Shrinking Memory (Prices)

The memory
module market recently has witnessed a major downtrend. Entire
components of
the dynamic random access memory (DRAM) supply chain have been
affected due to this trend. The lack of demand at each level
including vendors, distributors, and dealers has directly impacted
the pricing of the products. DQ Channels talks to Indian IT
honchos to get a clarity on this scenario and future prospects.

Atul Khosla,
director, Om Nanotech said, “The current dip in the pricing is
unprecedented since this negative trend has been going on for a few
months now. It is normal for DRAM price to fluctuate every day.
However, the prices go up sometimes and down at other times, thereby
creating some stability in the market. However, this time we have
seen continuous price slide leading to major concerns for everyone
involved in this business right from DRAM chip manufacturer to the
end-retailer.”

IHS iSuppli
DRAM market brief from information and analysis provider IHS, in
itsrecent report states that a dramatic oversupply and free falling
prices are in store during the third quarter for the DRAM space,
resulting in a turbulent second half for besieged DRAM suppliers.

Commenting
on
the industry, MA Mannan, country manager, Corsair Memory India said,
“Memory market is like the gold market or share market. Nobody can
tell anything about the future trends. Whatever is said is primarily
speculation, supported by some facts and figures. This exists because
it is difficult to source data from each and every chip manufacturer
and not many are comfortable with sharing such data.” This scenario
in the DRAM sector is going to directly impact the pricing of memory
modules specifically DDR3. As of today, the prices of 2GB DDR3 and
4GB DDR3 are hovering around Rs 550 and Rs 1,100, respectively.

Asif Khan of
Technocrat Infotech said, “DDR1 and DDR2 have seen an uptrend,
while DDR3 segment has not seen a 100% uptrend recently. However, in
the last 15 days, the downtrend has been negligible. There is a
possibility that the prices might dip a bit but it will not be a
drastic drop. The drop may be of Rs 50 or Rs 75.”

The findings
from the report states that in the DRAM segment, the average selling
price for DDR3 in the 2GB density is projected to drop to $1.60 in
the third quarter, down 24% from $2.10 in the second quarter. The
dive would be the biggest decline for the year, following a
surprisingly solid second quarter during which pricing fell only 5%
from the first quarter.

Going into
the fourth quarter, the price could plummet another 22% to
$1.25-dangerously close to cash costs for many manufacturers. One
year ago in the third quarter, prices stood at $4.70.

DRAMeXchange,
a
research division of TrendForce, in its recent market report states
the following downtrend in first half of August. 2GB and 4GB DRAM
contract price for second half of August fell by 12.24% and 8.51%
respectively, arriving at $10.75 and $21.50. August selling prices
for 2GB and 4GB DRAMs fell by 25.86% and 23.21%, respectively from
July's figures, showing no signs of slowing down.

From the
market perspective, although DRAM suppliers have continually made
production cuts, the results will only begin to take effect in early
part of fourth quarter, with no substantial short-term improvement to
the supply situation. If the price decline continues, major PC OEMs
strategy will be to maintain low DRAM inventory levels to prevent
losses caused by price decrease.

However,
TrendForce report indicates that it is highly likely that DRAM
contract price will continue to fall in September, since economy is
sluggish in many parts of the world and the traditional peak sales
season for PCs is unlikely to manifest this year.

According to
the iSuppli report, DRAM manufacturers attribute the low growth in
shipments in
the second quarter to 2 primary reasons: bloated inventory and
challenges in transitioning to new process technologies.

Khosla said,
“Such a negative trend is going to affect the market in ways more
than one. First of all, it is not a healthy trend because currently
everybody involved in the DRAM chain is incurring losses. Such losses
cannot be sustained on a continuous basis. This would force some of
the people in the DRAM chain out of business leading to possibility
of future monopolies. In a worst scenario, if one of the DRAM chip
manufacturer is forced to shut production, then it may lead to much
higher prices in future, once the demand picks up. As far as we know,
all the DRAM chip manufacturers today are incurring losses.”

Khosla
further added, “The module manufacturers also are incurring losses
because by the time
they are able to turnaround the chips into modules, the prices in the
market fall further. In a falling market, it is futile for a
manufacturer to stock the finished product since that further
restricts the cash flow.” At the same time due to recession or
recession like conditions in some countries, the demand for new PCs
has not picked up.

Also, there
has been no introduction of any new software in recent past that
might be memory
hungry. And there has been no pull in the market to upgrade memory in
the systems. This has led to stagnation in the growth of memory
market.

