Memory IC purchasers can expect a buyers' market for DRAM and flash for the rest of the year. Buying conditions will likely favor purchasers through the first half of next year. With fab capacity utilization rates low and demand still sluggish, memory chip manufacturers cannot raise prices.

Prices for DRAMS increased briefly in the first quarter as production was cut back and some OEMs began to replenish stockpiles after last year's inventory burn off. However, the spike in demand was short lived and prices soon retreated.

Demand for DRAM, flash DRAM and other memory ICs is likely to pick up in the third quarter, but not enough to cause any major price increases or significant long-term shortages. However, there could be some tightness in supply especially as the DRAM industry moves from synchronous DRAM to double data rate (DDR). If the transition occurs faster than expected, some 256-Mb parts could be in short supply at least temporarily.

Sluggish demand and weak prices mean that DRAM manufacturers face another year of declining sales, according to semiconductor industry researcher IC Insights. The DRAM industry declined from $26 billion in 2000 to just $11 billion in 2001. It will drop to $10.5 billion in 2002 before rebounding to $14.5 billion in 2003.

The DRAM market will fall this year because supply will be loose and demand sluggish overall for the year, says Brian Matas, an analyst with IC Insights.

"I don't think supply will tighten because there is plenty of capacity and capacity utilization rates are in the high 60s or low 70s. They would need to be in the high 80s to have upward price pressure," says Matas.

However, memory manufacturers are a little more optimistic about market conditions. Demand should rise for personal computers (PCs) and more memory is being added to computers. There is also growing demand for DRAM from non-PC applications.

The first quarter was strong for most DRAM manufacturers because prices increased due to production cutbacks. DRAM revenues increased 83% in the first quarter from fourth quarter 2001, according to the Semiconductor Industry Association.

Business softened in the second quarter. "However, there is an expectation that we will see a relatively strong second half," says Fred Waddel, director of sales, networking, and communications for DRAM manufacturer Micron Technology. "It's due to a combination of factors. One is there is a build up of potential demand on the PC side," he says. Many companies last upgraded their computers in 1999 because of Y2K compatibility issues. Companies usually upgrade computers every three years. That pent up demand may kick in during the second half.

Waddel adds there are changes in operating systems. "Microsoft XP is moving from a operating system for consumers to a corporate one as well," he says. XP requires more memory than previous operating systems such as Windows 2000. That means more memory per box. "A year ago there was an average of 100-130 megabytes of memory per system. Now it is 210-260 megabytes per box," says Waddel.

Another reason that DRAM manufacturers think business will improve is that DRAM is being used in more types of electronic equipment. DRAM is being designed into consumer electronics and networking equipment and will be used in cell phones.

"As 3G cell phones get more Internet capable you will see more phones with big chunks of DRAM in them," says Jim Sogas, vice president of sales for Elpida Memory. "You will never see cell phones with 16- DRAMS in them, but a lot of cell phones will have a 256 Mb DRAM."

He says more DRAMS will be added to digital televisions and high definition TVs. Also, networking equipment will need more memory. "As the Internet gets bigger and moves more information traffic around the world, the amount of memory and speed of memory gets to be important. We are looking at designing DRAMS for that high-performance network market," he says.

Tom Quinn, vice president of memory marketing for Samsung Semiconductor, agrees that non-PC applications are a potential big market segment for DRAM. "We see the cell phone business migrating to low power DRAM to replace SRAM. We see a lot of consumer applications coming out in high volume driving lower power DRAM." But the volumes won't be that large in 2002.

Because of increased demand for memory, DRAM manufacturers believe bit shipments will grow significantly over last year. In 2001 bit demand grew only about 5%. This year manufacturers see bit demand growing in the 50% range. That increase in demand coupled with capacity cutbacks from last year could mean tight supply and higher prices in the fourth quarter, according to DRAM suppliers.

"A lot of suppliers cut capacity because of how bad business was last year," says Sogas. "The capacity cannot be brought back because suppliers cut .20 micron capacity and some .18. This year, the densities are transitioning to 256 Mb with speeds that go up to 266 MHz. The older manufacturing processes cannot achieve those," says Sogas.

To build 256 Mb parts, .18 micron process technology can be used, but realistically ".15 and .13 are better suited for the chips to be profitable," he says. "That technology is not widely available. Most companies cut back on capital investments and didn't spend money on advanced processes. So there is not a lot of that capacity on line," says Sogas.

"This year as demand picks up again, and with a lack of capacity, we think we will see short supplies in DRAM," says Sogas.

Some DRAM manufacturers say there will be shortages of certain parts simply because the DRAM market is so fragmented. They say it is hard to forecast what parts will be most in demand and plan production around that forecast. If demand builds for a specific type of DRAM faster than expected, the part could be in short supply and the price will increase.

"You have an incredible mix of product that is coexisting on the DRAM front," says Quinn of Samsung. "With double data rate (DDR) we ship 400, 333, 266, 200 MHz devices and we are still shipping PC133, Rambus in 1,066 and 800 MHz. We still ship EDO (extended data out) and fast page mode devices. It's challenging to manage that mix, but from a market perspective the complicated mix favors the supply side," he says.

While there be may be a complicated mix of DRAM product to deal with, most suppliers agree that there is a transition to 256 Mb DRAM and to DDR architecture. "In the fourth quarter we will be shipping more DDR than synchronous and more 256 meg than 128 meg units," says Terry Lee, executive director of advanced technology and strategic marketing for Micron Technology.

