May 12, 2003

DRAM Pricing: The Fix Is In

- by Melanie Hollands -
Price manipulation by manufacturers of PC memory components such as double data rate (DDR) DRAM is deliberate, periodic, predictable, and has been happening for decades. Conveniently, DRAM price increases tend to be observed during critical
periods, such as just before earnings reports or after periods of substantially subdued demand. It has also been suggested that some memory suppliers periodically withhold supply of DRAM and other memory components. This creates an artificial supply shortage, which in turn generates a level of artificial demand that drives up prices.

Irrespective of the cause of the price increase, DRAM prices are a key driver of PC-related and semiconductor stocks. As memory prices rise, so do semiconductor stock prices.

The November, 2002 "rally" in semiconductor stocks was regarded by some to be the result of price fixing tactics. DRAM price increases propelled the PC-related, semiconductor and semiconductor capital equipment issues. DDR was at its highest level in over three months, which explains why Micron Technology stock rose nearly 40% to $17.30, up from October lows of around $12. And Infineon traded up over the $10 mark, doubling from its October lows.

While I believe that the demand for chips in the second half of
2002 was real -- it was part of the inventory build – it is the
sell-through that remained a question mark. The build was likely
stimulating demand at a time when most had written off a lift in real
end-demand. The seasonal build in DRAM typically begins in the second
calendar quarter and typically peaks mid-November. The 2002 price
ramp didn’t last beyond that, and if history continues to be a
guide I doubt that this year’s higher DRAM price trend will
last beyond mid-November, but I am not making any guarantees.
However, I do believe that it is largely these "supply
shortages" that have supported these ramps in DRAM pricing and,
in turn, semiconductor and related stock prices.

Heavily Concentrated Market
DRAM supply is heavily concentrated in the hands of five major
suppliers who, collectively, control nearly 82% of the worldwide
market. In 2002, the top five suppliers were:

  1. Samsung Semiconductor, a
    division of Korea’s Samsung, the world's
    largest supplier of DDR, SDRAM (synchronous DRAM), and flash memory,
    and with >32% DRAM share,

  2. Micron Technologies’
    subsidiary Crucial Technology (>18% share),

  3. Infineon Technology, subsidiary
    of Germany’s Infineon Technology AG (12.8%)

  4. Hynix Semiconductor, from Korea
    (12.8%), and

  5. Nanya Technology Corp., of
    Taiwan (5.5%).

Other DRAM suppliers include Toshiba, Mitsubishi, Elpida Memory
Inc. (a 50:50 Japanese JV between NEC and Hitachi), and Taiwanese
manufacturer Winbond Electronics. More comprehensive DRAM market
share details are provided in Tables 1 and 2, below.

In recent years, the computer memory industry has undergone
significant consolidation, and continues to consolidate further.
Currently, half of total worldwide DRAM supply is controlled by two
companies: Samsung and Micron. Memory kingpin Samsung alone controls
one third of total DRAM supply. In November 2002, Infineon and Nanya
formed a joint venture to help each partner expand its position in
the DRAM market while sharing development costs. And in March this
year, Elpida and Powerchip Semiconductor Corp. signed a sales and
purchasing contracts agreement for their own DRAM strategic alliance.

Table 1:
Worldwide DRAM Market Share Ranking












































































Mosel Vit.



















iSuppli, February 28, 2003

Table 2:
Top Five DRAM Suppliers' Ranking Q1 2003

2003 Sales







Market Share

Share Change


























revenue includes DRAM licensing fees

Source: iSuppli
Corp. May 2003

Some industry observers believe the major memory suppliers
deliberately and routinely conspire to fix prices in order to 1)
influence earnings results or 2) potentially squeeze out some of the
weaker players from Asia. From time to time, these large suppliers
withhold supply of DRAM and other memory components, thereby driving
up prices and creating artificial demand that in turn helps earnings
results. Regarding the latter “conspiracy”, the three
main culprits appear to be Samsung and Hynix, both of Korea; and
Taiwan’s Nanya.

