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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

SEPTEMBER 17, 1999 VOL. 25 NO. 37

When the Chips Are Up
DRAM-makers tap a temporary gold mine
By ASSIF SHAMEEN

The analysts have been proved wrong--again. Four months ago, they were predicting a price downturn for industry standard 64-megabit DRAM (dynamic random access memory) chips, which are used for personal computers and servers. Then fetching about $7 apiece, the chip was forecast to sell for $6 in the short and medium-term. Last week, the price soared to $10.50. Now the experts expect the commodity--yes, memory chips have become commodities like rice and oil--to hit $12 within weeks, and $15 before long. "Supply is very tight," says Daniel Heyler, a regional semiconductor analyst for Merrill Lynch in Taipei. "We see a lot more upside in prices over the coming months."

If the experts are correct, that is more good news for South Korea, Japan and Taiwan, which dominate the DRAM market. At least in the short term. Analysts--there they go again--say prices will begin tapering off in 2000 as supply catches up with demand. After that, the industry will see a big change. The normal cycle for a DRAM product is 36 to 42 months. The 64M chip, which has been around for 20 months, can thus be superseded in less than two years. Already, Samsung Electronics is shipping more capacious (and very expensive at $200 apiece) 256M memory chips. The 128M memory chip, which has twice the capacity of its 64M cousin but half that of the 256M, is likely to become an intermediate product in the last quarter of 2000.

The bonanza from the current rally should help chip companies prepare for the changeover. If the price is right, DRAM-making can be incredibly profitable. "The manufacturing cost for 64M DRAM in Korea is now just over $4," says Son Jong Hyung of the Gartner Group in Korea. "At $12 or $15, the profit margin would be three or four times cost. The DRAM-makers are now minting money." The winners: Korea's Samsung Electronics and Hyundai Electronics, NEC of Japan and Micron Technology of the U.S. They account for over two-thirds of the world's memory- chip production. Five Taiwan plants that primarily make chips under license for Japanese manufacturers have 15%. Once DRAM giants, Fujitsu, Toshiba, Hitachi and Infineon (the hived-off semiconductor unit of Germany's Siemens) have become minor players. America's Texas Instruments got out of the business last year.

Investors are happy too. Samsung's share price has doubled in six months and Merrill Lynch expects another 75% rise in 12 months. The Korean company made $275 million in 1998. Earnings are forecast to surge to $2.4 billion this year and to $3.2 billion in 2001. The DRAM division alone is expected to turn in $2.5 billion in pre-tax profit this year. Hyundai makes as many DRAM chips as Samsung, but its production costs are higher, its debts are bigger and extra expenses are heavier this year because of an ongoing merger with LG Semicon. Still, Hyundai Electronics' stock is up 129% over three months. (The company is currently embroiled in a share-rigging scandal.). NEC rose 28% in the same period.

What a reversal of fortune. Just a year ago, DRAM-makers were reeling. Most were losing money or just marginally profitable. Prices had fallen about 70% annually in three years. The global market shrunk from $15 billion to just $12 billion in 1998. Companies were shutting down production for weeks on end to cut inventories and boost prices. No longer. Computer demand is rising. "It isn't just PCs," says Heyler. "The server market is very strong too. Partly it's because of the recovery in the PC and server markets in Japan. But U.S. and European sales have been stronger than most people expected earlier this year. Internet service providers [in the West] are giving away PCs for free to customers who sign up with them. Moreover, there is demand for more memory in PCs and servers."

Can the boom turn into a bust? After all, we've seen this cycle before. DRAM shortages in 1995 and 1997 saw new suppliers rush in and cause a glut. That does not seem to be happening. "It takes some time to build new plants or increase capacity and we are not seeing that right now even though prices have rebounded sharply," says Heyler. One reason is the shortage of specialized deep ultra-violet steppers (DUVS) machines, which are needed for chip-making. Another is the exit of the Japanese giants from the DRAM business. Fujitsu, Toshiba and Hitachi have resorted to outsourcing, giving up on chipmaking as an important part of their operations.

Don't forget the imminent Big Change. Given the long lead time for DUVS equipment, new players may start production of 64M chips just as the industry is moving over to the 128M version. So current 64M makers have the field to themselves. Of course, while they are minting money now, they should be preparing for the coming wars too. Samsung is ahead in the 256M race, although the other major makers are also developing high-capacity memory chips. Demand, supply and technology may change, but the reality of competition stays the same.


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