Good news for DRAM makers translates into bad news for PC buyers

Elpida lifts spending plans for next year to $1B on forecasts of higher DRAM prices, which could increase the cost of PCs or dent their performance

The global DRAM industry will see higher prices per chip next year than in the past three because the global recession has forced many chip makers to reduce spending on new factories, the head of Japan's Elpida Memory said Tuesday.

DRAM makers have for the most part been producing chips at a loss since the second half of 2007, after over-investment in new factories caused a chip glut and brought prices down. The price of mainstream DRAM chips hit bottom late last year at around $0.50, far below the cost to make each chip. Weak pricing caused German DRAM maker Qimonda to file for bankruptcy early this year, and forced others to mothball factories and lay off workers.

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Since then, the global recession has eased and demand for the main product DRAM is used in, PCs, has rebounded strongly. Mainstream DRAM prices now hover around $2.50 per chip, far better than before. The price remains near the cost of production, though, causing chip makers short on cash to remain cautious about new factory spending.

Fewer new factories means the supply of DRAM may not be sufficient to meet demand, said Yukio Sakamoto, CEO of Elpida, at a news conference in Taipei. That would push prices up and make DRAM manufacturing more profitable: "Next year the DRAM industry is going to be so much better," said Sakamoto.

But good news for DRAM makers translates into bad news for PC buyers.

Low DRAM prices have been a boon to PC buyers over the past few years, and sharply rising memory prices could increase the cost of PCs, or dent their performance. PC makers generally keep product prices as low as possible with low-priced components. When DRAM prices are low, they can add more chips or technically better chips without raising the price of the PC. But when DRAM prices rise, PC vendors generally reduce the amount of DRAM inside to compensate for the price increase. If DRAM prices rise too quickly, PC vendors will have to find other ways to cut system costs, or pass the price increase along to consumers.

DRAM prices could rise further soon. Contract DRAM prices for the first half of December were flat for almost all densities and common types of DRAM, including DDR2 and DDR3 (double data rate, third generation), according to DRAMeXchange Technology, an online clearinghouse for the chips. The company had anticipated up to a 10 percent drop for the period because of a sharp run up in prices during November and because PC production usually weakens in December as most shops are already stocked up ahead of holidays.

This year the weak season may come late because PC shipments remain strong, DRAMeXchange said in an e-mailed statement Tuesday. PC shipments in December may match November, the company said, resulting in strong support for DRAM prices. Prices may weaken in January this year, instead of December.

Elpida plans to catch the stronger DRAM market next year by investing more in new production lines. The company will spend a total of $1 billion on new production lines, Sakamoto said. Around $600 million will be spent on Elpida's factories in Japan, and another $400 million will be spent on new machinery at its Taiwanese subsidiary, Rexchip Electronics. Elpida had previously announced $600 million in capital spending.

The company will also transfer chip production technology as fine as 40 nanometers and even 35 nm to its new Taiwanese partner, ProMOS Technologies, so the company can produce DDR3 on behalf of Elpida. Chip technologies are usually described by the size in nanometers, or billionths of a meter, of the smallest feature that can be manufactured on a single chip. Reducing the size of the features in DRAM typically increases chip speed and reduces power consumption, as well as lowering production costs as more chips can be made from each silicon wafer.

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