That will also be true for other DRAM manufacturers. In fact, Quinn says Samsung is already shipping more 256 Mb DRAMS than 128 Mb parts. "We have pushed the higher density," says Quinn. "There are two crossover points: bit level and unit level. For us, the 256 Mb has been the main device for over a year. At the unit level, we had crossover early in the year. Everybody is following the same course. We are about 6-12 months ahead of the industry based on density," he says.

Samsung is also shipping its 512 Mb DRAM although demand is relatively low because it costs about $100. "We ship it at a high price. It is used in Unix server applications. We are seeing a lot of it in networking applications where there are reliability concerns and a need for massive amounts of density in a small amount of space," says Quinn.

While the transition to 256 Mb density is on schedule, the transition to DDRDRAM is a little slower than expected, according to Quinn. DDR performs better than synchronous with Pentium 4 processors because it can process information twice per clock cycle rather than once.

"Everyone was convinced that DDR would take over this year, but there has been a slower than expected uptick in DDR demand," says Quinn. "It hasn't hit the server market yet. It hasn't hit the mobile market yet."

Part of the slower than expected transition is the lack of chipset support. "If you look at Intel's original strategy, Pentium 4 was only going to be packaged with Rambus," says Quinn. Intel then supported synchronous and DDR after being pressured by suppliers and OEMs who wanted different memory technologies.

However, Intel just started shipping the 845M chipset for portable computers. The chipset supports the Pentium 4 and DDR technology. Intel offered Brookdale, the 845, which can support synchronous and DDR. "What we have seen is a healthy balance of systems going out, Pentium 3 systems with 845 with synchronous," says Quinn. "We are convinced that DDR will take the majority of the market share. It's just slower than expected."

While DRAM manufacturers are having a tough year in 2002, so are flash memory manufacturers. The flash market is expected to fall from $7.6 billion in 2001 to $6.2 billion in 2002, says Jim Cantore, principal analyst, memory with market intelligence provider iSuppli.

One reason is the cell phone market. Cell phones are the single biggest user of flash memory. "Last year there were about 390 million handsets shipped. The forecast is about 400-410 million and some investment firms have said 390-400. So shipments will be flat this year and that's not good news for flash memory suppliers," says Cantore.

As with DRAMS, there is a shift to higher density flash. About 360 million 32-Mb flash chips will ship this year compared to about 305 million 16-Mb units. In addition about 20-40 million 64-Mb flash units will also ship.

Buyers can expect prices to fall through the year. In large quantities, 16-Mb flash devices cost about $2.40 while 32-Mb tags are in the $4.20-$4.40 range. Tags will likely fall about 5% by year end.

Cantore says because of the current oversupply, it's a good time for buyers of nor flash devices to sign long-term contracts with suppliers. Reason: the market won't stay oversupplied forever.

"Now would be a great time for those who know their long term demand trend to get to the table and start negotiating long-term agreements with suppliers. It is a good way to lock in a source of supply," he says. "Suppliers have cut back their capital expenditures for two years, so ultimately there is going to be a capacity pinch and it will show up a year from now."

However, long-term contracts only apply to buyers of nor flash. Nand flash, used in consumer electronics equipment, is in short supply and buyers will have a hard time negotiating long-term contracts.

Nor flash is used for code storage in cell phones and networking equipment. Nand flash is used for data storage in consumer electronics equipment such as digital cameras, digital camcorders, and MP3 players to store photos and music.

Nand accounts for about 12% of all flash, but by 2004 that figure will grow to 16% as it is used in more electronics equipment, says Cantore.

"Nor is better suited to execute programs and code because you need high speed, a lot of random access," says Cantore. "With nand flash, you can write to it fast, but it writes sequentially. Nand flash is like a little hard disk drive. It's good for storing pictures on digital still cameras and music in music players," he says.

Nand flash will also be used in 3G phones in the future. "As cell phones move to 2.5 and 3G, they are becoming more than voice tools," says Quinn of Samsung. "Because of architectural changes in the cell phone, the phone is starting to look like a PC. Those architectural changes are driving nand technology because it is no longer about code storage, but about data storage," he says.

While supply is not a problem for buyers of nor flash, it is for nand buyers. Leadtimes for nand flash have stretched to 12 weeks from three to four last year. Cantore says Toshiba recently sold its facilities to Micron which will be converted to DRAM production. "Toshiba took the equipment and moved it back to Japan and all of a sudden there is a supply shortage of nand flash. We expect the shortage to be cleared up by the end of the year," he says.

One trend involving flash, DRAM and other memory technologies is multichip packages (MCP). Memory makers say there is growing demand for module packages containing several types of memory. With MCP, DRAM, flash and SRAM are stacked in a single package. The modules are starting to be used in cell phones and personal digital assistants, which require a lot of memory in a small space.

"With consumer equipment, it's all about how you save space," says Quinn. "We are putting in a single package stacked vertically, at die level, lower power DRAM, SRAM, nand flash and nor flash. We are selling it into cell phones and PDAs.

MCP modules will eventually be replaced by "fusion" technology. "At this point we are stacking separate die vertically in a single package," says Quinn. "We do see that the market will move to fusion memory where on a single die you may have the multiple technologies."

Fusion memory will come out in 2005.