Summary
The semiconductor cycle is here to stay. It is driven by factors beyond the control of any single semiconductor maker. Industry consolidation will occur, but it will be driven by the spiralling cost of manufacturing plants. Industry cycles will not abate by the consilidation of the market unless only one supplier remains.
Analysis
This is in response to another GLG News article by Mr. John Berg - Chief Technical Officer of American Semiconductor entitled "Consolidation: A Neccessity in the Semiconductor Memory Supplier Market."
In the article, Mr. Berg presents a well conceived argument, but there are factors which he missed that heavily impact this market.
The first is that DRAM capacity cannot be turned on and off at will. The overcapacity that is in place today, and which is discussed in depth in the report at http://www.objective-analysis.com/Reports.html#2008_Forecast, was committed to in 2006. DRAM suppliers at this time had a choice: spend earnings on capital expansion or pay taxes to retain them as cash. Clearly the first choice is the more appealing, despite the fact that it would cause a DRAM/NAND glut. Memory makers have to use their capacity at full tilt or it will simply depreciate unused, bleeding off any profits the manufacturers might make.
The second is the belief that the Micron & Nanya alliance indicates a change in the way that the industry is moving. In fact, this kind of joint venture is anything but new, and the Inotera joint venture between Qimonda and Nanya is very similar to the Micron Nanya Joint venture this post mentions. If we turn the time machine back to the early 1990s we see a number of such alliances, the most notable being that of IBM, Siemens (later Infineon, and now Qimonda), Toshiba (whose DRAM business is now a part of Nanya), and Micron. These four companies collaborated to develop DRAM technology that was beyond the R&D budget of any one of these companies. This particular alliance didn’t work out as planned, with IBM dropping out of the DRAM market, Toshiba selling their DRAM business to Elpida, Siemens divesting itself of DRAM, and Micron selling the Dominion fab in Manassas, VA, USA to SanDisk and Toshiba for NAND, before buying it back to return it to DRAM production, then converting it back to NAND production with its IMFT NAND flash joint venture with Intel.
The most important factor, though, is that DRAM makers (and NAND flash makers as well) have no control over their market. Mr. Berg mentions “predatory pricing”. On the one side, should any manufacturer in any commodity market (NAND and DRAM included) attempt to price in a predatory manner, the simple result would be lower earnings than their competition, and that would put shareholder pressure on the company’s officers. On the other side, if they set their prices too high, the market opens up for their competition, and the higher-priced company loses market share. Although the argument indicates that such price decreases would stop if there were only 2-3 competitors, it would, in fact, only stop if there were a single legitimate source for such products.
Mr. Berg's argument also mentions that NAND is starting to substitute for DRAM in DRAM’s traditional markets. Although this will happen in the next few years, the argument is premature for now. DRAM continues to be the dominant memory of choice. There are indeed some interesting breakthroughs being made by Spansion, EMC, and STEC. Even Dell and Apple are looking into the use of Solid State Drives (SSDs discussed in http://www.objective-analysis.com/Reports.html#SSD) and Intel, Seagate, and Hitachi are exploring the use of NAND in hybrid hard drives (HHDs) to improve PC performance through the use of NAND (as is explored in a report at http://www.objective-analysis.com/Reports.html#Hybrid). Interestingly enough, there is interaction between the NAND and DRAM market since Hynix and Samsung, two leading DRAM suppliers, have production capacity that can alternate between NAND and DRAM.
In brief, the Micron/Nanya deal is a rational extension of existing industry protocol, and these companies are no more likely to consolidate than are any others in the market.
Consolidation will indeed occur as the cost of manufacturing plants continues to spiral, but this will not bring an end to the price collapses endemic to the semiconductor industry. Rest assured that there will be semiconductor price cycles as long as the industry exists, or until tax laws change, a subject that I will leave to another post.
