Tensilica and Design IP Blogs

Updated version to reflect correction to company naming due to errors in original (5/28/09)

Today's Memory Market is the Toughest Ever.

The memory marketplace has always invited participation and competition since the earliest beginnings of the semiconductor business in the 1970s. Needless to say, with the memory supplier base becoming more and more concentrated, most of those once-participants no longer make memories today. Caught in the vice of below-cost selling, and an extended period of unprecendented financial losses, we are in the midst of yet another consolidation and elimination phase. Nowhere is this more evident than in the DRAM business. This industry has a ferocious ability to reduce prices and costs (to benefit consumers and expand markets), but it also has Dr. Jekyll's ability to cause immense financial damage to the greatest of companies, lay waste to reputations, mobilize the resources of huge conglomerates, banks and governments, and surface some of the most confused and spurious arguments for getting into the business, making DRAMs, investing billions of dollars in DRAM fabs and technology, continuing to make DRAMs (and invest in making them) when there is no possibility of ever making a profit, and instead taking suicidal actions to stay in a money-losing business, when those actions only propagate the damage to anyone who remains standing.

Historically, getting into the DRAM business has proven far easier than getting out of it.

Here are several observations and lessons that we have gleaned from some of the most significant DRAM departures than have happened over the past decades, which some may use to their benefit today, or ignore at their own peril. Almost all the DRAM pioneers from the 1970s, 1980s and mid-1990s are gone: Intel, TI, Mostek, Japan, Inc. (though NEC, Hitachi and Mitsubishi live on in a downsized Elpida...all other Japanese are gone to the showers), Siemens-Qimonda and Inmos. Except for Micron and Elpida (not insignificant exclusions, to be sure, but not at the center of the Main Event), the battle today is best summarized as 'Taiwan' v 'Korea', each with cash-rich stakeholders who need to decide how long to play, how much they're willing to pay, and why they are making DRAMs; these are the same questions that float up in every brutal DRAM cycle since the 1970s.

DRAM makers have lost about $20B over the last 18 months. Understandably, their share prices are a fraction of what they were in 4Q07, forcing similar losses on their shareholders. Despite the infusion of about $12B over that time period in CapEx and R& D, it has only served to make their prior investments worth less (or nothing), and put their huge long-term debt truly at risk. This is not the first time this has happened, but it is the most severe "DRAM recession", with the highest stakes and the most confounding problems facing DRAM makers, their parent companies and shareholders, their bankers and their Governments. Their huge CapEx investments in 2006 and 2007 have run smack dab into a financial-crisis led weakening of semiconductor demand today. One could easily imagine another $20B in losses in the next 18 months, if the industry does not find its way out. It is not an intractable problem, but one that requires decisiveness and some considerable attention to how the diverse stakeholders are all impacted, rewarded and punished. DRAM suppliers have only to decide what they want to do, and avail themselves of the options at their disposal.

Backgrounder on Memory Crises: Although most memory products are highly commoditized, few have caused such financial (and emotional) damage as DRAMs in terms of placing their practitioners in such compromised financial conditions that an exit was a life-and-death choice for the parent or shareholders. Not only is the DRAM business the largest, in terms of revenues, but the large center of the product line...roughly 70-80%...offers almost no room for safe haven, product differentiation, enforced 'customer (or vendor) loyalty', or margin protection. Until the advent of NAND Flash, DRAMs were the perpetual leading-edge lithography and technology memory product standard-bearer, pushing the envelope on the litho front ahead of all other products. For a long time, it was said, "You need DRAMs to drive the process technology", and that was that (at least until Intel said 'Logic drives processing", in the early 1990s.)

In this discussion below, we have described and analyzed the departures from the DRAM business for eight companies that have occurred over the past three decades. Each of these departures was driven by severe market downturns, though other factors were also at work. Each of these companies were at the time, or formerly, major forces in the DRAM business. Along the way, there were also many smaller 'DRAM Dabblers' who were squeezed out of the business, for lack of scale, skill, or a clear purpose. Here are some of the generalities that we have distilled from these DRAM Demise Experiences:

Lesson #1: Companies, owners, stakeholders and agents must have a clear understanding of why they are in the DRAM business. Real reasons, or make-believe reasons? Today's reasons, or yesterday's reasons? Are there alternative ways of accomplishing the same goal? How can we exit with minimum damage to the larger coroporation and shareholders? Can we ask and answer, 'Why are we making DRAMs?'

