Memory supply conditions to get worse for buyers

By By James Carbone -- Purchasing, 7/13/2000

Rising demand and a lack of investment in new fabs mean a tighter supply of dram and higher prices toward the end of the year and continued allocation of flash memory until the middle of 2001. sram supply will also be tight, but not as much as dram and flash will be.

Buyers should not expect the tight memory IC supply conditions to disappear anytime soon. While suppliers are doing die shrinks resulting in more usable chips per wafer, there has been little new fab investment, especially for dram. At the same time, demand for dram is rising due to strong growth of the PC industry which uses the bulk of dram and emerging uses of dram in networking equipment and consumer electronics.

Bit demand growth is expected to be in the 75% range this year as the overall market rises from about $20 billion in 1999 to $27 billion in 2000. Flash and sram will also post strong growth. The flash market is forecast to double to $10 billion in 2000 and SRAM will rise from $4.6 billion in 1999 to $5.2 billion in 2000, according to market researcher IC Insights.

Through the first half of the year, dram buyers have had nothing to complain about.

"The dram market was a little oversupplied, but a lot less than it has been over the past three years," says Steve Cullen, dram analyst for market researcher Cahners In-Stat. "But all indications are that by the end of the year, the market is going to be considerably tighter." A tighter market will affect prices which have been volatile for the past year. For instance last year, a 64Mb part was $5 and then shot up to $20 in the fall on the spot market but then fell back to the $5 level and was about $6.50 at midyear. Cullen expects prices will creep up to the $7 range by the end of the year.

However, after several years of steep price declines, dram manufacturers would be happy if prices were stable. "With dram, anytime prices are not going down, that's good. If they inch up, that's outstanding," says Cullen. The latest generation dram starts out at a high price, but declines as production volumes build. If supply conditions are in balance prices decline 25%-30% per year. When dram is oversupplied they decline at a higher rate and if dram is in short supply tags stay flat or edge up a bit.

Shortages coming

Unfortunately for buyers, over the next 12 months dram will go into short supply due in large part to a lack of investment in new fabs and recent consolidation in the dram ranks such as Micron's purchase of Texas Instruments' dram business and the merging of Hyundai and LG Semicon. In some cases dram suppliers have sold off capacity. Example: Hyundai had an empty fab in Scotland that was built in 1996 that could have produced 20,000 wafers per month. The facility was sold to Motorola.

Other manufacturers have not added significant dram capacity. New fabs cost $1.5 billion to $2 billion. "It seems dram capacity is going away rather than being added. Who's going to build fabs?" asks Cullen.

It's hard to say how widespread shortages will be because the dram market is fragmented. There are different density parts in different organizations and different architectures. However, Bob Eminian, vice president of memory marketing for Samsung Semiconductor, the top dram manufacturer, says that by the end of the year demand will outstrip dram supply by 3%-5%. He says demand is especially strong for 128Mb devices and Samsung is increasing its output of those parts. In fact, Samsung will build more 128Mb devices than 64Mb units this year.

The growing demand for 128Mb parts will drive prices up. Contract prices for 128Mb devices in the second quarter were about $13, according to Eminian. By the end of the year, prices should be around $17 or $18.

dram demand is strong because PC shipments are expected to grow 20% this year. In addition the amount of memory per system is growing and there are emerging uses of dram. "We will see a diversification of the PC," says Eminian. "We are seeing more appliances that have part of the PC function. They won't use as much dram as the PC but there will be more units of them produced," he says. Handheld personal digital assistants and new Internet phones are examples.

Eminian adds that Microsoft's new Windows 2000 operating system will also boost memory consumption because a minimum of 64 megabytes is required to run the OS, but 128Mb are needed for it to run well.

The combination of rising computer shipments and emerging uses of dram and a lack of investment in new fabs means tough buying times for buyers over the next three years.

Cullen says the market will remain tight until 2003 when capacity will finally catch up with demand. Because of the undersupplied market the next several years will be challenging for dram buyers.

"A lot of people have been buying dram for a few years and don't remember what a tight market is like," says Cullen. "Nobody remembers 1994 and 1995 and some buyers are in for a rude awakening because they will find out they can't push their suppliers around anymore."

