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Asia's major memory-chip makers aren't likely to cut output significantly next year even amid mounting losses as they try to clinch on market share and stay competitive, analysts say.
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28 December 2007
TAIPEI (Dow Jones) -- Asia's major memory-chip makers aren't likely to cut output significantly next year even amid mounting losses as they try to clinch on market share and stay competitive, analysts say.
The move may lead to further price declines and margin erosion in the dynamic random access memory chip market in 2008, which could force out some players with weak financial positions and accelerate a much-needed industry consolidation.
"The industry is like a packed ship where all will survive if one jumps the ship," said Joyce Yang, an analyst at online chip clearinghouse DRAMeXchange. "But nobody wants to be the one."
Prices of DRAM chips widely used in personal computers have plunged this year due to an oversupply as manufacturers boosted output anticipating strong demand with the launch of Microsoft Corp.'s Windows Vista operating system. But demand failed to meet those expectations while supply continued to balloon as semiconductor plants became more efficient. Many analysts and industry executives forecast difficult market conditions to continue in 2008.
"The poor market condition will encourage DRAM manufacturers to be compromising," said an analyst at a European investment bank, who declined to be named. "I believe there will be more and more noise about merger-and-acquisition talks in the first half of next year. "
The price of the mainstream 512-megabit double data rate two chip that runs at 667 megahertz has been hovering below US$1.00 on the spot market this month, a level which analysts say is below the production cost for chip makers.
Despite the weak pricing environment, chip makers from Samsung Electronics Co. (005930.SE) to Hynix Semiconductor Inc. (000660.SE) and Powerchip Semiconductor Corp. (5246.OT) have plans to continue to boost their DRAM output in 2008.
Taiwan's largest memory chip maker by revenue Powerchip said the company expects its market share to continue to rise next year or at least stay flat.
"Growing market share is an important goal for us," said a Powerchip official who declined to be named.
Samsung Electronics, the world's biggest DRAM maker by revenue, forecasts DRAM shipment growth of 70% in 2008, while Taiwan's Nanya Technology Corp. (2408.TW) is forecasting 80% growth for next year.
Hynix Chief Executive Jong-Kap Kim said Friday difficult market conditions are likely to continue into 2008.
"In 2007, the memory chip industry suffered its worst oversupply and adverse conditions since 2001 as a result of competitive capacity expansion in the past few years. This situation won't improve much in the first half of 2008," said Kim.
DRAMeXchange's Yang said despite falling profitability, DRAM makers may stand to lose more if they cut production, mainly because idle equipment will increase depreciation costs.
The DRAM industry saw overall shipments surging 90% this year and analysts expect industry output to rise another 50% in 2008.
Industry Consolidation May Speed Up
Analysts say the tough industry conditions may force some players to look for partnership opportunities while the weaker ones may be vulnerable to a takeover.
Last week Micron Technology Inc. (MU) of Boise, Idaho, said it is looking for partnership opportunities for its DRAM memory business.
Rick Hsu, an analyst at Nomura, said Taiwan's Nanya may need to ally with companies that use the advanced "stack" technology such as Micron.
Nanya and its partner Germany's Qimonda AG use a different technology called "trench" to etch electrical circuits onto chips. The world's two biggest DRAM suppliers, Samsung and Hynix of Korea, use another method that stacks chip circuits on top of each other.
"We think the group of companies using the trench technology is more in danger of being taken over because the technology advancement is slower relative to stack technology users," said the European investment bank analyst, who declined to be named.
Nanya Technology spokesman Pai Pei-Lin however said the company isn't considering any partners other than Qimonda at the moment.
Micron officials couldn't immediately be reached for comment, while Qimonda officials declined to comment.
Qimonda and Nanya set up a 50-50 joint venture called Inotera Memories Inc. (3474.TW) in 2003 as a way to share technology and capacity.
Some analysts say Taiwan's ProMOS Technologies Inc. (5387.OT) could be a takeover target because of its weak financial position.
ProMOS posted a net loss of NT$2.92 billion for the third quarter after posting a net loss of NT$3.83 billion in the second quarter. The losses were much wider than its bigger rivals such as Powerchip and Nanya.
ProMOS's cash and cash equivalents totaled NT$12.51 billion in the first nine months of this year, compared with Powerchip's cash position of NT$24.68 billion and Nanya Technology's NT$18.89 billion.
Some analysts speculate that a tie-up between ProMOS and its shareholder United Microelectronics Corp. (2303.TW) could also be a possibility.
UMC, a made-to-order chip foundry, has also been interested in broadening its business portfolio to include DRAM chips, they say.
"As a shareholder, UMC will very likely help out if ProMOS really runs into difficulty," said Kenneth Lee, an analyst at Primasia.
UMC owns nearly an 8% stake in ProMOS.
UMC spokesman Chitung Liu said the company currently has no plans to increase its shareholdings in ProMOS.
ProMOS spokesman Ben Tseng said Hynix is the company's only partner at the moment. But he said the company is open to other options.
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