TOKYO After four years in the pricing dumpster, DRAM makers finally were able again to raise prices significantly this fall and tell customers to stand in line for orders. But that party has been rudely interrupted by a price collapse in recent weeks that threatens to linger well into November.
Figurative aftershocks from the Taiwan quake and a reluctance on the part of PC makers to raise prices due to the high cost of components have conspired to cause the counterintuitive price drop, setting off a cat fight between OEMs and their memory suppliers and altering system design plans.
Since Taiwan is a relatively minor player in DRAM production, the Sept. 21 earthquake there had little effect on actual DRAM supply other than a short-lived spike in spot prices. But for PC OEMs, it did cause a shutdown in production of PC motherboards, CD-ROMs and displays, causing as much as a four-week loss in motherboard supply and shortages in the other component areas, according to customers and International Data Corp. (IDC), a market-research firm.
"What's the point to buy tons of memory when they don't have enough CD-ROMs?" said Michel Hassan, general manager of memory-module vendor Dane-Elec.
If 3 million motherboards intended for fourth-quarter systems were lost because of the quake and the average PC system contains 94 Mbytes, as IDC estimates, then it means a loss of roughly 35 million 64-Mbit equivalent devices that would have gone into PC slots.
But that's not the only problem contributing to the price declines. In some cases, the component shortages that stymied box makers' production plans prompted them to resell their DRAM inventory on the gray market, according to one source close to OEMs. "They turn around and go to their [DRAM] vendors and say, 'Look at the gray market price. You're going to have to drop your contract price,' " the source said.
In addition, PC OEMs resisted the higher DRAM prices earlier this fall to avoid having to pass along the higher cost to customers or eat some margin. That prompted OEMs, who had started to pack in as much as 128 Mbytes of DRAM per system, to scale back to 64 Mbytes and below. One of those vendors was Dell Computer Corp., which said memory price hikes had added $75 to the manufacturing cost of many of its systems.
"Most of the DRAM companies still think this year and next year there will be a DRAM shortage. However, we don't think so," said Akira Minamikawa, a senior semiconductor analyst at IDC Japan here.
The OEM pushback has set off alarm bells at DRAM manufacturers. Recently, a group calling itself the Council on Computing Power comprised of DRAM producers Samsung, Hyundai, Micron and Infineon issued a "warning" to PC consumers that their systems will suffer if they opt for a computer with too little memory. The group said 32 Mbytes is not enough for memory-intensive applications, and that the forthcoming Windows 2000 operating system will require 64 Mbytes and will perform best with 128 Mbytes of memory.
Avo Kanadjian, senior vice president of memory marketing for Samsung Semiconductor Inc. (San Jose, Calif.), said another problem rests with the module makers.
"What's going on is that there are some loose parts that are available and there are no takers because of the lack of qualified assembly and test capacity for OEM-quality modules," he said. "Component production has exceeded the available module assembly capacity."
Observers such as Hassan say the shortages of motherboards, CD-ROMs and displays are ending. Indeed Intel executive Sean Maloney told a news conference this past week that Taiwan is on track to ship a record number of motherboards for October and for the quarter.
But that supply situation may not push prices back up. Before the Taiwan quake, 64-Mbit spot prices were in the $15 to $17 range, well above contract prices. After the quake, they jumped to as high as $22. But recently, they have come down to as low as $10.
"Spot prices are down to $10 already, and OEM prices are higher than spot prices," Minamikawa said. "In general, when the spot price is cheaper, it's a sign of an oversupply situation."
Minamikawa said he expects DRAM contract prices to head south this month. Pricing should fall about 50 cents in November and another 50 cents in December. The average selling price of 64-Mbit DRAM for the first quarter of 2000 should be in the $8 to $8.50 range, he said.
Aside from reductions in motherboard shipments, another problem that could drive DRAM prices down starting next month is a reduction in corporate PC sales, which represent 70 percent of all PC sales, because of spending freezes due to Y2K, said Saturo Oyama, a senior analyst with ABN Ambro Securities Japan Ltd.
"PC demand was growing at 20 percent in the first, second and third quarter of this year, but in the fourth quarter we don't expect that much, maybe around 10 percent," he said. "We see purchase freezes from October to next January, and we have heard of some top Fortune 500 companies doing this."
Even so, the fact remains that for now DRAM prices have more than doubled from their low of $5 earlier this year, and many manufacturers are putting their customers on allocation. NEC Corp., for one, decided to postpone a plan to reduce its production of 64-Mbit DRAMs to 8 million a month by year's end, and will now hold production steady at the current 10 million per month, a spokesman here said. The company expects prices to fall to the $8 to $9 level in January, but not before, he said.
Toshiba Corp. expects prices to stay stable or possibly creep up for the remainder of the year, and drop off slightly in the first quarter. The company expects to get an average of $10 per 64-Mbit chip sold for its fiscal second half, which ends next March. Even so, Toshiba will not change its plan to reduce its output of 64-Mbit chips from 5 million to 3 million units per month by year's end while holding 128-Mbit production relatively steady at about 7 million units per month, a spokesman said.
And the specter looming over the industry is the delay with Rambus systems.
"That's a wild card," said Dane-Elec's Hassan. "Rambus is not happening. Samsung, Infineon, Micron and Hyundai and all their Rambus plants what are they going to do with capacity?" The answer: they'll switch very quickly to PC100 DRAMs at 64 and 128 Mbit densities.
"This capacity is going to come back in our face and make the market fall down," Hassan said.
Additional reporting by Brian Fuller and Robert Ristelhueber