The scent of blood is in the air in the embattled DRAM market, but the expected carnage may extend beyond where the vultures are currently gathering.
With DRAM average selling prices down about 90% from last year and weak demand tearing into margins, it's looking like some second-tier players and perhaps even a top-five supplier, possibly Hynix Semiconductor Co., could be driven out within the next few quarters, industry sources speculated last week.
"We don't believe the current situation is sustainable for any length of time," said Michael Sadler, vice president of global sales and marketing at Micron Technology Inc., Boise, Idaho. "Every day we're seeing supply-side [reduction] moves. We're a strong proponent of letting the market dynamics sort things out."
Japan's Toshiba Corp. was the first to finally capitulate last week, signaling that it has opened discussions to sell its DRAM business to rivals Samsung Electronics Co. Ltd. of Korea and Germany's Infineon Technologies AG. News of the talks with Infineon and Samsung coincide with Toshiba's announcement of a sweeping reorganization plan, including a reduction of 18,000 jobs, 10% of its workforce, by 2003.
"Toshiba will not be the last announcement because we have a very depressed DRAM market," said Sherry Garber, an analyst at Semico Research Corp., Phoenix. "Somebody fairly major has to go out of the market in order for things to turn around."
Joining forces has been one way ailing DRAM companies have tried to stem their losses in recent years. Japan's NEC Corp. and Hitachi Ltd. combined their struggling DRAM operations a year ago to form joint venture Elpida Memory Inc. And three years ago, the Korean government orchestrated a merger of LG Semicon Co. into Hyundai Electronics Industries Co. That combine, renamed Hynix, itself is now enmeshed in a severe financial crunch, seeking funds to meet more than $2 billion in short-term debt maturing in the next 12 months.
"It's very difficult for us to pay our debts short term, but we will come out of this," said Farhad Tabrizi, vice president of worldwide memory marketing at Hynix. "All of the financial loans are being negotiated and we're very confident that we'll have a positive announcement in less than two weeks."
That may be so, but last week speculation intensified that Hynix, the world's No. 3 DRAM supplier, could follow Toshiba out. The reason is that DRAM market fundamentals remain weak.
Although DRAM unit shipments are expected to rise 2.5% this year, to 4.1 billion from 4 billion last year, declining ASPs will result in revenue falling by almost half, to $15.5 billion from approximately $29 billion in 2000, according to EBN estimates. Other forecasts call for revenue to sink as low as $14 billion for the year.
The optimal production cost per DRAM chip is about $3, according to analysts, but ASPs have eroded from as high as $9.48 a chip in August 2000 to a low of $2.92 in June 2001, the most recent month that data is available.
"While it seems inconceivable that prices could have gone this low, it's also inconceivable that this situation can continue for any length of time," said Victor de Dios, an analyst at de Dios & Associates Inc., Newark, Calif. "You'll notice some increased level of desperation among the leading players if prices don't go up."
Not going quietly
Despite its heavy debt burden, no one expects Hynix to exit DRAM quietly, even though its demise would remove a significant portion of the current excess capacity and help boost prices. That's because the company is a pillar of the Korean economy, and analysts expect high politics to play a role in its rescue.
"The Korean government is in a dilemma," said Nam Kim, an analyst and head of the memory commodity desk at iSuppli Corp., El Segundo, Calif. "The government is in between supporting Hynix and letting the market determine its future. But don't forget, [Hynix] represents 4% to 5% of GNP and there is a presidential election next year."
Any intervention by Korea's government in favor of Hynix is likely to draw the ire of rivals such as Micron and Infineon, as well as smaller manufacturers in Taiwan. Still, some pundits doubt the Korean government will enter into Hynix's affairs if the company's troubles appear fatal.
However unlikely, a government-sponsored bailout could prove insufficient given that many of Hynix's rivals are planning massive capital outlays by moving to smaller line geometries and preparing 300mm-wafer production.
Still, the current market slowdown could buy Hynix some much needed time if it can appease its creditors and get them to refinance the loans. Due to the huge expense involved-approximately $3 billion to $3.5 billion- even deep- pocketed market leaders such as Micron and Samsung are slowing 300mm-wafer programs and concentrating on R&D.
Trouble for Winbond
For many Taiwanese chip suppliers, a weak DRAM industry and further consolidation could spell big trouble. Last week, amid reports that Toshiba was planning to sell its DRAM business, Taiwan's Winbond Electronics Corp. withdrew its technical team from Toshiba's lab and put plans for a 300mm-wafer fab on hold until renegotiations with Toshiba and other partners are completed.
"We believe our long-term relationship with Toshiba will carry on" no matter what Toshiba decides to do with its DRAM operation, said Hander Chang, an assistant vice president at Winbond.
Some analysts took a more negative view, raising concerns that Winbond would lose its ability to license next-generation technologies.
"The most significant effect would be once Toshiba sells its DRAM business, Winbond will be in a tough situation since it has no ability to develop new technologies on its own and it's very expensive to license from somebody else," said Barro Liou, an analyst at Prudential Securities Investment Trust & Co., Taipei.OR