Powerchip Cuts DRAM Output to Cushion Falling Prices

With DRAM (dynamic random access memory) prices on a consistent downward slide, Taiwan's Powerchip Semiconductor (along with its Japanese partner Elpida Memory) recently announced a plan to cut production by 10-15% (or 15,000 units per month) in a bid to alleviate the oversupply situation in the industry.

The supply glut caused by last year's capacity increases has pushed average selling prices down to all-time lows. According to DRAMeXchange, the average unit price for a 1GB DDRII (double data rate, second generation) DRAM to just US$1.3 now, down from US$3.8 last year.

"At the end of the fourth quarter this year," laments Elpida CEO Yukio Sakamoto, "the DRAM market will have been sluggish for two years. We've never seen sluggishness last for so long before. Now, we expect market conditions to improve in the first half of 2009." The weak market caused Elpida to post an operating loss of JPY15.6 billion (US$145 million at NT$32:US$1) in the second quarter of this year.

Powerchip chairman Frank Huang claims that his company turns out 1GB DDRII DRAMs for just US$2.3-2.4 each, the lowest cost in Taiwan. In today's market, though, this does not translate into profit; in the first eight months of the year, sales were down to just NT$5.038 billion (US$156 million).

In the current situation, the more DRAMs the manufacturers sell, the more money they lose. This is bad for them but good for computer makers, which like to add more DRAMs to their products (more DRAMs mean better performance) when prices fall.

Taiwan's top four DRAM makers (Nanya Technology, ProMOS Technologies, and Inotera Memory, in addition to Powerchip) reported combined operating losses of more than NT$54 billion (US$1.6788 billion) in the first half of 2008.

Switching Production Lines

As it cuts DRAM production, Powerchip plans to switch some of its production lines to 12-inch wafer fabrication for driver ICs and other memory products. Elpida will change to chips used in LCD displays. Both companies will delay plant construction and capacity expansion plans.

The production cuts will not have much immediate impact, however, since existing high inventories will take the rest of the year to digest and since Powerchip and Elpida are not a very big part of the global supply chain.

According to statistics compiled by iSupply, Samsung Electronics is the largest DRAM maker in the world, with a 30.3% share of the global market in the second quarter. Korea's Hylix Semiconductor is second with 19.5%, Elpida is third with 15.4%, and Powerchip sixth with 5.2%. The cuts by Powerchip and Elpida will amount to only 2% of global DRAM production, so much depends on what the rest of the producers will do.

A few days after Powerchip and Elpida announced their production cuts, Samsung Electronics of Korea said that it had no plans to follow suit; in fact, it may boost investment in new capacity in order to put more pressure on its competitors. Samsung plans to spend US$6.32 billion on new memory chip production lines this year, a little more than it spent in 2007.

Other international suppliers, including Hynix, Qimonda AG of Germany, and Micron Technology of the U.S., also reported that they do not plan to cut production this year. Other Taiwanese suppliers, such as Nanya Technology, ProMOS, and Inotera, are holding a wait-and-see attitude and hoping that the worst market they have ever seen will begin to improve soon.