Memory costs dive as DRAM vendors slash production

DRAM makers have cut production in the hope that reducing supply might spur a price recovery, but the action is too little, too late, analysts say.

Elpida Memory of Japan and Powerchip Semiconductor of Taiwan both trimmed DRAM production last week as market prices plunged to new all-time lows. But while the actions slowed the pace of DRAM price declines, they didn't stop the fall.

DRAM makers have been in trouble all year due to a chip glut. They built too many new factories last year on hopes that DRAM demand would continue to rise with strong sales of new PCs and Microsoft's Windows Vista OS. But DRAM demand hasn't kept pace with output.

The oversupply has been a bane to suppliers, many of which are losing money on the chips they sell, but a bonus for users.

DRAM is often a bottleneck for speed in computers because most vendors only add the minimum required for each system. But when DRAM prices drop, PC vendors often add a lot more DRAM. A quick look at Dell Deals, for example, shows PCs with 1GB to 3GB of mainstream DDR2 (double data rate, second generation) DRAM. For users that like to open multiple windows and use memory-intensive programs, the more DRAM the better.

The production cuts by Powerchip and Elpida won't have much impact on DRAM prices because it takes months for a supply cut to take effect and because the actions represent only 2.3 percent of global DRAM production, says Andrew Norwood, DRAM analyst at market researcher Gartner.

Reducing DRAM production today won't affect output until November, he wrote in Gartner's Semiconductor Monday DQ Report.

"By then, the peak buying season for the holiday [PC] build will be winding down," he said.

Given current high inventory levels, the industry probably won't see any shortages for the rest of this year, he added.

Powerchip said it will reduce DRAM production by 10 percent to 15 percent, while Elpida said it will cut production by 10 percent at one of its main factories in Hiroshima, Japan.

Elpida plans to convert some production lines to make chips used in LCD displays instead of DRAM, said Kumi Higuchi, vice president of corporate communications at the company.

The main problem for the two companies is that their rivals do not plan to follow their cuts.

Samsung Electronics, the world's largest maker of DRAM chips, has no plans to reduce DRAM production this year, said Eunhee Lee, a spokeswoman at the company.

In fact, Samsung is taking advantage of the downturn to put more pressure on rivals by increasing its planned spending on new factories this year. Samsung estimates it will spend 7 trillion Korean won ($6.32 billion) on new memory chip lines this year, compared to 6.91 trillion won last year.

Hynix Semiconductor, the second largest DRAM maker by revenue, also has no plans to cut DRAM production, said Seongae Park, a spokeswoman at the company. Other major DRAM makers, including Qimonda of Germany and Micron Technology of the US, also have no plans to trim DRAM production, representatives of the companies said.

The best hope DRAM makers have in the short run is for one company to go out of business or be taken over by a rival. Longer term, DRAM market prices will likely remain low for at least the next four or five months, analysts say.

DRAM makers won't see better prices until next year, when the amount of new DRAM supply coming on the market slows down, said John Lei, chip industry analyst at iSuppli. Overall, DRAM makers have reduced spending on new factories this year by about 50 percent compared to last year.

The capital spending cuts will boost DRAM market prices next year and in 2010, Lei said.