DRAM prices may remain firm over next few years

Over the next few years, users may have to pay more attention to the price of DRAM chips than they have in a long time, since a transformation to new factory technology could cause shortages.

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Normally, users enjoy falling DRAM (dynamic RAM) prices for better storage capacity, the kind of price performance and technology improvement they've come to expect in most IT products. But the DRAM industry is transitioning to a new kind of semiconductor plant, and DRAM prices will be impacted as companies phase out outmoded factories over the next two years. The result will likely be higher prices than usual for end users, analysts say.

The new factories, dubbed 12-inch plants (300 millimeter) due to the size of the silicon wafers used on production lines, are already outpacing older, 8-inch (200mm) chip factories in terms of the ability to cut costs: The 12-inch plants produce chips for about a third less than their older counterparts.

Silicon wafers are the raw materials from which chips are made, and thousands of DRAM chips can be made from one wafer.

As time goes on, the 8-inch plants will also run into a wall for the size they can efficiently etch transistors on chips. Some analysts say that limit is already approaching, around the 90-nanometer size, while others say the plants could be tweaked to produce DRAM using 80-nanometer production technology.

But there is general agreement that there is a limit, not because engineers are befuddled by the technology, but because it costs so much to retrofit an 8-inch plant for intricate chip production.

"It doesn't make sense for companies to spend the money to upgrade their 8-inch plants. They'll put that investment towards new 12-inch plants," said Crystal Lee, memory industry analyst for ABN AMRO Asia in Taipei.

Currently, a number of 12-inch chip factories are under construction in Taiwan and other parts of the world. But memory chip analysts overall reckon there aren't enough to make up for the production currently done by 8-inch plants today.

"Approximately one-third of the global DRAM capacity is becoming obsolete because it cannot be converted to 90-nanometer and smaller processes. This suggests long-term capacity constraints, in our view," said Simon Woo, DRAM industry analyst for Merrill Lynch (Asia Pacific) in Seoul, in a recent report.

Taiwanese DRAM maker Nanya Technology, which operates two 8-inch factories in Taiwan, believes it will be able to produce advanced DRAM chips competitively in those plants until the middle of next year. After that, they'll look to produce different kinds of memory chips in those factories, according to Pai Pei-lin, a vice president at the company.

It's hard to predict exactly how DRAM prices will be affected the factory transition. Some analysts believe the market will see firmer prices than normal over the next two years, while others predict bottlenecks and intermittent price spikes as older factories are phased out and new ones come online.

To be sure, not everyone agrees the DRAM industry will be hurt at all by the chip factory transition. Nam Hyung Kim at market researcher iSuppli, believes there are enough new 12-inch plants under construction now to meet coming demand as older plants are phased out of high-end DRAM production.

He noted that many 8-inch plants have already been transformed from DRAM production to make NAND flash memory chips, the data storage of choice for digital cameras, iPod music players and other consumer electronics products. The 8-inch plants still being used for high-end DRAM globally should see their lifelines extend through 2008, he said, when around 83 percent of global DRAM will come from 12-inch factories. That should mean a stable transition, he said by e-mail.

Still, the widespread gloom and doom predictions for tight supplies could cause DRAM prices to rise on speculation, much like global oil prices these days, even if there is no real interruption in the supply. The DRAM market has long acted like other commodity markets worldwide, reacting to rumor and fear faster than to reality.

And if there is a real shortage, as many industry players and analysts predict, then users may end up paying more dearly for DRAM over the next few years than they have in a long time.