Lesson #2: Departing earlier is better than later. Indecision has a price, though the prospects of huge losses are sometimes needed to focus the mind on the other issues below. IBM Micro's losses ranged over 3+ years, and doubled their exit cost. Ditto for Infineon/Qimonda...and maybe ditto for Taiwan DRAM Companis...TBD

Lesson #3: DRAMs are different, in size, scale and market dynamics, not to mention a host of 'emotional factors' not based on any reality or consensus. Outsiders making DRAMs have not fared well..but even insiders have been treated to a new twist in every market cycle.

Lesson #4: Good decision-making demands a clear line of authority for making the decisions. Dictators are more decisive than Boards of Directors or shareholders, or than a herd of cats, with their different interests, though there's always need for discussion and 'consensus building'. Institutionally, companies need a clean process for responding to business crises...rights and responsibilities, pecking order for payback.

Lesson #5: Even in a down DRAM market, an enlightened exit strategy can participate in some comeback of the surviving entity; a comprehensive exit strategy can clear up a lot of problem areas and complications in the seller's existing operation, and set them on a new path. TI's sales of its DRAM business to Micron exemplified how a comprehensive package could make an exit so beneficial to the seller. By taking Micron stock back for part of the sale price was smart, since the MU shares were cheap when they took them in 1998, but cyclically rose up 10x to a record high of $94.50 in 6/00.

Lesson #6: No companies ever regreted getting out of DRAMs, even though almost always the decision was painful for all those who abandoned the business. At worst, you take a substantial loss and move on. At best, resources are freed up to 'Chase your Glory', and undo the heavy burden of DRAMs and give life to MPUs (Intel and IBM), DSPs and Analog (TI), Foundry Partner to TSMC (Vanguard)...all the other ambitions that are starved by the disproportionate burden placed on the institution by DRAMs (Japan, Inc., Infineon).

Lesson #7: The threat of government involvement, or a rich parent who is willing to fund its child's DRAM addiction indefinitely, is a good reason to be extra cautious or stay away...The market stakes are too high already, and below-cost sales too frequent, but made worse by your competitor having a large reservoir of cash at their command...cash that is often not subject to 'market rational' behavior

SRAMs, EPROMs and NOR flash (to name only the larger memory markets), as well as Mask ROMs, EEPROMs have had their own dynamic, and some of these eventual departures were painful...but nothing like what the industry has witnessed in DRAMs over the past decades. It has always proven to be easier to reduce one's position in smaller markets, especially ones that a clear transition was visible ahead...one could just stop investing and let the system wind down over a few years (Like SRAMs, moving onto the Logic/MPU/SoC beginning in the mid-1990s.) Mask ROMs was mostly this way, too, once flash gained inertia and price competitiveness, and was seen as superior and almost as cheap except in the highest volume applications, or could not keep up in density with CDs for games. Also, there are markets with only 2-3 strong players could intimidate others to leave (EPROMs: Intel and Hitachi/Japan). Departures from most of those markets were not financially painful or especially noteworthy; things just wound down (exceptions and examples of precipitous departures do exist).

This essay is merely a prolog; in another article to be placed on the Denali website on Tuesday next week (26 May 2009), we will describe the following DRAM market exits, with background and discussion about the companies' 'pre-exit' situations, and the genesis of their departure:

Case History #1: UTC sells Mostek Division to Thomson...to SGS Ates, which shuts it down, 1985+
Case History #2: Intel's Painful Exit, 1985
Case history #3: Inmos Swept up by STM, vanishes from DRAMs, 1987
Case History #4: LG Semi's Shotgun Wedding, "Married" to Hyundai/Hynix, 1999
Case History #5: TI Sells DRAM Operations to Micron, 1998
Case History #6: Hitachi-NEC merge to form Elpida (1999); Mitsubishi joins later
Case History #7: IBM Micro Exits DRAMs, record 'loss per unit of market share', 1999
Case history #8: Toshiba Sells DRAM operation, fabs to Micron, 2002