DRAM tags will stay low through rest of the year

Demand is strong, but plentiful capacity will keep prices down

James Carbone -- Purchasing, 7/14/2005

It will remain a buyer's market for DRAMs through the year as supply will outstrip demand, and prices will remain soft. DRAM tags fell by about 35% from January to June and the good news for buyers is, they won't recover this year. However, they also will not fall any more, according to analysts and suppliers. Weak pricing means that the DRAM market will post little growth as the market rises from about $26.45 billion in 2004 to $26.53 billion, according to market researcher iSuppli.

Minuscule revenue growth will occur despite strong DRAM bit demand. Bit demand will grow by about 53% because of 10% unit growth of computer shipments, increased memory content in computers and the growth of DRAM use in digital consumer-electronics equipment.

Computing, including desktop PCs, portable computers, workstations, enterprise servers, and memory upgrades account for 76% of DRAM demand, according to iSuppli. While the DRAM industry is affected by the number of computer shipments, it is also affected by the amount of memory per system which increases every year. For example, in 2004 the average amount of memory in a desktop computer was 410 megabytes (Mbytes). In 2005, that will increase to 560 Mbytes. Mobile computers will increase from 370 Mbytes in 2004 to 510 Mbytes this year and entry-level servers from 1.2 gigabytes (Gbytes) to 1.7.

Despite strong demand, there continues to be excess capacity which was responsible for the DRAM price decline in the first half. While no one is forecasting a huge price hike in the second half, there are two wildcards that could result in short-term price increases later in the year.

One is the willingness of major DRAM manufacturers such as Samsung, Hynix and Infineon to transition DRAM capacity to NAND flash memory production. Demand is strong for flash from cell phone and consumer electronic equipment manufacturers. DRAM flash margins are about 30% higher than DRAM so suppliers periodically move some DRAM capacity to flash. With DRAM prices falling in the first half, it's a safe bet that more capacity will transition to flash and that could temporarily mean higher DRAM tags.

However, DRAM buyers shouldn't do too much hand wringing about transition of production to NAND flash. While major suppliers like the idea of producing NAND because margins are higher, they don't want to lose any DRAM market share. If they transition too much production to NAND they will lose DRAM share and drive the price of NAND flash down. That means suppliers will make sure they have a balance of DRAM and NAND production.

The other price wildcard is the transition from double data rate (DDR) DRAM to higher performing DDR2 devices. Buyers who are slow to make the transition to DDR2 could have some supply issues in sourcing DDR1 parts in the second half and may see prices rise.

"DDR2 is the future of memory and the cost of DDR2 is lower than DDR1 so it doesn't make sense for suppliers to have a lot of DDR1 inventory," says Nam Kim, iSuppli's principal analyst for memory ICs.

Most DDR2 shipments will occur in the second half of the year. Despite the transition, more DDR1 units than DDR2 units will ship in 2005. About 50% of units will be DDR1, 40% will be DDR2 and the rest will be synchronous, Rambus and other DRAM architectures, says Kim. However, in 2006, 68% of DRAM shipments will be DDR2 and 24% will be DDR1.

Tom Quinn, vice president of memory marketing for Samsung Semiconductor in San Jose, Calif. says the transition to DDR2 was slow in the first half because supporting chipsets needed for use with DDR2 were bimodal, meaning they could be used with DDR1 or DDR2 memory. That gave PC companies the option of using DDR1 which many companies did, but future chipsets will be exclusively DDR2.

However, despite the transition to NAND flash memory and to DDR2, buyers can expect DRAM prices to remain weak, perhaps for years. One reason is the movement to 300mm wafers which effectively increases the number of chip per wafer by about 30% over 200mm wafers. All of Samsung's new DRAM production will be 300mm. Infineon Technologies North America, also based in San Jose, is adding 300mm capacity, says Ulrich Englert, director product marketing for memory products.

"We will have converted all DRAM manufacturing to 300mm by 2009," he says. That includes Infineon's new plant in Richmond, Va.

DRAM manufacturers are confident that there will be enough demand to support extra capacity. They expect PC growth to continue to be strong and demand from digital consumer electronics equipment manufacturers will grow. New 64-bit processors, 64-bit operating systems and dual-core microprocessors recently introduced by Intel and AMD will drive DRAM demand.

"With dual-core processors you roughly need the same amount of memory per processor core," Quinn says. That means about twice as much memory will be needed for a system using a dual-core processor.

In addition, DRAM is being used in cellphone handsets, videogame consoles, networking equipment and consumer-electronics equipment. Demand for all those applications is expected to rise in the second half. "It is almost like a perfect storm going into the second half. DRAM demand will be strong and we are bullish," Quinn says about the second half.

Elpida Memory USA in San Jose, is bullish about the growing use of DRAM in cell phones and consumer electronics, says Dan Donabedian, president and CEO. DRAM demand by digital consumer electronics equipment manufacturers was down in the first half, but will pick up later in the year. "That segment has been strong over the last year and a half and we see that continuing. The mobile phone market is strong," Donabedian says.

He says those two market segments have distinct DRAM requirements such as low-power DRAM , unlike many computing applications.

"Our DRAM is 45% lower power than a standard-version DRAM," he says. "In some cases we have a super-cell refresh for digital consumer equipment. It allows very low data-retention current. It lowers the power 95%."

While computers tend to use the highest density DRAM , consumer-electronics equipment DRAM density needs are varied. "It runs from 16Mb to 512 Mb," says Donabedian. "Higher functionality devices like digital cameras and digital televisions use higher-density devices. Mobile phones are closing in on 256Mb."

While more DRAM will be sold to mobile phone makers and consumer- electronics manufacturers, there is still demand for legacy parts such as 16Mb, 64Mb and 128Mb DRAM s for applications such as hard disk drives and networking equipment. The challenge for buyers of legacy parts will be to encourage suppliers to continue to make those parts despite limited demand.