The lines separating memory-module makers, OEMs, and contract electronics manufacturers keep blurring in swift response to changing business needs within the industry.
In the past three years, many module suppliers have expanded into contract manufacturing, adding OEM design services, laboratory and test centers, inventory management, and shipping functions to their operations, in addition to widening their product lines.
The list of non-DRAM products now being offered by several leading module makers- including Kingston Technology Co., PNY Technology Inc., and Smart Modular Technologies Inc.-goes to show just how far companies in this sector have moved beyond their core businesses.
Between them, the three companies make motherboards, networking components, flash memory, PC cards, PC and notebook hard drives, storage devices, modems, cables, and terminators-in short, just about everything needed to assemble a PC.
Analysts said module makers have little option but to diversify and begin offering value-added services to OEMs. With the average selling prices of DRAM falling about 30% in each of the past three years, the global DRAM market is a mere shadow of its old self, said Richard Kanadjian, director of the strategic marketing and services division at Kingston. The market has declined nearly 66%, from $41 billion in 1995 to $14 billion last year, according to the Semiconductor Industry Association.
"The last three years have been one of the longest and worst downturns in the volatile history of the DRAM," said Mona Eraiba, an analyst at Gruntal & Co. LLC, New York. "Meanwhile, the last six months have been characterized by stop-and-go high hopes coupled with painful correction."
Contrary to plans being unveiled today by Fremont, Calif.-based module vendor WinTec Industries Inc., Kingston, Smart Modular, and PNY said they have no immediate plans to market their own branded PCs. But, in fact, all have moved far from their roots as they continue to march in sync with the cost-cutting sweep of OEM outsourcing.
Kingston opened its first manufacturing plant for OEMs in 1997, and has since added three new plants overseas. The Fountain Valley, Calif., company now provides contract manufacturing and shipping services for 10 of the 14 chip makers and OEMs that it services, including Toshiba Corp. and Hitachi Ltd.
"We're becoming the OEM of memory modules," Kanadjian said. "OEMs want flexibility, 24-hour turnover, designs, and testing services. At the same time, they are not forecast-driven, so we provide that service also."
As OEMs continue to push for lower production costs by outsourcing more of their operations, memory makers will pick up more of the slack, said Keith Dunne, an analyst at BancBoston Robertson Stephens, San Francisco.
"There's no question that some memory makers are actually playing a bigger role in manufacturing," Dunne said. "As far as I'm concerned, Smart Modular is a contract manufacturer. It's also doing supply-chain management, designs, and shipping directly to OEM and semiconductor customers."
Fremont-based Smart Modular said it recognized the changing needs of its OEM clients three years ago, when the company began adding new units to its corporate structure, including I/O communications and embedded-computing divisions and an OEM group. Last month, it created a third-party OEM validation laboratory and test-services center for Rambus DRAM, making Smart Modular "an outsource testing company for OEMs," said Ajay Shah, the company's chief executive.
Nimble steps like these have helped Smart Modular stay competitive, Shah said. The company is still reeling from pricing pressures in the DRAM market, however. Its fiscal second-quarter revenue grew 42%, but net income declined 8%. The stiff drop in DRAM prices cut into the company's gross-profit margin, which fell to 12% during the quarter from 17% in the comparable 1998 period.
Meanwhile, PNY insists that it wants to remain a memory maker, though the Parsippany, N.J.-based company is finding itself functioning more and more as a contract manufacturer, said Sushil Dhiman, vice president and general manager of PNY. At least 40% of operations at PNY's Santa Clara, Calif., plant are now devoted purely to OEM contract manufacturing jobs.
"To the OEMs, these functions bind us in a more strategic relationship where we are their customers and they are ours," Dhiman said. "We want to focus on memory, but we're also expanding into manufacturing and increasing our engineering resources."
While the new strategies being adopted by module makers are still in their formative stages, analysts said they will provide some measure of relief to embattled suppliers. There are pitfalls along the way, however. Rapid changes in technology will involve heavy capital investment, which may again cut into their bottom line. In just two years, Kingston Technology, for instance, has raised its capital investment to $60 million and plans to spend an extra $40 million in the next year, according to Kanadjian.
"Changes in industry segments, DRAM types, processors, and chipsets are all serious issues," said Sherry Garber, an analyst at Semico Research Corp., Phoenix. "It's a tricky proposition for DRAM suppliers to accurately predict the market and make the transition as effectively as possible."