, as we saw in the 2001-03 dot.com bubble aftershock.

If Taiwan wants to do battle with Samsung/Hynix/Korea, they should do it in foundries, logic and manufacturing logistics, and high-value add designs...where they have a head start and a huge advantage...vs. their 'fire and forget, huge commodity' mentality that permeates most memory makers' way of thinking and doing business.

Sure, it will/would be a good story if Taiwan were to win and establish a sustainable (and profitable) DRAM position. The story would be great: "'The Comeback Kid', How Taiwan's DRAM Business Rose from the Ashes to Become a World Leader"...but what if they lose?...and why not apply themselves in an area where 'Victory' and 'Success' are far more likely, and aligned more with their current strengths and market trends?

Samsung's Foundry Possibilities: Further and finally to this argument, Samsung, The Memory Guy, took 40nm Xilinx FPGA business away from UMC within the past six months, and was reported sniffing about in Taiwan's foundries for skilled employees to hire away. (see relevant footnote on Samsung DRAM offensive, ca. 1990, below).

Although Samsung's System LSI business and 'other' have languished in ignominy for a decade, they show sparks of excellence, and know that they cannot overtake Intel (or grow their sales and profits much more) by relying only on memories. They have been a part of the IBM-led Common Technology Platform roadmap development consortium for many years; they have their own developing ASIC group, and take in foundry (in addition to Xilinx, noted above.) Their System LSI Group is running about $2B a year...a pittance by Samsung memory standards, but it would easily rank in the Top 20 in world chip sales by itself.

Taiwan's Strengths, Taiwan' Exposure and Taiwan's Opportunity: Why "Taiwan" would want to challenge Samsung, or Korea, in DRAMs, is a question that has not been satisfactorily answered in the discussion so far.

But a more important way to look at the problem is to ask, "What are Taiwan's strengths and what are its opportunities?" As we discussed in an earlier BLOG, Taiwan is more of an entrepreneurial culture, against the large Chaebols ('authoritarian' family-owned businesses) of Korea. It is more democratic in decision-making, and less prone to be run by diktat, as the Korean companies are. In Taiwan, there are fewer cozy government-banking-corporate tie-ins than there are in Korea, or than there are in Japan...which tie-ins have some competitive advantages when played against smaller, and more disassociated entities such as are found in Taiwan. Anyone can play in a market with the Koreans, but they play at their own peril, and usually with huge disadvantages in the power that can be asserted in a market, seemingly without regard to profit or damage potential. Though there is a fine line between 'thinking long term' and investing foolishly, somehow Korea manages to make it work. American driveways filled with Kias and Hyundai Sonatas attest to their perseverance and skill.

To see Taiwan's strengths, one has to look no further than TSMC and UMC, the #1 and #2 pure-play foundries, with 50% and 15%, respectively, of the worldwide foundry business. TSMC had sales of more than US$10B in 2008; UMC had sales of more than US$3B in 2008.

This is the Glory of Taiwan, and it is right in the path of perhaps the most important trend in the industry today, 'fablessness for finer line geometries'. It is these next-generation processes that are increasingly expensive to develop by oneself, and will drive more and more companies to lean on foundries as the industry moves forward to advanced process nodes, in the coming years.

In the Industry's Consolidative Phase, Fablessness is Fabulous. As process development costs hockey stick up at 65nm and then 45nm and 32nm, as fab costs approach $3B per megafab, the drumbeat of fab-lite, fablessness and 'mere' design houses, resonates more loudly...and more profitably. While outsourcing of chip manufacturing is said to be in the vicinity of 20% of total chip sales in 2008, an increasing fraction of the industry's profits are to be found there...far from the idle fabs, rusting with depreciation as NAND and DRAM demand lulls, far from those huge capex budgets which strangle the higher-value-add design programs that form the value proposition in end systems into which they are sold, and shut off the profit stream of the whole of the silicon food chain. Fablessness also takes one far from the specialty processes that require constant attention to maintain competitiveness, against products and markets which are forever morphing, and/or wanting to morph into other markets, process requirements and functionalities. This is a huge exposure to a smaller producer...to develop a one- or two-generation process roadmap, then abandon it.

This is the accelerating wave of the coming industry recovery, as high-value logic, ASIC and SoC implementations make Intelligent Designs more production-justifiable and more valuable to everyone in the silicon food chain, than 'mere' bulk bits' (sold at a loss, to be sure). With the current industry 'pause', painful as it is, Taiwan now some slack time to rethink its mission, to take stock of its available resources and skills and reset its industry direction. Through its leading foundries, it is uniquely positioned to become even more dominant in the next stage of industry evolution. Sinking more money into DRAMs is a fool's errand, that will bring good to no one.

Footnote for Consideration: Samsung DRAM Offensive, ca. 1990 Samsung (as "TriStar"...its corporate/family logo) came on the DRAM scene in about 1983, after being the best Korean 'regional semiconductor player' for many years. With great fanfare, LG Goldstar, Hyundai (incarnate in the US as "Modern Electrosystems"), and Samsung all joined hands and jumped in to the world chip business. Not being shy, soon thereafter, Samsung declared its goal to become the #1 Chipmaker by the year 2000. Well, not quite, and not quite yet. But recall that this declaration was made when Intel was about #10 in the industry rankings, behind five Japanese (NEC, Hitachi, Mitsubishi, Fujitsu, Toshiba), TI and Motorola, and two Europeans (Philips, Siemens = Infineon).

But, barely were the Korean's feet wet when the Tsunami of 1985 hit, and forced major retreats and reconsiderations by all three companies. On the surface, they retreated to more traditional corporate names: "TriStar" reverted back to "Samsung Semiconductor", and "Modern Electrosystems" became, nce more, "Hyundai Semiconductor". And, "Goldstar" stayed the same, at least for a while.

They continued progressing on the technology front, but their big day only came when the Japanese Meltdown began in the early 1990s, leaving a huge market void...a DRAM void...to be filled with Korean DRAMs. Toshiba, Hitachi and NEC rode the end-of 1980's wave, but Samsung, with more money and more nerve, was in hot pursuit. When Toshiba showed signs of faltering in 1990, and whose 4Mb DRAM was not the market leader that their 1Mb had been, Samsung came into play with a vengeance.

Throwing down the gauntlet, Samsung hired the Top Guns from right from under Toshiba America's (TAEC) nose: Keith McDonald, TAEC's Director of Sales, Mark Ellsberry, the TAEC VP of Memory Marketing, and Mike Crawley, the TAEC Director of Distribution and Sales Reps, all came over to work for Samsung. Within a year, these three had a huge impact on improving the Samsung image to its customers, brought immense experience to reshape Samsung's DRAM business into the market leader it is today. As soon as 1992 came in, Samsung had risen to the top of the (DRAM) heap, and became the market leader, never to be headed off. Where each generation of DRAM had had a different market leader from 4K to 4M, Samsung has led every generation since.