Computer buyers are smiling this year, and with good reason. Prices have fallen, especially for the small but vitally important memory chips that sit inside every personal computer. Now, the long downward spiral in memory costs is coming to an end.
In the last couple of weeks, memory prices have even rebounded a bit in certain markets. While that's not particularly good news for computer manufacturers and buyers, it's sorely needed by the semiconductor industry, which has had to cut prices a whopping 80 percent in the past year.
"The worst of the decline is over," says Jonathan Joseph, a semiconductor analyst at Montgomery Securities in San Francisco. "In the short term, prices should be a bit firmer."
The industry is still not out of the woods. Chipmakers built so many new manufacturing plants, called fabs, during the first half of the 1990s that they have too much capacity for a computer market that has slackened from its roaring pace a year ago. Especially hard hit are makers of dynamic random-access memory or DRAM chips, which have become high-tech's most visible and troubled commodity.
Profit margins were already low, and when the popular 16-megabit DRAM chip dropped from $70 wholesale a year ago to $7 this summer, profits disappeared completely. It was one of the sharpest downturns the industry had witnessed in 20 years, analysts say. In recent weeks, wholesale prices have jumped back to $12 to $14, sparking a rally in the stock prices of chipmakers. But few analysts see the rebound continuing, at least in the short term.
"The memory environment is showing some stability," says Rob Chaplinsky, semiconductor analyst at Hambrecht & Quist in San Francisco. "But I'm still cautious, because there's a lot of capacity." Last month, International Data Corp. forecast that the glut in the popular 16-megabit chip wouldn't peak until the second quarter of next year.
Stock rally overblown?
Of course, chip prices are supposed to fall as time goes by. Typically, DRAM prices decline 25 to 30 percent a year as sales volumes increase. If the industry can replace this year's 80 percent plunge with a more typical pricing pattern, the industry could regain its balance quickly, analysts say. Still, the stock rally of recent days is overdone, says Drew Peck, technology analyst at Cowen & Co. in Boston.
"We have a long way to go before we get to the halcyon days of 1995," he says. "And it's not going to happen." Some analysts predict revenues for makers of memory chips will be flat to down for the year.
The slump won't have much of a negative impact on high-tech companies in the United States. Only Micron Technology and Texas Instruments manufacture enough memory chips to be hurt by the downturn in pricing. Micron reported its net income fell 30 percent between its fiscal 1995 and fiscal 1996 year, which ended Aug. 31.
Most American chip companies make higher-value chips, such as the microprocessors that lie at the heart of personal computers. Intel last month announced it expected its third-quarter revenues to be up at least 5 percent over its second quarter.
From Japan to Korea to Taiwan
The DRAM debacle has had more impact overseas, particularly in Asia. A decade ago, Japanese companies supplanted American firms as the world's premier DRAM suppliers. Since then, they have been supplanted by the South Koreans. Last month, Micron asked the US Commerce Department to investigate whether two Korean manufacturers, Hyundai Electronics and LG Semicon, were selling DRAM chips in the US for less than the cost to produce them.
It marks the second time Micron has requested a federal probe of dumping by the two Korean companies. But the Koreans have problems of their own. Now Taiwanese chipmakers are challenging their dominance.
These countries see DRAM manufacturing as their entree to high-tech manufacturing. Unfortunately, it's a false dream because of the chips' commodity nature, Mr. Peck says. "It's one thing to throw money at a fab and make commodity DRAMS. It's quite another to create microprocessors. They [Asian countries] have not yet realized that."
As computers become more powerful, they need more memory. Chipmakers are working to ramp up production of next-generation 64-megabit chips, which should hit the market in volume in the next year or two, analysts say.
Of course, finding a market means convincing computer manufacturers and users they need more than the 16 megabits typically installed in today's machines. Korean chipmaker Samsung last month released a study finding that a high-powered personal computer operates much faster with 64 megabits of memory than 16 megabits.