Electronics Production | May 29, 2007

South Korea in Danger of losing<br>DRAM Domination, iSuppli CEO Warns

South Korean companies, which long have been the dominant force in the global DRAM industry, are in danger of losing their unit production lead to foreign rivals within the next three years, according to Derek Lidow, president and chief executive officer of the market-research firm iSuppli
Speaking here today at the Seoul Digital Forum, Lidow said South Korea's DRAM manufacturers remain the leading players in the global market for now. The major South Korean DRAM makers, Samsung Electronic Co. Ltd. and Hynix Semiconductor Inc., controlled 45 percent of global DRAM revenue in 2006, compared to 17 percent for Taiwanese/Chinese companies. In terms of unit production, the market shares are very different.

Lidow predicted that South Korean companies in 2007 will account for 47 percent of total DRAM unit production, compared to 31 percent for Taiwan/China and 22 percent for other regions.

However, this gap will begin to close in 2008, as Taiwanese/Chinese manufacturers increase their DRAM unit output by 4 percentage points to 35 percent, and the South Koreans' share declines to 46 percent.

“South Korean companies are adding DRAM manufacturing capacity, but this is contributing significantly to the collapse in pricing for the memory this year," Lidow said in an address to event attendees. “These price declines will cause South Korean manufacturers to reduce DRAM output growth next year. Meanwhile, Taiwanese/Chinese suppliers will increase their output, and may surpass the South Korean manufacturers in DRAM manufacturing capacity by 2010."

The attached figure presents iSuppli's estimate and forecast of global DRAM production by region.

This potential shift in the regional balance of power in DRAM reflects a major turn in market conditions, Lidow said.

“The DRAM market has grown because of added manufacturing capacity, but this has required
DRAM suppliers to drastically cut prices in order to sell their output," Lidow said. “Prices now are below cash production costs for many suppliers. Annual DRAM revenue growth peaked in March, and is in the midst of a deceleration that will continue until March 2008."

DRAM makers are already feeling the pain, with the industry as a whole expected to suffering double-digit negative DRAM Operating Profit Margins (OPM) in the second quarter. Profitability is likely to hit bottom at the end of June or in early July.

With prices for DRAM at extremely low levels, PC OEMs have begun accumulating inventory.

Fortunately for the South Korean companies, the market for the other major variety of memory they supply—NAND-type flash—reached its low point in the first quarter and profits now are beginning to recover.

On the positive side for the South Korean manufacturers, the decline of their DRAM domination may translate directly into increasing their lead in NAND.

“The South Korean DRAM suppliers will shift capacity away from DRAM and toward NAND, which
is expected to be more profitable over time," Lidow said.

Korean suppliers are not in danger of losing their brand leadership because much of the Taiwan/China production is private-label and destined to be sold under other brand names, such as Qimonda and Elpida.

“The challenge is faced by Korea as a strategic manufacturing location, because there are many more Taiwanese and Chinese companies that can invest in such capital-intensive industries than there are Korean memory suppliers," Lidow said. “Korea's manufacturing and investment base is highly concentrated and this makes it very challenging for the nation to maintain long-term leadership in capital-intensive areas, in spite of its superior technology and operational excellence."

Global DRAM revenue will rise to $45.7 billion in 2010, up 35 percent from $33.9 billion in 2006. NAND flash revenue will increase to $21.5 billion in 2010, up 74 percent from $12.4 billion in 2006.

Korean suppliers still are dominating the DRAM and NAND markets. However, it will be very challenging for them to keep their lead in both spaces. Beyond Taiwanese/Chinese sales growth, more memory suppliers are forming partnerships to compete against the Korean firms.
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