April 1, 2006

View from Silicon Valley- NAND price crash?

(c) copyright View from Silicon Valley, 2006.  All rights reserved.

The folks at DRAMeXchange continue to publish weekly reports focused on real-world market prices for memory ICs.  The focus on DRAMs and Flash can keep you abreast of developments in component pricing.  DRAM and, lately, NAND flash prices are the canaries in the coalmine of the semiconductor industry.

This week's report includes a couple comments which received NO coverage in the mainstream press.  DRAMeXchange's English is not perfect but we choose not to correct it.  Don't let their imperfect grammar fool you into thinking these folks don't know what they're talking about!

Here a few "highlights" from this week's DRAMeXchange report:

"According to DRAMeXchange, Cyclical downturn on PC demand prolonged the trough of DRAM spot pricings."
--Anybody else miss the news about a downturn in PC demand?

"Prices of DDR2 remained weak last week with non-major-brand (NMB)512Mb 64Mbx8 533Mhz DDR2 leading the price drops at 6.18% to US$3.64.  The same specification branded DDR2 chips also dropped by 1.8% to US$4.84."
--Maybe we missed memo but aren't DRAMs supposed to immune to price drops due to a bunch of the volume being converted to bullet-proof, endless-demand NAND flash?

"Technology advancement aggravates 2Gb and 4Gb NAND Flash prices slumped by over 63%

"Spot prices of NAND Flash edged down further in the last week of March amid the quarterly financial pressures. The over 50% average price slump of NAND through year to date has spurred bundling demand from consumer electronics (memory cards, USB Flash drive, MP3P, etc.) and gift market.

"DRAMeXchange indicates that 2Gb and 4Gb are the two density of chips that encountered the bleakest price falls and the prices of these two chips had nose dived by an average of 63% while other densities chips had also plummet by a minimum of 43%. The deteriorating price dips are now come along with the overage of these two parts."


--Did anybody see mention of this anywhere??? At 50%(!!!) NAND price drop in 90 days but nobody is distracted from touting the certainty of a strong 2006 semi market???  Perhaps there was some truth to the rumors a few weeks ago about declining iPOD demand?

"On top of the considerable overage of the mentioned parts, DRAMeXchange also observes the production transition for these two densities' chips production on 90nm, 70nm and 60nm processes. DRAMeXchange notices that some new comers start producing 4Gb on MLC architecture. With the multiple choices on available 2Gb and 4Gb parts, required time for customer qualifications takes longer. Under this concern, some producers only subscribe some of their products for validation, which in turns limit these goods' applications and drag prices drop further."
--It used to be when new versions of parts were hard to qualify, the current vendors knew they could hold up prices.  With the current glut of parts, any such restraint will result in lost market share.  Market share is more important than prices in weak markets.  In a strong market, you get both.

"For the week Mar21-27, price falls of 1Gb, 8Gb and 16Gb showed minimizing dropping signs at a drop range of 3-5% only on normalizing market equilibrium."
--"Equilibrium" is now "only" a 3 -5% drop per week?

"Moving ahead to 2Q, DRAMeXchange is still doubtful about any price rebound under the current technology advancement trend. Unless any killer application appears and digest the rapid growing NAND capacity, prices should still place under shadows."

"PC market watch: Shrinking margins prompts Dell to seek for "kickback" from OEMs
Kevin Rollins, CEO of Dell, admitted that the company's revenues setback in 2Q and 3Q of 2005 was a reflection of the failure of pricing strategies, rather than the direct-sales mode that the company has long established. DRAMeXchange believes that the PC giant did make its fatal mistake in attempt to swing its first revenues setback. When Dell discovered that the sales of low-priced PCs trended revenues opposite to what it estimated in 2Q, it shifted its focus on high-end models in the following quarter. However, the positive impact on this shift was minimal due to the relative limited market size of high-end PCs market, for this reason, it unable to prevent the problem that revenues setback continuously."
--In short, if you want growth, you must sell more PCs in China.  To sell in China, you must compete on price which, of course, is not healthy for margins.  Don't expect PC profit margins to improve any time soon.

"(T)he 60-70% sales growth of Acer PCs at China has shaken the confidence to Dell's direct sales mode."
--China PC buyers want to see and touch a product before ordering it.  In a market where few trust, or own, credit cards, mail order is a tough business.

"Dell pulled its revenues back on positive track in 4Q05, it still trimmed down its 1Q06 revenues forecast to 6-9%."
--Single-digit sales growth at Dell but still selling at 21x P/E.  Hmmm...

Dell requests "discount" to preserve margins

"In order to cope with the negative impacts from slowing-down revenues growth, Dell is reportedly requesting its OEM partners to pay 3% of their revenues in order to win the contract orders for 2007."
--If Dell's suppliers think the market was strong, will they renegotiate?  If the PC market is crashing, or growing only at the low end, they may have no choice. This will be very "interesting" (for us) to watch.

Conclusion:  The news from DRAMeXchange is consistent with our previous missive on declining dollars per square inch of wafer area over the last few quarters.  Price weakness is apparent in the memory market, including the formerly bullet-proof, endless-demand NAND memory.