Memory Maker’s Profit Shortfall Amid a Time of GB Aplenty…And It Will Get Worse before It Gets Better

Based on reported financials, it appears that only Samsung and Macronix were profitable in memories in the 2Q08 session. And it was questionable for Samsung. NAND prices have headed steadily downward for now a full year, without interruption, at a rate way faster than costs can be reduced. DRAM prices, which have been bad for most of 2008, paused for a few months with stable prices in their own race to oblivion. However, they resumed their march to ever-lower quotes recently, and remain under significant pressure. Strong demand and high GB shipment rates can usually act to stabilize pricing. But not this time, since large production increases have washed out any potential shortfall of supplies. Indeed, the huge expansion of memory demand over the past 24 months has been totally without impact in taking the pressure off DRAM and NAND Flash prices. They have fallen just as much as if demand had collapsed.

For the 25 companies that make up our memory producer database, losses were reduced in 2Q08, compared to 1Q08, largely due to more stable DRAM prices and fierce cost cutting throughout the industry. Cost reductions of 10-15% per QUARTER have not been uncommon for DRAMs, and sometimes more than that for flash, in both the NOR and NAND camps.

For the first half of 2008, memory makers have lost about $6B on sales of about $25B. No one expects 3Q to be much of an improvement (indeed, DRAMs will worsen), and 4Q is anyone’s guess. Well-respected market punditry iSuppli, foresees no market turn until 2H09. Though CapEx has been shaved back, mostly from Taiwanese DRAM makers, productivity is ‘on a roll’, with everyone ramping next-generation designs, pushing the lithography and innovating on more compact cell structures and multi-bit per cell advances.

This is not demand weakness that is driving low prices; it is supply excess, driven by these impressive productivity improvements and technical advances, and hyper-capacity investment, in 2006 and 2007, with momentum into 2008, borne of ‘irrational investment exuberance’ and some probably misguided strategic ambitions to gain market share either by driving the weak players from the market, or adding wafer starts while everyone else is (supposedly) asleep at the wheel.

Of course, this never works and only makes matters worse before they get better. Financially, the industry would have been far better off by pooling their resources, buying “Qimonda” (or some other player), divvying up their assets, taking their fabs off line and dissolving the company. Too late, the damage is done. That $6B in 1H08 DRAM losses would have bought almost any DRAM supplier and all but the largest NAND makers.

In addition to the quarterly dose of red ink, strategic moves to cut costs by technology development sharing, and DRAM CapEx cutbacks to ration cash have been more common. No one has dropped from sight yet, but the pain is palpable and the end is not in sight. As we noted in our earlier BLOG (Memory Industry Humming While Losing Money, 08/11/08), all the excess cost is being squeezed from the production lines, which are running at high utilization rates and uniformly on leading-edge processes. This is like driving on the freeway in Los Angeles: 75mph and with only one car spacing between you and the next car, thin profit margins for too long have left the industry with similarly thin margins for error, or to respond to new and changed business environments.

NOR: Numonyx (formally launched 1 April 2008), and Spansion maintain the lion’s share of this flat market, combining for about 80% share. Spansion continues to bring forth innovations based on Mirror-Bit, which they will take into the NAND Flash market with ORNAND II, with their EcoRAM that seeks to upset the data server memory applecart, R/W performance boosted NOR flash, a significant agreement with SMIC (as a part of their own version of FabLite capital make-up)..but, so far, their financials show no impact from these moves…many of which will require significant market making efforts to ease concerns about unorthodox applications of replacement technologies, i.e., it will be a slow process. Their 8K 300mm wafers a month in their Japanese fab makes hardly a dent in their quarterly silicon output…they could easily use 5x that to reflect 65nm-Mirror-Bit business potentialities and cost advantages, as well as their focused efforts to take on NAND in phones with ORNAND and ORNAND II. Oh, well.

Numonyx is showing a more traditional direction with NOR flash, sticking with the floating gate process (but with PCM in the background), being very tight on capital, and signing an agreement with Elpida to supply back-process generation NOR flash on 300mm wafers. With a ‘Major’ in NOR, Numonyx also has a ‘Minor’ in NAND, brought in from ST and foundried at what was the ST-Hynix JV fab at Wuxi, China.

Below are the gathered company financial reports for 2Q08 (incl. Micron Technology, whose fiscal 3Q ended May 31), ST-Intel-Numonyx is proving a little hard to unravel, so far, but it should become clearer for 3Q08.