Scrambling for parts

In fact, some buyers will be pushed around by suppliers when it comes to dram. Even buyers at major PC OEMs and large contract manufacturers may have supply problems, although they buy large volumes and have long-term contracts with suppliers. But it's buyers at midsize contract manufacturers and second-tier PC companies that will be most affected by shortages and will be scrambling for parts. "Right now we are trying to settle on which customers we are going to support and how much is going to be allocated by OEM vs. strategic accounts," says Mario Martinez, director of memory marketing for Hyundai.

Cullen says buyers should expect to be treated by suppliers the way they treated suppliers during the recent supply glut. "Suppliers tend to have long memories," says Cullen. If buyers squeezed suppliers during the recent supply glut, they may have a hard time finding parts they need.

Many buyers will buy from franchised distributors or from independent distributors or brokers. "Many buyers have purchased on the open market because it has been a way to get parts cheaper than under contract," says Cullen. "When the market turns, the advantage is supply and not price." Translation: Buyers will be able to buy parts, but will pay through the nose.

While dram supply may become tight and tags may rise significantly, the spot market and contract prices won't rise as much. Reason: the PC business is very cost conscious. When memory prices were high in the mid-90s, PC companies were slow to add memory to systems. When prices fell, they loaded systems with more memory. If memory prices get too high, PC OEMs will cut back the amount of memory in a system or keep it flat resulting in lower revenue growth for dram manufacturers. In fact that happened last Fall. When prices briefly spiked upward, Dell and other PC companies announced they would ship systems with less memory than originally planned.

"When prices [for 64Mb] went into the two-digit territory in fourth quarter, OEMs cut back their megabyte per system in Q1," says Martinez of Hyundai. "We were penalized with softness in demand and reduction in megabyte per system." Memory prices need to stay in line with the budget of the PC company if dram suppliers expect PC companies to continue increasing the amount of memory in computers.

What about Rambus?

Besides prices, purchasers need to keep an eye on dram architectures and how much capacity suppliers devote to which technology. Several years ago most suppliers and analysts saw Rambus as the next dominant architecture because Rambus dram (rdram) delivers 10 times the performance of other architectures because data can be transferred at speeds of up to 800 MHz over a two-byte-wide channel. By comparison synchronous dram, the most widely used dram, has a maximum bus speed of 200MHz.

rdram transfers data through strict layout rules that specify maximum path lengths so the signal is not distorted, according to Bill McClean, president of market researcher IC Insights. Data from the rdram is sent to the processor in a single packed that is several bits long. By separating data this way, circuits run significantly faster, he says.

Because of superior performance, many say the future for Rambus is rosy, while others say it will be a niche product because of its cost. It costs about three times what a synchronous dram costs. There is also a royalty up to 2% that suppliers must pay.

"We are not optimistic about Rambus," says Martinez. "We see sdram PC 100 being replaced by PC 133. We don't think it will move into servers or notebooks, but will reside in high-end PC solutions. We think Rambus market size will be less than 10% next year."

However, rdram supporters say as dram moves to 128Mb and 256Mb densities, process technologies move to .13 micron, and 12-inch wafers are used, cost will be reduced. As processor reach speeds of 1 gigahertz and above, the advantages of Rambus are fully realized and it will become the preferred architecture in most computers.

"We are bullish on Rambus, says Cullen. "It has the support of Intel and we believe by 2004, Rambus will be half of the entire dram market. This year, Cullen forecasts that Rambus will represent 10% of the dram market although other researchers peg it at 5% or less.

Samsung was an early Rambus supporter and produces about 90% of all rdram.

Eminian says Samsung tripled its output of rdram in the second quarter and will continue to ramp up production.

No stopping flash

While the future of rdram is debatable, there is no question about the future of flash memory because of the cell-phone explosion and the proliferation of consumer equipment that needs non-volatile programmable memory. Besides cell phones, uses of flash include personal digital assistants, settop boxes, digital cameras, modems, DVDs and disk drives among others.

The flash market is forecast to double to $10 billion in 2000 and grow to $19 billion by 2004, according to IC Insights. The good news for buyers is that while flash parts are on allocation and prices have risen over the last year, dramatic price increases are not likely through the rest of the year.

While demand is strong for 16- and 32Mb devices which are used in cell phones, demand is also strong for lower-density flash chips, according to Sam Young, vice president of the flash memory business unit for Hyundai.

