EL SEGUNDO, USA: In the dangerous game of “chicken,” two drivers aim their cars at each other and accelerate to full speed. The first driver to lose his nerve and swerve is the loser, or the chicken.

“In the multibillion DRAM industry, many suppliers have engaged in massive spending programs in a bid to increase capacity and take market share from competitors,” said Nam Hyung Kim, director and chief analyst of memory ICs and storage for iSuppli Corp.

“Using this the strategy, DRAM makers hoped that their competitors would be forced to back out of the spending race and concede market share. However, in 2008, no one won this game of chicken, with players continuing their massive spending drive amid weakening demand, contributing to oversupply, price declines and a massive market downturn that is hurting all suppliers.”

Global DRAM revenue will fall by 19.8 percent in 2008 to $25.2 billion, down from $31.5 billion in 2007. This will mark a second year of decline following the 7 percent drop in 2007.

Unfortunately, this decline won't mark an end to the memory sinkhole just yet. The troubled DRAM market is expected to suffer a revenue decline of 4 percent in 2009 due to global economic uncertainty.

The figure presents iSuppli’s estimate and forecast of annual global DRAM market revenue. The three-year decline contrasts sharply with market conditions in the mid 2000s, which delivered growth of 52.9 percent in 2004 and 35.2 percent in 2006.

iSuppli: Global Annual DRAM Market Revenue and Growth Estimate and Forecast (Millions of US Dollars)


“The industry, which has been in decline for seven straight quarters, is in a stage of emergency with massive layoffs and production cuts,” Kim observed. “The Top-8 DRAM suppliers have lost nearly $8 billion since 2007, and their total operating loss is expected to amount to $11 billion by the end of next year.”

Spending spree
What's wrong with the industry that was one of the most profitable semiconductor segments just two years ago?

After massive losses in 2001, the overall DRAM business had accumulated profits until 2006. At the same time, DRAM makers increased capital expenditures by more than threefold, rising to $21.1 billion in 2007, up from $7 billion in 2001. Since 2000, the DRAM industry has spent more than $100 billion, which is almost double the level of the Top-8 suppliers' combined market capitalization today.

“Three Taiwan-based DRAM suppliers, whose total market capitalization now is around $1.4 billion, have spent a total of more than $20 billion on capital expenditures since 2000, which represents an enormous overinvestment during the period,” Kim said. “Furthermore, most capital expenditure money has been raised by issuing debt among many suppliers. The frozen credit market is punishing suppliers that need additional cash not for investment, but for their very survival.”

Playing chicken
Why did the industry spend such enormous amounts of money in such an undisciplined manner? Scale is one of the most important elements required to generate profits. This has resulted in a game of chicken during the past two years.

“The industry's DRAM bit production growth rate didn't slow down, even with a 48 percent capital expenditure reduction this year, showing how much investment already was made,” Kim said. “This indicates that an additional capital expenditure cut is inevitable in the near future.”

As a result of this game of chicken, there are no winners among the DRAM suppliers. The industry leader, Samsung Electronics Co. Ltd, which has spent about $27 billion on DRAM manufacturing investments since 2000, holds the same DRAM market share this year as it did in 2000, at about 30 percent. The South Korean memory giant in the fourth quarter of 2008 likely lost money in its DRAM business amid oversupply and the global economic slowdown.

Four DRAM suppliers: Powerchip, Promos, Nanya, and Qimonda, now are seeking government bail-out packages.

Hynix is close to finalizing an additional rescue package of $600 million from its creditor, KDB, according to a local Korean newspaper. The double whammy of overinvestment and the global credit crunch clearly has impacted the industry badly, and the prices remain below variable costs for DRAM suppliers.

Despite unhealthy economic conditions and an unclear demand picture, iSuppli cautiously predicts that the market will turn around in the second half of 2009 due to suppliers' rapid reduction in capacity growth. In the near-term, iSuppli believes that prices will stabilize from the current level, and suppliers' losses will be reduced regardless of whether suppliers receive rescue packages from other parties.

“Until that time, the game of chicken has turned into a game of survival, a situation that will persist for months to come,” Kim said.