TOKYO South Korean DRAM vendor Hynix Semiconductor Inc. appears ready to take an unprecedented move to reverse its own fortunes and, by extension, those of the DRAM market. The former Hyundai Electronics Industries said this week it may cut DRAM production about 20 percent this month in a bid to halt the chip industry's bloodiest price war.
But if Hynix makes good on its promise, it may find itself the odd man out among its largest competitors, analysts and other vendors said this week.
Hynix is considering switching DRAM production at geometries above 0.18 micron to nonmemory or foundry production, said Farhad Tabrizi, worldwide marketing vice president for memory products at Hynix. The move could come soon after the July 4 holiday, he said.
About 20 percent of Hynix's DRAM production is on older-technology, 0.21- and 0.19-micron processes, Tabrizi said.
"Beyond a certain threshold of pain, it doesn't make sense to keep on producing," he said.
Wrapped into Hynix's move is its assertion that a cut could turn around the market if competitors follow suit. Taking out 20 percent of Hynix's production could reduce world production by 4 percent. That could trigger a change in spot pricing and spark a price recovery, Tabrizi claimed.
"We think there is between a 5 and 8 percent oversupply at the moment. If we cut a week or two weeks out of production, it could change the psychology. It doesn't take that much," he said.
Tabrizi said discussions within senior management over the plan come at a time when the market has reached rock bottom and when other companies are discussing similar options.
A recent Gartner Dataquest report predicts the DRAM market will suffer its worst year ever. The market is on track to shrink 55.5 percent from last year, according to senior analyst Andrew Norwood at Gartner Dataquest's Worldwide Semiconductors Group.
DRAM prices have plummeted about 80 percent over the past year, according to the research firm. Spot-market pricing for 128-Mbit memories has hit $2; contract prices have fallen below $3. With no relief in sight and little demand for 256-Mbit parts in evidence, the consequences have been devastating.
Infineon Technologies AG has just cut its revenue estimates for the current fiscal quarter to show a 30 percent sequential decline from the prior quarter. Even powerhouse Micron Technology Inc. has blamed plunging prices for a third-quarter after-tax net loss of $301 million from continuing operations.
Jim Feldhan, president of Phoenix-based Semico Research, said the ultralow prices for DRAM could spur PC makers to pump up the memory subsystems of midrange systems to 256 Mbytes as a baseline. "It makes sense and enables differentiation," Feldhan said.
But any way you look at it, it's going to be a bad year for DRAM makers. Feldhan said worldwide DRAM revenues this year should fall to $18 billion, an $11 billion drop from last year and almost $3 billion less than in 1999.
"Everyone is feeling the pressure and the pain, and the feeling is they can't go on with it much longer," said Tabrizi of Hynix Semiconductor.
Gartner Dataquest's Norwood has called on Samsung, Micron Technology and Infineon which together with Elpida Memory Inc. and Hynix produce about 80 percent of the world's DRAMs to cut production.
But Micron, which is running neck-and-neck with Hynix and Samsung in DRAM market share, does not plan to reduce its output, said a Micron spokesman. "Gaining more market share is one element of what we're doing, but it's more about being a low-cost provider," he said. "To reduce capacity means to run less efficiently."
The cost efficiencies of higher production provided little shelter from the storm in the first half. Micron took a $260 million write-down last quarter, put a freeze on new hires and chopped its executives' salaries by 10 percent.
But both Micron and Samsung are keeping their production levels steady in the hope that prices will recover in the second half.
A Samsung executive suggested Hynix would commit a major strategic blunder if it executed its plan. "We have a different plan: We'd like to maximize production to maximize our market share," said DRAM marketing director Il Ung Kim. "The beauty of the DRAM market is that . . . only the fittest survive."
'Game of chicken'
Flooding the market with product is a common strategy among DRAM players to drive out weaker competitors. Analyst Bert McComas has called the practice "a game of chicken."
Samsung's Kim said that Hynix may have underestimated the commitment of other memory makers, unnecessarily sacrificed market share and gotten its timing wrong.
On the matter of timing, Elpida quietly shaved 20 percent off its 64-Mbit production in the first quarter of this year and a further 15 percent in the second quarter, said Soo Kyoum Kim, senior manager for worldwide memory and semiconductors with IDC's operation in South Korea. "Sixty-four Mbit is due to dramatically fade out [at Elpida] from the next quarter until March 2002," Kim said, adding that about 57 percent of Elpida's output is of the barely profitable 128-Mbit density.
Elpida executives in Japan were unavailable for comment at press time. But with any cut in production seen as a sign of weakness, recent reports in the Japanese press that Elpida was ending 64-Mbit production provoked an angry response to EE Times recently from a spokesman at one of Elpida's parent companies, NEC Corp. "We announced this ages ago; there is no news," the spokesman said.
Analyst Brian Matas at IC Insights Inc. (Scottsdale, Ariz.) called the Hynix plan "a bold move" if executed. Matas said Hynix would be showing fiscal responsibility in light of its just-rescheduled debt payments to the South Korean government.
But Matas warned that one company's cutting production may not be sufficient to shift the dynamics of the market. And he noted that the DRAM industry has traditionally been the most cutthroat of the chip sectors. "Samsung may scoff and try to capture market share, and they will be knocking on the doors of Hynix's customers," Matas said.
IDC's Kim said the move might have an impact if another major DRAM maker followed suit, but he doesn't expect to see that happen. "Four percent is not enough to move the market. If they cut 20 percent of their 128-Mbit production, it could have some sort of impact," he said.
"There is still channel inventory and oversupply of about 12 to 13 percent," Kim added. "Except for possibly Micron, nobody will follow, because they feel they are good enough to survive the competition. Infineon, for example, starts first silicon at its 12-inch fab in August, and they think they are good enough to compete."
Kim went so far as to suggest that a Hynix production cut would be rich justice for the company, which many executives and analysts blame for worsening the savage spot-market price erosion seen over the past two quarters. Hynix is often accused of having flooded the spot market with excess memory to alleviate its cash-flow problems, exacerbating what Keiichi Shimakura, deputy vice president of NEC Electron Devices, has called "crazy prices."
"Basically, a DRAM manufacturer has never before adjusted production like this," said IDC's Kim. "Others have increased volumes going to their warehouses or shipped to subsidiaries. It's very tricky.
"They want to push memory prices up from the level that they themselves caused. If they actually move stuff off memory to foundry, they still have a problem in that they have yet to find demand on either product."
Hynix's well-publicized $11.2 billion debt burden, arising out of its October 1999 merger with LG, had been seen as potentially crippling its chances of making crucial investments in new fabs and die shrinks to survive the DRAM business. Hynix has been fighting a rear-guard action against speculation that it would go bankrupt unless saved by personal connections between the leadership of the Hyundai Group and top Korean politicians.
In the past two years, the chip company has paid down $6 billion of its debt and has invested more than $1.5 billion in capital expenditures, Tabrizi said. Hynix's recent general depository receipt issue raised about $1.25 billion from 104 million shares and gave the company all the liquidity it needed "until the end of 2002."
But while Hynix may have overcome its liquidity problems, it still faces up to two weeks more inventory than its competitors, said an analyst who asked not to be identified. While the industry average is a none-too-healthy four weeks, Hynix is running a sickly six.
"I guess they cannot purchase the wafers, so they had to reduce production," the analyst said.