Other observers argue
that such structured, formal conspiring seems unlikely and that the
price trends are seasonal only. So perhaps it is merely coincidence
that Samsung’s, Infineon’s and, to some extent, Micron’s
2002 results benefited from firming DRAM prices in the second half of
the year – particularly considering the otherwise flat PC

The Legal Issue
Last year, the Antitrust Division of the United States Department
of Justice (DoJ) in California launched an investigation into alleged
“anticompetitive practices” such as price fixing in the
computer memory markets, possible collusion in DRAM pricing, and
manipulation of manufacturing capacity. Subpoenas were served on
Samsung, Micron, Infineon, Hynix, and a handful of other smaller
suppliers. At the time, Micron was preparing to pay around $3.4
billion to acquire Hynix, but the deal fell through –
coincident with the DoJ investigation.

Speculation at the time was that the DoJ was looking into
collusion on memory chip pricing, although industry participants and
observers seem divided on whether the big chipmakers have ever
engaged in such practices. However, at an industry conference in
April 2002, Dell Computer's Chairman and CEO, Michael Dell, commented
that memory suppliers must be benefiting from the recent rise in
memory component prices. These companies supply DRAM to PC-makers
like Dell for use as the main memory in desktop and notebook
computers. "There was some cartel-like behavior by a number of
DRAM suppliers," Dell said at the conference. "There was an
assumption by some of the companies that they could have both an
incredible increase in the price of DRAM and [increased] demand at
the same time. The world just doesn't work that way."

I understand the exact nature of the DoJ investigation has not
been disclosed. Many have speculated that volatile price patterns in
the memory market, coupled with the “coincidental” unison
with which DRAM prices (from all the large suppliers) react, suggests
that suppliers may have acted to adjust prices accordingly. These
patterns may have raised the issue of possible collusion. However,
the DoJ did confirm that its antitrust division
was conducting an industry-wide investigation. The
investigation reportedly revolved around an alleged effort among DRAM
suppliers to influence, or “fix”, prices. Related legal
actions alleged that price increases by the major suppliers of memory
components such as DRAM, DDR and SDRAM had violated California
antitrust laws and forced buyers of DRAM to overpay for the chips
purchased during certain times when DRAM prices were inflated.

Price Fixing: A Conspiracy or Long-Standing Competitive

It is hard to imagine such fierce competitors as Micron, Samsung,
Hynix, and Infineon acting together. Some believe that these
companies have been illegally cooperating in order to salvage profits
in what has become a cutthroat business with razor-thin margins.

However, it is often the case that competitive dynamics, such as
price fixing behavior, particularly in a heavily concentrated
industry, do not need to be part of a formalized process. These
suppliers have all been observing each other’s moves for
decades. As a result, they all have extensive competitive
intelligence “institutionalized” within their respective
organizations and management ranks. Competitor information can be
readily gathered since they have all shared, and continue to share,
customer, supplier, and vendor relationships. Speaking the language
of “the nod, the wink, and the whisper” these players
recognize all the signals and know how to signal each other.
Consequently, these suppliers can readily “read” each
other’s market signals, infer conclusions about each other’s
predictable behavior, and react accordingly.

Some industry analysts believe there is no hard evidence that DRAM
suppliers have ever fixed component prices. There appears to be no
direct evidence from the suppliers, or the PC manufacturers, and
collusion appears less likely during periods when memory prices were
particularly low. That being said, after a bad year in 2001, the
memory suppliers enjoyed a solid recovery in the first quarter of
2002. The average selling price for a 128-megabit SDRAM jumped over
120% from around $1.70 in the fourth quarter of 2001, to around $3.75
in the first quarter of 2002. After a seasonal easing of DRAM pricing
back to $2.50 last summer, bad for memory suppliers, in the Fall DDR
was back trading at a nice premium, and advantageous for the memory
producers as they ramped capacity. 

Impact of DRAM Prices
In December 2001, contract prices for DRAM were less than $1. A
slump in demand for the standard 128-megabit DRAM chips had sent chip
prices plummeting and this, in turn, negatively affected memory chip
economics and results at the major chip suppliers. However, by the
end of May 2002, DRAM prices were moving back up into the $4 - $4.50
range, and industry chatter in Asia at the time suggested price
fixing maneuvers among the major DRAM suppliers.