Mannan said,
“Price downtrend is not because of over production. It happened
almost one and half years back. At that time the industry introduced
corrective measures and brought the prices to a stable level. The
present trend is because of the fact that there is no demand even in
the international market. OEM orders, which are huge, have dropped in
the last 2-3 quarters. One OEM order can completely change the trend.
The demand is only coming from channels while the OEMs have not
placed a single order for a long time. Industry produces 75% of
stocks for OEMs and the rest for channels. So with no orders, the
industry was forced to bring down the prices.”

Anshuman
Gupta, CEO & founder, Strontium said, “DRAM is like a commodity
product and it behaves like that and has the perfect price
elasticity. Nobody with right mind will hold up stock of base chips
in this industry and then wait to sell it at higher rates.”
Industry stalwarts and reports indicate that one of the primary
reason for this situation is because of oversupply of the products in
the market. In such a scenario, there are only limited options to
stabilize the market ie, either production has to reduce, or the
consumption has to improve. To bring a drop in production is a
difficult affair, particularly in this product category.

The reason
is
that the DRAM production is done by extremely capital intensive units
called FAB.
There are only a handful of FABs for DRAM around the globe and none
in India. It takes almost 3 months for FAB to restart the production
once it is stopped for any reason. Due to this reason, the DRAM
manufacturers do not reduce production even if they are making
losses, unless the losses become so high that it threatens the very
existence of the manufacturer. Thus, considering this option is the
only solution, when the final guns have to be drawn. However, certain
industry reports do indicate that one of the FABs did come out with a
statement to reduce production.

Gupta
further
added, “The products are selling below the cash cost for most of
the manufacturers. There is a serious reluctance from most of the
companies to continue this state of affairs as everybody has to keep
their factories running. However, the nature of product is such that
predicting the future trend is really difficult. But further price
drop is a very less probability.”

While,
Sushmita Das, country manager, India, Kobian said, “Because of the
economic conditions, overall demandfor PC has slowed and this has
resulted in oversupply from manu facturing side. Secondly, demand for
tablet PCs and notebooks has increased and thus there is not much
growth in traditional desktop PCs.”

Commenting
on
market scenario, Khosla said, “Due to this negative price trend,
the stockist and large distributors do not want to stock beyond a
point and are wary of taking forward positions. At the dealer's
level, we find that their stocking under such conditions becomes
minimal. The dealer who used to buy a stock of, say, 50 modules for a
week, would now buy 10 modules per week so as to restrict his
losses.”

Elaborating
on the global scenario, Mannan said, “Presently, we are witnessing
a bottom pricing which means someone somewhere is taking losses.
Probably the chip manufacturer or the module manufacturer or the
brand is taking the loss. The market scenario is such that everywhere
the prices have bottomed out. This cannot sustain for a long time and
everyone is trying to increase the price by any means.”

Mannan
added,
“Looking at the price trend, initially there was a huge drop.
However, for the last one and a half month, the prices have been
almost constant without drastic variation. The companies have reached
a state where further drop is not acceptable. These vendors have put
corrective measures in place which will ensure that pricing will come
up where everyone gets their share of margins.”

Commenting
on
future probabilities, Das said, “There is very less inventory in
channel so demand will multiply. But, there won't be much effect on
the Indian market.” She further added, “Dealers would be more
cautious as they would be losing money on the inventory they have on
hand. At the same time, there would be some set of dealers who would
buy on further drop anticipating that the price will rebound in
future. For end-customers, it will be good as they can have more
memory for the same price”

“We do feel
that currently the prices have almost bottomed out and there is
little scope for further fall. We should see some firming up of
prices but nowhere near the levels from which the slide started.
Having said that, this was the prediction by most of the market
players when market was 10% higher than today's level. Hope, our
predictions come true,” said Khosla.

All the
circumstances are currently against the memory module vendors.
However, the companies are relying on some factors which might create
an uptrend. Like, traditionally, Diwali time has been a positive time
for DRAM market. At the same time, September and October is the
period when companies all over the world do their buying to prepare
inventory for Christmas time. All this leads to some increase in
demand, hence improvement in the pricing.

There are
clear indicators that the manufacturers are coping with this
situation in multiple ways. Many have stopped manufacturing or even
reduced the output. Some are holding up stock, while a few are not
even packaging it into a component. This industry is so dynamic that
it is a major challenge to contemplate the future pricing or even the
extremes. Hopefully, the trend would immediately reverse once there
is some indication of DRAM prices firming up.