Rising DRAM (dynamic RAM) prices could mean bad news for users who hope to find cheap computers packed with lots of memory.
A three-month rally in memory prices is causing discomfort among PC makers and may lead to cuts in the amount of DRAM that is shipped with some low-end PCs if prices continue their push upwards, industry observers said. If memory prices rise too much, PC makers would be faced with a choice of either reducing the amount of memory in some systems or raising PC prices. If memory cuts are made, users will have to pay extra to increase the amount of DRAM inside their PCs.
On Tuesday, spot pricing in Asian markets for a 256M-byte module containing 266MHz DDR (double data rate) DRAM was around US$39.50, according to market analyst ICIS-LOR, which tracks memory pricing. By comparison, the same modules were selling on the spot market or around US$28.25 on Jan. 1 and for around US$25.00 on April 1, 2003, it said.
Spot prices for other memory types, such as SDRAM (synchronous DRAM) and 333MHz DDR, have also shown significant gains during the same period. Contract prices, which represent the bulk of memory transactions, have also been rising but the change has not been as steep as in the spot market.
At Samsung Electronics Co. Ltd., the world's largest DRAM producer, customers are "not comfortable" with the increase in memory prices, said Kim Il Ung, vice president of the company's semiconductor business, speaking Friday in a conference call with analysts.
The rise in DRAM prices threatens to slow down the current trend of increasing the amount of memory that OEMs (original equipment manufacturers) ship with each PC, Kim said.
Samsung's 10 largest customers shipped an average of 440M bytes of DRAM with each PC during the first quarter of 2004, an increase of 15 percent over the previous quarter, Kim said.
Kim estimated that PC makers could reduce the average amount of memory per PC if prices for a 256M-byte DDR module rise above US$42 but conceded Samsung is not certain exactly where the breaking point lies for PC makers.
"We are trying to make a survey of what will be the breaking point of megabyte per system in terms of pricing," he said.
Looking ahead to the second quarter, Kim expects memory demand to remain strong due to healthy corporate demand for PCs and demand for DDR2 memory. But supply will remain tight due to low production yields of DDR2 chips and problems encountered by manufacturers migrating their memory production to more advanced production processes, he said.
The surge in spot prices for DRAM chips and modules has caused panic among PC makers, according to an analyst at iSuppli Corp.
"Shocked and confused OEMs and spot market buyers have gone into panic mode due to the price hikes," Nam Hyung Kim, a principal analyst at iSuppli, wrote in a research note last week.
"If the price increases are too sharp, they could serve to depress DRAM sales in the second half of the year. PC OEMs may cut the average DRAM content in their systems to accommodate the higher cost," he wrote.
Intel Corp. is also watching the rise in memory prices.
"There's a lot of rumblings right now that memory prices in general are going up and we're still frankly trying to run ourselves through it," said Louis Burns, vice president and general manager of Intel's Desktop Platforms Group, speaking in Taipei last week.
"I don't see it as a big issue (but) we're paying very close attention," Burns said.
Citing the cyclical nature of the memory industry, Andrew Norwood, a principal analyst at Gartner Inc., downplayed the significance of rising memory prices, noting that DRAM makers have labored through an extended downturn and are now in the midst of a recovery, reflected by higher memory prices.
Moreover, this isn't the first time that OEMs have been faced with the possibility of reducing DRAM content to avoid raising PC prices, Norwood said.
The business model of PC makers is based on declining component costs, which allows OEMs to offer PCs with greater performance at the same or lower price, he said. However, the DRAM market sometimes bucks this trend with higher prices, as is happening now, he said, noting that PC makers have benefitted from low memory prices in recent years.
"Every PC sold over the last two years has had about US$30 of free DRAM in it," Norwood said, explaining that many memory makers have been forced to sell memory chips at cost or at a loss in recent years. "The PC OEMs have really had it good over the last two years and it's time they stopped getting a free ride."
With OEMs keeping an eye on rising memory prices, there are signs that the upward pressure on memory pricing may have already abated somewhat.
"End users appeared to have picked up sufficient parts over the past weeks to tide them over (for their) immediate requirements and were said to be keeping to the sidelines for the moment," ICIS-LOR said, commenting on developments in the memory market last week. On Tuesday, activity on the Asian spot market showed signs of picking up again as prices remained steady and DRAM sellers indicated they were unlikely to fall due to tight regional supply of memory, it said.
With some prices having stabilized or fallen off highs posted in recent weeks, the big question is what happens next.
"In terms of future pricing trends, the major question now is whether spot buyers and system manufacturers are going to buy more DRAM at the present high prices -- or wait for a downward adjustment," iSuppli's Kim said, adding that present spot market prices are "overheated" and should start to drop next month.
However, any respite from higher memory prices may be brief. ISuppli expects to see a DRAM shortage during the second half of the year, as demand for memory outpaces increases in production capacity.
Market analyst IDC also expects to see a shortfall in supply of memory later this year. In a February report, it predicted a supply shortage of 4 percent to 5 percent during the fourth quarter as vendors shift production capacity to non-DRAM memory types to diversify their sources of revenue and boost profits. However, at the same time IDC said it doesn't expect to see PC makers reduce the average amount of DRAM shipped with each computer.
The average amount of memory shipped with each desktop computer will rise from 438M bytes during the first quarter -- a figure that is close to Samsung's estimate of 440M bytes -- to 472M bytes in the second quarter, IDC said. The second half of the year will also see increases in the average amount of memory to 500M bytes and 528M bytes during the third and fourth quarters, respectively, it said.
However, these increases in average memory per PC could be slowed down if memory prices remain high, said Soo-Kyoung Kim, program director for semiconductor research at IDC and author of the February report.
Looking ahead, IDC's Kim expects memory prices to fall off somewhat during May before rising again in August and September. The current price increases are the result of supply-related problems, rather than demand, and memory makers are expected over the coming weeks to heed the calls of OEMs to adjust their production to meet demand, he said.
OEMs can hold out in the face of higher memory prices for several more months before adjustments will be needed to PC memory configurations, IDC's Kim said. If prices remain high through the third quarter, OEMs will be forced to make some changes, particularly at the low end of their product lines, he said.
"If the current pricing stays so high, PC OEMs may adjust the memory configuration of their value PC lines," he said.
Even so, Gartner's Norwood doesn't expect OEMs to significantly cut the amount of DRAM that is shipped with low-end PCs and noted the amount of DRAM will rise again before too long.
(Martyn Williams, in Tokyo, contributed to this report.)