The Module Makers - Crisis but opportunity too

Elpida might have only held 13% of the DRAM market but their hold on some of the major module makers was considerably larger. Unsustainably so, as Elpida consistently came off on the worst side of the deal in recent years.

In the very short term there will be limited impact on these customers and their channel. But when the new Elpida (or their assets) return to the market, they will be unable to engage with the module makers in the same way or scale as before.

You've never had it so good

There were 3 reasons the major module makers gave such a significant share of their TAM to Elpida. 1. Price 2. Price 3. Price. No matter how Elpida or their customers try to dress it up, that is the reality. 

So, if, for example you are Kingston, where do you go to fill the gaps & what are the consequences? Having already virtually exhausted their supply base elsewhere Taiwan in recent years, what now?

• Samsung have de-emphasised the 3rd party module market sector in recent years. Its strategic value to them has long passed.
• Micron already have Crucial in this sector & are unlikely to want to jump in much further and certainly not on the sort of terms Elpida were providing.
• Hynix are already a key supplier and will probably offer more support. But Hynix are considerably shrewder than Elpida, so the terms to Kingston will be nowhere near as favourable.

Whatever way you cut it, I cannot see how, in the new supply environment, Kingston (and some others) are going to maintain the competitive advantage they enjoyed in the past. 
 

Darkest hour, right before the dawn

The big module makers DRAM revenues probably dropped 30% in 2011 and they will likely endure at least another 20% drop this year. As for being able to make a sufficient margin in high volume DDR3 PC memory, you can forget it. Many are running for the exits.

In the past the downturns could be paid for on the way back up. But as we've mentioned before, PC DRAM's problems today are structural not cyclical. So that's the crisis. What about the opportunity?

Personally, I see it with another set of module makers - the DRAM makers themselves. Kingston and one or two others have the capability to be the module maker who sits in between the DRAM makers and Tier 1 PC makers.

I will touch on this in more detail in the next post but I believe the case for the DRAM makers to get out of the PC module business is here, the strategic value of doing it yourself is effectively gone - it's a $20 part for God's sake. Resource and focus would be better utilised elsewhere in their businesses.

Please feel free to post any comments below.

If you want to discuss anything in more detail please email me at memoryman@notsodimm.com

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