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Memory chips for a buck

Spot market prices for 16-megabit DRAMs, the core of PC memory modules, sometimes go for less than half the cost of producing them.

It's a very bad time to be in the memory chip business.

"Everything under a dollar" might be the industry's sales slogan for 16-megabit DRAM (dynamic random access memory) chips, which form the core of a personal computer's memory modules.

"We've seen it for 99 cents in a Korean spot market," said Mark Giudici, director of the semiconductor supply and pricing service at Dataquest. For servers and workstations, he added, "we've seen 64-megabit DRAM for under $7."

Memory is selling at prices barely above the cost of production--and often below--because of a worldwide glut, according to Giudici and others. Although major manufacturers have vowed to reduce or even suspend production, the glut likely will continue because of prevailing industry conditions and the international economy.

"We're pushing out the recovery to until the year 2000," said Brian Matas, vice president of market research at IC Insights. A recovery previously was slated for late this year.

The extent of the surplus can be seen in current wholesale pricing. While the prices given above represent extremes, they don't greatly deviate from the norm.

Giudici said DRAMs now are selling on average for $1.50 in the spot, or clearance, market. In the contract market, the wholesale arena where PC and memory card makers pick up the bulk of their memory, a 16-megabit DRAM sells for $2.55 on average.

Contract prices will descend to an average of $1.90 by the fourth quarter, Giudici predicted. It costs about $2 to make 16-megabit chips.

Meanwhile, 64-megabit DRAMs are selling for an average of $11.30 in the contract market and for between $7 and $9 in the spot market. By the fourth quarter, the contract price average will drop to $8. Current manufacturing cost is estimated around $11.

Such pricing is destroying the bottom line of vendors, even if its makes memory cheaper and more plentiful for consumers.

"It is very difficult to make money," Giudici said. "Overall demand for memory remains healthy, but on the supply side there is an overhang of capacity."

Under normal circumstances, below-cost selling would lead to a correction, but the memory market is presently far from normal.

The glut comes as the result of a number of factors, which together make the situation that much more difficult to correct. In 1995, demand for memory and low barriers to market entry made memory look like a relatively lucrative opportunity, a number of observers pointed out. Accordingly, a number of companies expanded plant capacity, which lead to greater supplies of chips.

At the same time, a Silicon Valley company called Galvantech developed a relatively inexpensive manufacturing method, Jim Handy, a Dataquest memory analyst, earlier told CNET. Rather than sell the process to a limited number of manufacturers, Galvantech sold it to lots of competitors.

As a result, memory prices began to plummet. 16-megabit chips went from $27 to $3 in early 1996; 64-megabit chips debuted in volume during this period and likewise began to decrease in price.

In 1997, Taiwanese makers announced that they would begin to ramp up production of DRAM chips to challenge the dominant Korean and Japanese manufacturers. Although U.S. and Japanese manufacturers began to suspend production, supplies continued to grow. The Asian financial crisis then came to throw gasoline on the fire sale.

To further aggravate matters, PC pricing began to slow this year. Unit shipment growth of memory will shrink from 21 percent in 1997 to 10 percent in 1998 this year, Matas said, but the glut will continue.

Part of the problem, he noted, comes from corporate strategy. The current pricing situation has led a number of manufacturers to suspend production, and smaller companies can be expected to abandon the market.

Despite the attrition, more chipmakers will likely stay in the market longer than necessary. Many will take losses for now in anticipation of the next upswing.

"There are more than ten companies that want more than 10 percent of the market," Matas said, "and none of them want to relinquish market share."

Recovery will begin to occur when the supply more accurately reflects demand. A shift to a more advanced manufacturing process will also help, he added, by cutting costs.