Two-megabit flash is used in PC BIOS and some modems; 4Mb parts are used in CD-ROMs, set-top boxes and disk drives; 8Mb parts are used heavily in DVD players, networking equipment and set-top boxes.

"It's a varied customer base and that's why you need a lot of products," he says. The number of flash applications will become more varied. Digital cameras, MP3 players and satellite TV receivers are also expected to see solid growth in the coming years and all use flash memory.

To meet that rising demand, flash memory suppliers say they are adding capacity, but flash is expected to be in short supply until at least the second half of 2001.

Troy Winslow, product line manager for flash at Intel, the leading flash memory manufacturer, says Intel is adding $1.2 billion in new capacity through die shrinks and new fabs. It is moving from .25 micron process technology to 0.18 at three flash fabs. It is also bringing in the former Rockwell fab that it recently acquired online.

"What this will do is almost double our flash capacity in terms of megabytes," says Winslow. "From 1999 to 2002 Intel will have an 8x capacity improvement in bits. Other flash manufacturers such as AMD and Hyundai are also adding capacity through die shrinks or new fabs.

But it remains to be seen how quickly the added capacity will affect supply because of burgeoning demand especially by the cell-phone industry which uses about 30% of all flash memory manufactured.

Winslow says there are expected to be one billion cell-phone users by 2003. "In addition, the replacement rate of cell phones is phenomenal," he says. He says most cell-phone users replace phones within three years. In addition, there will be a trend for more than one cell phone per household, further fueling flash memory growth.

"In countries where there is a high cell-phone penetration rate like Sweden and Finland, handsets are still growing because they have multiple phones per family," he says. That trend is likely in the U.S. and other countries.

Wireless Internet applications will be a huge opportunity for flash, says Winslow. "Internet phones, whether they just handle e-mail messages or have full-blown browsing, require higher densities of flash. We believe next year high-end, Internet-enabled cell phones will have 64Mb of flash.

He adds that an integration of technologies may further boost flash demand.

"Will MP3 players be combined with cell phones or will cell phones and personal digital assistants merge and adopt the whole smart-phone mentality?" he asks. Either way, it will boost flash memory demand.

While flash has been on allocation and prices have risen, there will be no dramatic price increases through the rest of the year, according to Winslow. "Flash is a competitive market and we have to respond to that," he says. "We don't necessarily have plans to change pricing. We are reducing cost and coming out with new lithographies and passing it on to the customer."

He says a 3V 32Mb part costs about $15 in quantities of 10,000 and might increase to $15.10 by the fourth quarter. Sixteen-megabit parts were about $7.50 and 8Mb parts were in the $4.90-$5.00 range and could rise some by Q4. Of course, buyers purchasing smaller volumes or through distribution or on the open market will pay higher prices.

While flash prices may not rise much, parts will be in short supply until at least the middle of next year and possibly longer.

Solid growth for SRAM

While dram and flash will post impressive growth over the next several years, the sram market will grow as well and supply conditions will remain tight for buyers. The sram market is forecast to grow from about $4.6 billion in 1999 to $7.4 billion in 2004 because of growing use of SRAM by networking equipment manufacturers and the cellular-phone industry.

Prices increased early in the year, but tags should not rise much for the rest of the year. Brian Maas, an analyst with IC Insights, says prices will rise 8% for the whole year. Strong demand and a lack of capacity investment means leadtimes will stretch.

sram seems to have been awarded a new lease on life. Many had forecast the decline of sram about two years ago. sram had been used primarily as L2 cache memory in computers. However, sram was integrated on microprocessors, resulting in less demand for discrete sram components from computer makers.

However, the cell-phone industry began to use slow-speed sram, those with access times of greater than 30 nanoseconds. In fact, it's estimated that 90% of all slow-speed sram is shipped to cell-phone manufacturers. Demand is strong for 1Mb 2Mb, 4Mb and 8Mb slow sram. High-speed sram, with access times of less than 30 ns, are used in a variety of networking equipment, including hubs, routers and switches. The market for that equipment is expected to swell from $36.8 billion in 1999 to $50 billion in 2000, according to Cahners In-Stat. The growth of cell phones and networking equipment means strong sram demand for years to come. Supply will remain tight because of demand and also because little sram capacity has been added. Some suppliers got out of the sram business several years ago in favor of dram or other products.