Bloomberg News

Chipmakers Lose Billions as IPad Challenges Computers: Tech

December 06, 2011

Nov. 29 (Bloomberg) -- Apple Inc.’s iPad is the bane of computer-memory makers, worsening the industry’s losses as consumers choose the hand-held device that uses about 75 percent fewer of the chips than a typical laptop.

Elpida Memory Inc., Hynix Semiconductor Inc. and other makers of dynamic random-access memory, the most common chip in computers, lost a combined $14 billion in the past three years, according to Bloomberg calculations. That comes after the $37 billion that researcher DRAMeXchange estimates they spent building factories in a bet on continued growth in the industry.

DRAM prices plunged to a record low this month after PC shipments missed analyst forecasts and iPad sales reached a record 11.1 million. As the faltering global economy and Thailand floods curb PC production, some DRAM manufacturers may not have enough money to mimic Samsung Electronics Co.’s profitable diversification into specialty chips for smartphones, tablet devices and servers.

“DRAM makers invested too much, and they bet heavily that growth of the computer industry would always continue,” said Chen Liway, an industry analyst at Polaris Securities Co. in Taipei. “That would have been OK if the iPad had never come along.”

Apple, Microsoft

PC shipments were hit last quarter by the popularity of tablets like the iPad, researchers Gartner Inc. and IDC said last month. PC shipments climbed 3.2 percent to 92 million units, compared with an earlier projection for 5.1 percent growth, Stamford, Connecticut-based Gartner said. IPad sales in the same period exceeded computer shipments by Dell Inc., the world’s No. 3 seller.

Apple has sold about 40 million iPads since the product’s debut last year, generating $25.3 billion in revenue. Apple may sell a record 20 million iPads globally during the holiday quarter, according to Forrester Research Inc. in Cambridge, Massachusetts.

Elpida and other DRAM makers bet that new versions of Microsoft Corp.’s Windows and a stable global economy would drive demand for their chips. Instead, Windows sales fell 8 percent in the three months ending Dec. 31, 2008, missing Microsoft’s forecast for 10 percent growth; the global financial crisis hit the following year; and Apple released the iPad in April 2010.

Lowest Prices

Manufacturers lost money on the DRAM business in three of the past four years, according to Bloomberg data. DRAM prices fell 32 percent in the third quarter, the most in almost three years, according to Bloomberg Industries data.

“Prices will keep falling,” said Alvin Lim, an associate director at Fitch Ratings in Seoul. “I don’t think there will ever be a meaningful recovery.”

DRAM is the most common chip used in computers and speeds up processing by temporarily storing data. Slowing growth in the PC industry, which buys 65 percent of all DRAM output according to Bloomberg Industries, and less memory requirements for newer versions of Windows will prompt a record slowdown in demand, Englewood, Colorado-based IHS Inc.’s iSuppli said in August.

Growth in DRAM per PC will drop to 35 percent after next year following 48 percent average growth for the past 25 years, iSuppli said.

Prices of benchmark DDR3 2-gigabit DRAM chips fell 61 percent this year to a record-low 71 cents on Nov. 21, according to Taipei-based TrendForce Corp.’s DRAMeXchange, the researcher and largest spot market for the chips.

‘Rice Ball’

Elpida, Japan’s largest memory-chip maker, will lose money this year and next, according to the average of 18 analysts’ estimates compiled by Bloomberg. Manufacturers like Elpida, which spent $3.8 billion on factories in the past four years, must keep churning out chips to generate enough cash to cover debt payments, pushing prices down even further.

“Elpida is using the state-of-the-art production technology, yet the finished products are sold for half the price of a rice ball,” Yukio Sakamoto, chief executive officer of the Tokyo-based company, told investors last month.

Elpida’s shares lost 2 percent to 386 yen as of 12:47 p.m. in Tokyo today, taking losses for the year to 59 percent. The benchmark Nikkei 225 added 1.1 percent, stemming losses to 18 percent for the year.

PC unit sales may decline 8 percent next year because of the recent floods in Thailand, where at least 40 percent of the world’s computer disk drives are made, Kevin Chang, a technology analyst with Fitch Ratings Ltd. in Taipei, said in a Nov. 23 statement. The original projection was for 5 percent growth.

“Lower DRAM orders will have a negative impact on memory- chip prices,” Chang said.

Flash Demand

Suwon, South Korea-based Samsung, the world’s biggest semiconductor maker, will post 2.3 trillion won ($1.98 billion) profit from DRAM this year, according to Shinhan Investment Corp. in Seoul. That’s because Samsung sells twice as many specialty DRAM chips, where margins are higher, as commoditized chips used in PCs, Shinhan said in an Oct. 25 report.

The company also supplies up to 64 gigabytes of NAND flash memory for every iPad, compared with about half a gigabyte of DRAM. Demand for NAND flash -- which saves photos, videos and software permanently -- will climb 49 percent in the five years to 2015 while the DRAM market will be little changed, according to iSuppli.

“The specialty chip market may look like sacred ground to smaller companies because Samsung is so dominant,” said Park Hyun, a Seoul-based analyst at Tong Yang Securities Inc. “Over time, they will increasingly try to switch to specialty products.”

Jason Kim, a Seoul-based spokesman for Samsung, declined to comment when contacted by phone on the company’s plans for its chip business.

Hynix, Winbond

Icheon, South Korea-based Hynix, the second-largest DRAM supplier, and Boise, Idaho-based Micron Technology Inc., the fourth-largest, also are increasing supply of NAND flash, helping both companies return to profitability last year after losses the two previous years.

“We’re quite positive about flash,” Fitch’s Lim said. “If smaller companies had both DRAM and flash, they could have offset the weakness in one market.”

Winbond Electronics Corp., a Taiwanese memory maker that posted losses in seven of 10 years through 2009, exited the computer DRAM business last year in favor of specialty DRAM for TVs and mobile phones. That helped the company post its largest annual profit since 2000.

Elpida is following a similar path, spending the last two years developing versions of DRAM used in smartphones that it expects to ship to clients next quarter, Sakamoto told investors last month.

“Some are making profits moving into specialty DRAM,” Chen said. “For others, it may be too late as they don’t have the money or the technology to make the switch.”

--Editors: Anand Krishnamoorthy, Michael Tighe

To contact the reporters on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net; Jun Yang in Seoul at jyang180@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net.


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