Boring Boring DRAM

George would be right at home in the DRAM business these days. 


The DRAM companies have been enjoying a steady increase in monthly contract pricing so far in 2012. But that run came to a halt in June, as Tier 1 PC makers are expected to hold the price flat (avg. $21.50 for 4GB).

Disappointing PC sales in Q2, an increase in their DRAM inventories and less concern about the Elpida situation, has meant the top PC makers are now in a better position to resist the DRAM maker's demands.

Contract prices are likely to remain flat at best in July, after the PC makers have completed their Back to School builds and much of the Windows 8 build ahead. But assuming we see no shocks on the supply-side, then it is likely the contract price may begin to fall after that.

If we do see decreases, don't expect too much though. PC DRAM is in little danger of slipping into a significant over-supply, so contract pricing it is still likely to trade within a narrow band for the rest of the year i.e. 4GB DDR3 $23~$17 (very narrow in the context of DRAM's history).

The spot and after-markets, which has been operating at a near 10% discount to the contract so far this year, are likely to continue to do so in the 2H, or at least until there is any significant change in the Elpida situation. Demand in the local System Integrator and upgrade channels has been abysmal for nearly 9 months now & there is no prospect of relief in the short term.

In the past when DRAM prices where at such low points in the cycle and when they accounted for less than  5% of the PC BOM, this always spurred on MB growth and following that the price rebounded. But nowadays there is no need nor appetite for increasing mainstream PC DRAM content.

It's all a bit of a sorry state of affairs. DRAM used to be the most dynamic sector of the semiconductor business, its 'wild west'. Whereas nowadays it is becoming so predictable and boring it's more 'west country' than 'wild west'.

So DRAM is boring right now, big deal. The interesting thing is though the relative predictability we see on DRAM (and NAND) this year is masking something very big that is coming behind it. The memory business is going thru a serious structural change that will re-shape it & it's participants for the remainder of the decade. Some memory makers have already recognised this and are changing their models successfully, others are paying mere lip service to it, in the hope that the usual cycles will return - most of these guys will be gone by 2020.

Haiku on Micron's takeover of Elpida

                                                               

                       

                                                                      reckoning arrives
                                     the future is still ahead
                                            namhan stirs

Crucial no more?

But does it really matter any more?

Micron have been keen to let investors know how little they depend on the commodity PC DRAM business. Today it accounts for approximately one third of their total revenues, which, in fairness, is no mean feat.

So why, when you are executing such a strategy, would you maintain a significant brand and presence in the aftermarket & channel with Crucial (and indeed Lexar)? If the PC market is dying a slow death, then the aftermarket is already six feet under.


With barriers to entry negligible, Crucial and Lexar face relentless global competition in a technologically commoditised market. On top of that they have to contend with some very strong operators like Kingston and Sandisk, which they have no realistic hope of ever catching.

Meh

The last two iterations of Moore's Law have created a memory surplus in DRAM and particularly NAND, which we are still trying to figure out how to utilise, at least in the PC and consumer space (although the Smartphone & Compute sectors will clear this up soon).
But still, when you can buy a 16GB micro SD for $10 and a 4GB DDR3 module for $20, you have to ask yourself, where do we go from here? The price elasticity that was so predictable and reliable for the sector of industry a decade ago has disappeared.


You could argue that, "developing market" demand will more than replace the drop off "developed markets" but this is too glib. With the likes of ZTE and Huawei already taking the smartphone towards the mass market in China & with low end tablets likely to eat into PC demand, it is folly to assume that historical trends will be a good indicator to the future aftermarket demand.


Getting back to Micron, the resources involved in maintaining Crucial/Lexar are not inconsiderable. The staff, the facilities, the marketing, the distribution partners, the cash flow, the sheer focus and time it must take up. It may provide Micron with some nice ASP's on paper but I don't believe the means come even close to justifying the ends.

Make your way to the exit please

Simply put, they should get the hell out of this business. It should be sold to one of the strong aftermarket players. Micron could potentially cut such a deal on good terms this year. We have already posted about the issues facing the big module houses with the demise of Elpida. With these guys now scrambling to secure similarily favourable DRAM supply elsewhere, an opportunity to bundle Crucial/Lexar along with this exists.


If Micron did takeover some or all of Elpida, they would immediately have this extra capacity to offer Kingston et al and could probably get $200~$300M offloading Crucial/Lexar as part of the deal too. But even without the Elpida takeover Micron need to have an exit strategy. I am not arguing that the aftermarket and channel will disappear overnight, only that DIY is not the most efficient way to approach it.


There was a time when establishing a presence in the aftermarket was a logical step. Many memory makers looked at Kingston & their profits and thought, 'we'll have some of that.' But very few have ever succeeding in doing so. Most have found that the cost advantage they have in terms of captive supply & IP is regularly given away in order to take market share, and often your channel is used as an easy dumping ground for problems elsewhere in the business. Lesson - leave the aftermarket to the experts and focus on your own core strengths.


On many levels Micron have done a remarkable job in the past 5 years, consolidating the DRAM supply base, rapidly lessening their dependance on the PC & not least striking up some really significant and successful JV's. So why are they still concerned about a dead market? Do yourself and your investors a favour and head for the exits.

Please feel free to post any comments below.


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

Time to change the PC contract DRAM model

 

 

 

Just because you've been doing it the same way for 20 years, doesn't mean it is still right.

The model of the monthly PC DRAM contract negotiations and fulfilment hasn't changed much this century - the volumes are still huge, the spot market remains a key influencer and closing it out every month takes up a lot of time, effort and focus.
But PC sales are close to peak & with DRAM content is effectively static, it is time to do things differently.


Mature industries need to strip out all unnecessary cost in order to make a return. The DRAM companies should make the current model much more efficient.


At present the industry is building tens of millions of memory modules every month, just to support the contract PC market alone. The memory module may have been the predominant way for the DRAM makers to sell their chips 10 years ago but with the PC's share of DRAM output sliding & the Ultrabook rising, it's time for a re-think.


It is not the module itself, rather the support and supply-chain that has built up around it. This requires considerable manufacturing resources. Which have to cope with complex product mixes, rapid turnarounds & increasingly complicated logistics chains. To add insult to injury, you will probably need to wait another 2~3 months after building it to actually get paid for it.


And after all that, we are only talking about a $20 part. Is this really what a cutting edge semiconductor company should be doing?
It's funny, when you consider that whilst most of their PC customers have been doing nothing but outsourcing for the past 10 years, the DRAM companies have remained virtually untouched by this phenomenon.


So imagine instead of building, testing, shipping and invoicing memory modules a DRAM maker decided to partner with someone to do that for them. The efficiencies to be gained in resource, cash-flow and focus by simply selling the wafer to your partner and letting them manage the rest are massive. But it's not just cutting costs in the supply chain that this approach could offer.

So Macho

Monthly contract negotiations between the PC and DRAM makers would still happen directly and of course I wouldn't suggest this model is ready to to applied to the Server module market just yet. But by bringing in a 3rd party into the mix you will change the dynamics of the relationship on PC memory.


The adversarial model we are all used to could evolve into one which delivers genuine consensus in achieving efficiencies & better decisions. This would free up resources, energy and focus which the DRAM makers need to employ elsewhere, as they continue to rush for the PC exits into other more promising sectors.


The PC business has always been a fairly macho environment. The winner takes all mentality (after Intel and Microsoft take their cut of course), was a very efficient way for the industry to grow. But with the industry well into middle age, it's high time that it starts to lower it's testosterone levels.

Please feel free to post your comments below.

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


Next Post: Crucial time for Micron.

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.