In a rousing sign of the market’s continuing health, inventories of dynamic random access memory (DRAM) won’t see an uptick anytime soon in 2014, according to a new DRAM Dynamics brief from IHS Inc.
The index measuring total weeks of DRAM inventory continues to decline after contracting throughout 2013, a process that first began in the fourth quarter of 2012. After slipping 8 percent in the first quarter last year from the earlier three-month period, the index plunged 29 percent in the second quarter and then slipped another 3 percent in the third, the latest date for which full figures are available. All indications point to the index contracting as well in the fourth quarter once final numbers are confirmed.
In all, the most recent index value stood at 7.22 weeks—more than two weeks lower than the long-run average of 9.60 weeks. Not since the second quarter of 2010, when the index stood at 6.65 weeks, has total DRAM inventory weeks hit such a trough, as shown in the figure.
Reduced inventory is a mainly welcome occurrence for the DRAM market. This is because commodity DRAM chips in inventory can become obsolete as process nodes drop continuously, making older DRAM product more difficult to move. With the supply-demand situation constricting each quarter, both PC original equipment manufacturers and third-party DRAM module makers are experiencing the tightest supply and demand levels in recent years—a sea-change from the chronic oversupply situation of the last few years.
The stretched DRAM supply, in turn, is benefiting DRAM makers. DRAM chip prices are rising drastically, yielding impressive revenues for suppliers of the memory product.
The only concern with an overly low inventory index is that DRAM makers might be leaving money behind by not producing enough desired product.
Not a repeat of the bad
Unlike before, the low stockpiles now won’t be followed by a sharp uptick reminiscent of the previous two cycles, IHS believes. The previous troughs were subsequently followed by vast amounts of capital expenditures, resulting in the rapid expansion of DRAM production and causing supply to increase much faster than demand.
Such a turn, however, won’t be the case this time. Fabs are much more costly to build, with advanced tooling needed to produce on smaller process nodes. Also, there are fewer DRAM manufacturers—just three left—after mergers and attritions: Samsung and SK Hynix, both of South Korea; and Idaho-based Micron Technology, which finally absorbed bankrupt Elpida Memory of Japan. Gone is the idea of expanding capacity as fast as one could, which exemplified the DRAM market of a few years ago. And capital expenditures are now smoothed out, preventing sharp jolts in the market when DRAM production jumps.
Another important reason, too, why a rapid DRAM uptick is not in the picture is the rising importance of mobile DRAM, which is produced to order. Made-to-order DRAM reduces the chance of large inventory buildups and subsequent write-downs—a change in the model of production formerly focused on commodity DRAM, which can be produced speculatively. With mobile products like smartphones and tablets that make use of mobile DRAM gaining ascendance over PCs utilizing commodity DRAM, a slowdown in commodity DRAM reduces the chance of the memory’s oversupply in the industry.
The changes mean that the DRAM index will now fluctuate within a tighter band than ever before, and the decreased reliance of the industry on commodity DRAM will further contribute to this effect.
Rational decisions being made among fewer suppliers will also result in smaller DRAM inventories—as well as higher profit margins and revenues.