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Memory chipmakers face survival test

Market and industry are in a brutal downturn, with little relief in sight. And it's forcing some companies to either merge or perish.

Memory chipmakers are fighting for their life.

The memory chip market--and industry--is caught in a particularly brutal downward price spiral that is threatening the viability of even the largest players.

"Memory manufacturers who have already been losing money for several quarters are now looking at another six months to a year of absolutely ominous conditions," said Avi Cohen, managing partner at Avian Securities.

Companies are now in survival mode, according to Cohen. "It is a matter of survival and everyone needs to figure out how to stay in business over the next year or how to scavenge something if one (company) decides it cannot survive," said Cohen.

Currently, two major memory chip manufacturers are seeking investment lifelines. Hynix, the world's second largest maker of memory, is trying to scare up cash by seeking buyers for a 36 percent stake in the company. So far, the only likely bidder to emerge is Samsung--which has also made a play for struggling SanDisk, the largest supplier of retail flash memory cards.

The other ailing memory maker is Qimonda AG--an Infineon Technologies subsidiary. Rumors have been rife that the manufacturing assets of the loss-ridden company will be snapped up.

All of this turmoil was underscored this week when Micron Technology, the largest U.S. maker of memory, announced that it had lost $1.6 billion in fiscal 2008.

"The DRAM business--it just doesn't feel like that, for many companies, it's sustainable," said Ron Foster, chief financial officer at Micron, speaking during the company's earnings conference call on Wednesday.

The average selling price for NAND and DRAM has dropped sharply since May.
The average selling price for NAND and DRAM has dropped sharply since May. Micron Technology

Pricing has fallen off a cliff in the last few months, making a bad situation worse. Micron said Wednesday that the average selling prices of DRAM chips--the main memory used in PCs--was down between 15 percent and 20 percent from last quarter. NAND flash prices were down between 30 percent and 35 percent. (NAND flash is used as storage in portable music players, digital cameras, and the nascent solid-state drive market.)

The NAND price crash has forced Micron and Intel to delay the "build out" of manufacturing capacity in Singapore, which is part of their joint flash memory venture, IM Flash Technologies, Micron said Wednesday.

"Overall, the NAND market continues to be in an oversupply condition," said Micron's Foster.

This is affecting investment. "The capital expenditure for the NAND market in 2008 is going to be down sequentially (year-to-year), which is the first time that's happened since the inception of the market," said Steven Appleton, chairman and CEO of Micron on Wednesday.

The PC market has also turned bleak. "The PC business was plugging along pretty well and then all of sudden in the last months the demand profile has just really dropped off," according to Foster.

All these negatives add up to a cruel market that is forcing some companies to either merge or perish. "This is leading to a new wave of forced consolidations and partnerships. This industry will look very different a year from now with very few players controlling much larger market shares and with a much better ability to control production and pricing," said Cohen.

This consolidation is not only affecting manufacturers but players in the retail channel too. SanDisk--which does not manufacture flash chips but sources them from a Japan-based joint venture with Toshiba--has seen its stock price plunge more than $60 per share over the last two years. This has made it vulnerable. SanDisk's chairman and CEO, Eli Harari, said last month that the $26-a-share bid from Samsung was "opportunistically timed at the trough of an industry-wide downturn."

Not everything is doom and gloom. The market for solid-state drives--which use NAND flash--is poised to grow. Appleton cited the burgeoning netbook market as an opportunity for SSDs. The enterprise is a target market too: SSDs based on single-level cell (SLC) technology can offer many times the performance of hard disk drives for customers such as credit card companies and airlines.

Ultraportable laptops, such as the ThinkPad X301 and Dell Latitude E4200, are also beginning to use SSDs as a storage replacement for hard disk drives.

The price decline for solid-state drives over the last quarter makes these drives "more attractive from an end user's perspective," Micron said Wednesday, adding that "NAND far exceeds DRAM growth demand rates."