Some win, some lose, as market drivers move from one to another
TORONTO — Boom or bust. It’s long been the cycle for established memory technologies. As 3D NAND pricing softens, DRAM still appears to be going strong. But for how long? And will these ups and downs always be the norm despite diversified demand and emerging vendors from China?
One key characteristic of the DRAM market is that there are currently only three major suppliers — Micron Technology, SK Hynix and Samsung Electronics.
“They’re keeping a pretty tight rein on their capacity,” said Brian Matas, vice president of market research at IC Insights, said in a telephone interview with EE Times. “And at the same time, there’s also pretty strong demand for higher performance and higher-density parts, particularly from the data center and server applications.”
In a sense, smartphones and tablets are the new PCs, which used to be the main driver of the DRAM industry. Matas said that the new purchase cycle on smartphones is widening. “Even though smartphones are improving and more DRAM is being added, they’re maybe not seeing the extensive or the explosive annual growth rate or increase in unit shipment from smartphones that we saw initially," Matas said.
Big DRAM buyers are companies such as Facebook, Google and Amazon, who are going ahead and buying whatever memory they need to run large, network storage systems and server applications, said Matas, and they’re fine with paying a premium price because of limited DRAM capacity. There’s also an increase in DRAM content in smartphones, he said, as well as a big increase in automotive.
This diversified demand for DRAM is one reason why Micron sees the market as being fundamentally different than in previous years, said Sumit Sadana, executive vice president and chief business officer at Micron, in a telephone interview. Sadana also point to the consolidation of vendors in recent years.
“We believe the industry going forward is going to be a lot more stable than it has ever been in the past, and that is a function of the consolidation,” Sadana said. He added that Micron is being more thoughtful and cautious about capacity expansion and staying in sync with the demand trends and its customers’ requirements.
Sadana echoes Matas when it comes to diverse places for DRAM to go today — no longer is two-thirds of the demand driven by the PC business.
“The market is now dominated by bigger segments like mobile and much faster-growing segments like cloud and autonomous driving applications,” Sadana said, as well as high-bandwidth memory for artificial intelligence (AI) and machine learning. This year is expected to be the most profitable year in history for the industry, and Micron expects a robust industry environment over the next five to 10 years.
Sadana attributes this healthy outlook to the fact that many innovative trends such as AI, machine learning and autonomous driving are still very much in their infancy, with the latter transforming the car into a computer that requires massive amounts of DRAM. Meanwhile, he said that the servers going into data centers to run cloud-computing workloads are two-thirds DRAM and flash, and they are the heart of all processing for AI and machine learning. Other drivers of demand include the internet of things, augmented and virtual reality, and cryptocurrency.
It’s not a bad thing when DRAM prices drop as long as the costs of making it drop are in parallel, said Sadana. It’s only when prices fall much faster than cost and on a sustained basis that there’s cause for concern.
“The reality is that the industry has been growing over the last several decades and the pricing has been continuously coming down over this time,” he said. “So long as price declines keep pace with cost declines that are current with the inevitable march of technology, it can certainly create ongoing healthy conditions for the semiconductor players. Falling prices in and of themselves are not any indication of the health of the market.”
Despite Micron’s optimism about longer-term profitability, investment analysts are already revising their outlooks for the company and the industry at large, with one Goldman Sachs analyst citing “incremental weakness in both DRAM and NAND fundamentals per our discussions with industry contacts and also based on our supply/demand analysis.”
Matas said that IC Insights is seeing a softening of average selling prices in the DRAM market. They will likely start plateauing through the end of the year and then start to decline as some of this capacity begins to come online and ramps up, leading to bigger tumbles in price by 2020.
He does expect that these cycles will continue, although the amplitude of the growth was surprising as were the extreme peaks and valleys in part because there are only three players.
“With the prices rising so much and with the investments becoming so tremendous, it becomes difficult for any of them to outspend the other in such a way that they can gain more market share, and nobody’s going to flood the market with excess capacity,” Matas said.
That raises the specter of new suppliers coming into the market, and it’s no secret that China would like to be a big player in DRAM.
“We don’t see the Chinese influence really having a tremendous impact on the DRAM market,” said Matas. At the very least, not the leading-edge DRAM market, he said, because even if they can get facilities up and running, their technology will be anywhere from three to five years behind what Samsung, Hynix and Micron are producing.
Jim Handy, principal analyst with Objective Analysis, said that as much as China wants to be a major player in the semiconductor market and has deep pockets, Chinese players haven’t been executing well on DRAM because they’re using technologies from partners that lack know-how, and getting access to the right technology means paying royalties.
“China’s ambitions are to be a major semiconductor supplier in 2020, so they’re going to be entering the market during a time when it’s oversupplied, anyway,” Handy said.
Handy sees the boom and pending bust as typical — two years up, two years down — but is predicting the next down cycle to be three years through 2021. “It should recover after that unless China continues to invest heavily all the way through the downturn,” he said.
Overall, he isn’t sure that this boom and subsequent bust is going to be much different than the last major one from 1992 to the end of 1995, which wasn’t driven by changes in demand but by problems bringing in supply as quickly as people were expecting to do. The major market for DRAM had become the PC, which needed 16-bit-wide parts rather than 4- or 1-bit-wide. DRAM makers then struggled for two years to bring those parts to market, he said, leading to a shortage that drove prices up.
It’s important to note that during that boom, there were 28 DRAM makers, not three. That's the largest the market ever got, said Handy.
Ultimately, what drives most memory cycles is supply. “Demand marches along on a very steady path, and supply bounces around,” Handy said. The pendulum ends up moving back and forth between shortages and oversupply when capacity ramps up to address the shortage, he added.
“The price increases started at the end of 2016, and we’re now nearing the end of 2018, and two years of shortage is about normal,” he said. “What’s different about this one is just that the shortages are more extreme, so this caused the prices to go up where typically the prices just go flat.”
Handy said that the spot market — customers that have an inventory of older DRAM they don’t have a use for and are no longer supplied by the big three — can be an indicator of the health of the overall market. When DRAM prices are high, the spot market prices are higher, he said, and when DRAM prices are low, spot market prices are lower.
“The spot market is often an early indicator for these things,” Handy said. For example, NAND flash spot prices have gone down 60% from the beginning of this year. “With DRAM, the spot market is still pretty much just flat as a pancake, and contract prices have not gone down," he said.
Objective Analysis uses capital spending as an indicator, said Handy, which is what typically causes the market to unravel. “If there was too much capital spending in 2017, then that’s going to cause an oversupply two years later in 2019,” Handy said.
Next year is expected to be profitless for DRAM, and the NAND flash oversupply is partly to blame because its excess capacity is being converted to DRAM. “When that happens, the DRAM market becomes oversupplied almost overnight," Handy said. He added that the only alternative to this domino effect is shutting down capacity and going idle.
Handy said that there’s not going to be an end to these cycles by simple virtue of the fact that DRAM is a commodity, and he doesn’t agree that there’s an oligopoly of consolidated vendors that somehow will eliminate the wild swings in DRAM pricing.
“When everybody in the industry starts saying that we’re not going to have a cycle this time, that’s the time to hold onto your wallet because that’s when the cycle is about to take a turn,” Handy said. “It's business as usual.”
— Gary Hilson is a general contributing editor with a focus on memory and flash technologies for EE Times.