Why Micron expects stable DRAM supply despite sluggish PC sales

Market Realist

Must-know overview of Micron Technology: A DRAMatic growth story (Part 2 of 8)

(Continued from Part 1)

Micron’s DRAM supply

DRAM remained the bright spot in Micron’s financial performance, with DRAM products, accounting for 69% of the company’s total net sales in 2013 and 68% in fiscal second quarter 2014. Micron said DRAM sales for the first six months of 2014 increased 246% compared to the corresponding period of 2013 but were flat sequentially, primarily due to the acquisition of Elpida, higher average selling prices, the restructuring of supply agreement with Inotera, and higher output due to improvements in product and process technology. Gross margins were up to 33% for the first six months of 2014 from 15% for the first six months of 2013, primarily as result of higher margins for DRAM products.

The current figures are in stark contrast to 2012, when Micron’s margin and profitability were impacted due to falling average selling prices (ASPs) because of oversupply, sluggish PC shipments, and intense competition in the DRAM market, which was highly commoditized and prone to volatile pricing. In 2013, in spite of the continual decline in PC sales, the DRAM industry saw growth  due to shift in demand to smartphones, tablets, and data centers. The industry also saw an improvement in prices with production cuts carried out to stabilize oversupply, coupled with consolidation, which reduced the number of DRAM producers worldwide from around a dozen to just three—Samsung, SK Hynix, and Micron.

The acquisition of the Japan-based Elpida Memory, which had filed for bankruptcy, and Rexchip Electronics Corporation (Micron Memory Taiwan Co. or MMT) in July last year for $949 million expanded Micron’s research and development and manufacturing scale. Both Elpida and MMT manufacture semiconductor memory products, including mobile DRAM targeted toward mobile phones and tablets. Elpida’s assets include a 300 millimeter DRAM wafer fabrication facility located in Hiroshima, Japan, its ownership interest in MMT (whose assets include a 300 millimeter DRAM wafer fabrication facility located in Taichung City, Taiwan), and an assembly and test facility located in Akita, Japan. The Elpida and MMT fabrication facilities together represent approximately one-third of Micron’s wafer capacity.

Micron said it benefited after DRAM spot prices soared 20% due to shortage concerns after a fire at rival Hynix’s Wuxi fabrication plant in September last year. “In terms of DRAM, the fire at Hynix’s (HSXCF) Wuxi fab last fall coupled with what was a healthy supply demand situation from beforehand is resulting in significant reduction in inventory across the DRAM supply chain, in particular for the PC and mobile segments,” management said on the first quarter earnings call.

Micron also pointed out that it received a deposit of $250 million from an unidentified OEM for DRAM supply in 2014, adding, “As customers look for 2014 sourcing, as they think about when Hynix’s Wuxi plant may come online, they are trying to lock up capacity and commitment to make it through calendar 2014.” News reports speculated that this OEM might have been Apple (AAPL).

The Wuxi plant accounts for around 10% of the supply of DRAM chips globally, and its primary customers include Apple (AAPL), Samsung (SSNLF), Lenovo (LNVGY), Dell, and Sony (SNE). Research firm DRAMeXchange believes the fire at Hynix’s fab didn’t have a significant affect on mobile DRAM output, and market competition brought average selling prices down by 10% in the fourth quarter. So, despite a 3% increase in mobile shipments from the same quarter a year ago, total mobile memory revenue experienced a 7.8% decline from the same period last year.

Inotera Memories Inc. is a listed Taiwan-based joint venture between Micron and Nanya Technology, an affiliate of Formosa Plastics Group, for the manufacture of DRAM products. Inotera, which Micron owns 35.5% of, provides DRAM foundry services on 300 millimeter silicon wafers and currently has two inter-connected 300 millimeter fabrication facilities with a combined capacity of approximately 120 thousand wafer starts per month. The JV agreement was amended in January of last year and included a new supply agreement between Micron and Inotera, under which Micron agreed to purchase all of Inotera’s manufacturing output beginning in early 2013. Under the prior agreements, Nanya and Micron were each generally obligated to purchase half of Inotera’s output.

According to news reports, Micron renewed pricing for the purchase of DRAM chips from Inotera, with the new prices taking effect on January 1, 2014.  Inotera said in its earnings release that Micron will buy all of Inotera’s output, and the discount percentage of Micron’s average selling prices will adjust according to Inotera’s prior quarter’s EBITDA. For the second quarter of 2014, Micron purchased $714 million of DRAM products from Inotera, and its supply from Inotera accounted for 37% of its aggregate DRAM gigabit production. Analysts expect Micron to benefit going forward, as Inotera’s net profit surged 52% to 11.05 billion New Taiwan dollars ($363 million) in the fourth quarter of 2013. Inotera’s management expects the DRAM industry to be “quite stable in terms of supply and demand” this year.

Micron expects DRAM supply to slowdown

Micron said in February that quarter-to-date DRAM ASPs and cost per bit were down by a low-single digit percentage. It expects to see “DRAM industry wafer production down at mid-single digits in 2014 as a result of DRAM to NAND conversions and the ongoing increase in process complexity as the geometry shrinks.” Micron expects total industry bit supply growth in the low to mid 20% range for 2014. It forecasted five-year DRAM demand CAGR in the mid 20% to 30% range, which implies continued favorable market conditions and likely a reduction in volatility compared to historical DRAM trends.

DRAMeXchange estimated last month that DRAM prices are falling due to “sluggish demand.” Weak PC shipments during the traditional off-peak quarter, a delay in Intel’s new Broadwell chip announcement to the fourth quarter, and Microsoft’s (MSFT) Windows 8.1 inability to properly stimulate PC demand have contributed to a conservative attitude from PC OEMs towards the second half of the year, the research firm said. The three main DRAM manufacturers could pursue quarter-based “lock-in” deals with clients in the second quarter of 2014 as PC shipments remain weak. However, as the peak quarters for smartphones arrive, the two major Korean DRAM makers are already taking steps to shift their production towards Mobile DRAM. With PC DRAM not expected to show any significant bit output growth for the second quarter, the TrendForce division believes the oversupply situation in the market will eventually ease.

In 2013, the majority of DRAM production was manufactured using 30 nanometer line-width process technology. In connection with the acquisition of Elpida, Micron expects in 2014 that a significant portion of its DRAM production will be manufactured on 25 nanometer technology. Rival Samsung already has a 25 nanometer DRAM production fabrication facility. It said it’s mass producing its 20 nanometer–class DDR3 solutions, while Micron expects to unveil its 20 nanometer DRAM chips only in the second half of fiscal 2014. The 20 nanometer process technology saves up to 25% of the energy consumed by equivalent modules fabricated using the previous 25 nanometer technology.

DRAMeXchange said in February that Samsung is maintaining its earlier strategy of increasing the ratio of commodity DRAM production while sourcing more mobile DRAM externally. The supplier has begun volume production on the 25 nanometer process, and it has a better cost structure compared to SK Hynix’s 29 nanometer technology and Micron’s 30 nanometer technology. With DRAM ASP expected to fall slightly this year, Samsung’s profit margin is estimated at 20%, which is ahead of its rivals.

Continue to Part 3

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