Semico: DRAM or NAND – iPhone or Vista – The Balancing Act

Phoenix, Arizona September 21, 2007 - After a close analysis of recent industry events and reports, one item above all grabs attention. DRAM manufacturing capacity has clearly exceeded OEM demand. Quarter-to-quarter bit growth has grown at approximately 20% for the past two quarters - mostly on the strength of the 512M. As a point of reference, if DRAM capacity remains exactly flat with no increase in capacity for the remainder of 2007, DRAM bit growth will still achieve highest growth rate in 7 years. The price collapse experienced in the first half of this year clearly indicates that DRAM demand and not DRAM capacity now determines how much will be shipped each quarter.

Does this signal a major overcapacity situation in the second half of 2007? In previous years DRAM manufacturers were faced with the choices of idling the fabs in order to reduce the supply or continuing to increase their output in order to reduce their average cost per device. With the huge sunk costs of a fab and the relatively small variable costs, ramping the volume and suffering through falling prices tended to be the best option. A third but more drastic choice was a “going out of business” strategy.

However the rise of NAND as a high volume commodity memory product has presented another variable to the memory manufacturers. Because of the manufacturing similarities between NAND and DRAM, some memory manufacturers have the option of shifting enough resources between the two products to impact the total production. Some resources shifting has been done in the past, resulting in fine-tuning of the combined output.

What has not been tested is the ability to correct from a strong oversupply condition. Now the question has become how quickly and how much output can be shifted.

“The second half of 2007 clearly establishes that the analysis of DRAM supply and demand can no longer be separated from a coordinated and linked analysis of NAND conditions,” states Bob Merritt, Vice President DRAM at Semico Research Corporation. “The demand and production ramp for NAND in iPhones is now directly linked to the DRAM cost and availability for Vista.”

One new impact from this new market equation has already been seen. Merritt maintains, “DRAM capacity is building in the supply channels in anticipation of tighter DRAM supply in the fourth quarter.”

Another impact is the adjustment in capital expenditures. Although wafer starts in any foundry typically have a practical limit based on the size of the foundry, the rate of progress toward that maximum output is adjusted by the annual capital expenditures necessary to reach that maximum output. These capital expenditures for memory companies now have to consider the growth rate of both DRAM and NAND applications.

This comprehensive report on DRAM identifies the reasons why Semico expects DRAM capacity to shift toward NAND and forecasts the resulting decline in DRAM production.

The report is available for immediate delivery for $3,995. To purchase, please contact Susan Cadel at 607-368-7600 or susanc@semico.com, and reference report VM104-07, DRAM and NAND – The Balancing Act.

About Semico

Technology manufactures, vendors, service providers, technology professionals and market specialists, worldwide, utilize Semico’s experienced staff and in-depth research to support critical business, product and technology decisions. Semico’s vision is derived from both a deep technology understanding and comprehensive research, which examines each segment of the supply chain for each market. Regular and ongoing end-user demand and primary research surveys are the foundation of the analysis, enabling Semico to provide insightful market analysis and guidance on future market opportunities.

Semico is a strategic partner with leading technology companies, with access to an extensive worldwide electronic network, technology databases and expert personnel. Semico was founded in 1994 by a group of semiconductor industry experts and has offices in Phoenix, California, New York, Japan and Taiwan.