April 15, 2009

Is a severe DRAM shortage in the cards?

Converge Memory Update.

There has been a lot of chatter over the last month or so about a possible severe shortage in memory by the end of 2009. It’s not really that far-fetched if you think about it. The memory market has been in a prolonged slump for over two years, and the biggest casualty has been DRAM. Although the flash memory market has also suffered severely, DRAM stands out the most because of its volatility, the range of end user markets and the volume of revenue produced from its sale. When one refers to memory, the first thing that comes to mind is, “What is the price of DRAM today?” That is what investors want to know when it comes to the state of the memory market.

The amount of money lost on DRAM has reached historic levels, which has prompted a series of events that could result in the perfect storm for a severe memory shortage. Qimonda filed for insolvency, which has resulted in a loss of jobs, reduction in output and a closure of fabs. The amount of Qimonda product in the market is quickly evaporating, which is forcing end users to use other manufacturers. Samsung, Micron, Elpida and Hynix have all cut back on CAPEX; reduced output (in some instances as much as 50% over the last year); and manipulated their workforce through either layoffs, reduced hours or job elimination. Finally, the Taiwanese DRAM manufacturers have been forced to merge companies in order to survive. This move will certainly eliminate sourcing options and stabilize prices. Even with all these moves already in motion, the price of DRAM remains at historic lows and supply remains abundant.

Looking back, it has been years since corporate spending has had an impact on the memory market. When the economy does turn around, Converge believes that the corporate market will make it a priority to update older computers, IT infrastructure and outdated servers. When this does happen, we believe that volumes will be high. That will no doubt trigger a shortage of memory. After two straight years of underinvestment, the DRAM manufacturers will simply not be positioned to handle this type of demand. It will take time to get fabs back up and running, hire staff, and increase output levels to meet demand.

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