Possibly it was the dramatic decline in DRAM
prices in 2001, followed by the steep price hike in 2002, which set
off the DoJ investigation. Memory suppliers were trying to recover
some economics after a period of selling units significantly below
cost. The slump in demand for the standard 128-megabit SDRAM chips
sent prices plummeting, and adversely affected all the major

Many industry observers have noted that the DRAM
industry has been subject to wild price swings over the years. The
synchronization of pricing trends seems to be easily explained. While
DRAM suppliers find out from their customers what they are willing to
pay, it's entirely possible that some suppliers have other channels
to obtain each other's pricing information. It is a fiercely
competitive market but cooperation, particularly in support of higher
prices, would benefit all of the suppliers.

Memory component pricing can have a dramatic
impact on PC manufacturers such as Dell, since main memory can make
up 5-6% of a PC's total materials cost. Easy to see that major PC
manufacturers may have felt that, during times of steep increases in
DRAM pricing, they were being hit by a unified action and suspected
DRAM suppliers of colluding to “fix” prices higher. On
the flip-side, from the DRAM suppliers’ perspective they went
from losing a substantial amount of money in 2001 to trying to make
up some of their prior year losses in the first quarter of 2002.

Spot Versus Contract Prices
As for the relationship between spot and contract prices, the DRAM
contract price has recently moved up, but spot will always lead
contract, at least in a normal environment. In Spring 2002, there was
a point where spot was below contract, which was a signal that prices
were headed lower. Last fall, however, the bias was up. And today,
that bias is also up, after soft DRAM prices in the first quarter.
Until such time as the bias is down, if spot converges to contract by
declining it will be a bearish indicator until proven otherwise.

In March this year SDRAM was being priced above DDR in some lots,
which was not a great sign. Spot pricing on DRAM recently crossed
above contract, after a period in the first quarter in which DRAM
prices were falling. This crossover and upward bias in DRAM prices
should provide some support and potential for more orders from DRAM
companies later in the year. And this in turn should provide support
for, and probably even propel semiconductor and semi cap equipment
stock prices over the next three to six months.

According to DRAM-Exchange, DRAM contract prices have
remained stable recently despite falling spot prices, and this looks
set to continue through May. Despite weak PC demand, hardware
manufacturers continue to source DRAM from the contract market, which
has supported memory prices. However, absent evidence of sell-through
to end-users or an up-tick in demand, there is mounting concern that
this will lead to channel inventory build-up and softening DRAM
prices. DRAM-Exchange goes on to explain that although the major DRAM
suppliers are trying to keep unit prices above $3, it is possible
that this price point is not sustainable beyond mid-May.
Consequently, as DRAM suppliers are pressured to ship before the end
of May, and as demand continues to weaken, this suggests DRAM price
erosion, rather than ongoing stability.

Market Impact of DRAM Price “Fix”
One hypothesis is that the move up in the broader stock market in
October-November 2002 was led by the semiconductor and semiconductor
capital equipment [semi cap] stocks, which led all the tech stocks
up, which in turn brought the overall averages up.

But what was causing this upwardly mobile market daisy chain? The
semis were quite possibly led up by the move in DDR prices.

Coming into late second quarter/early third quarter, there should
be the usual uptick in PC demand as corporations spend out their IT
budgets for the year, which in turn should stimulate DRAM pricing.
This happens every year; it is regular and predictable, and is
irrespective of whether there is great PC growth, or just OK growth,
or even no growth in the second half. So the stock prices of
companies like Micron could be expected to rise as DRAM prices firm.

A common misconception in the
analysis of the semiconductor business is that a shortage in DDR
memory requires a substantial increase in semi cap equipment spending
in order to boost DDR manufacturing capacity. In reality, DDR just substitutes for SDR [single data rate], so the
only expense incurred by the chipmakers is for new masks (a kind of
mould) for the different chip designs. This involves little more than
a slight tweaking of the manufacturing dials. However, many investors
believe that a shift to DDR on the production line requires new
factory equipment, which is just plain wrong. Still, this widely held
belief in the investment community was one of the reasons that the
Fall 2002 spike in semiconductor stock prices was accompanied by a
spike in stock prices of semiconductor capital equipment companies
(such as KLA-Tencor and Applied Materials).

In summary, history points to, at the very least, some
coincidental factors leading to periodic spikes in DDR prices, such
as that which occurred last Fall. Such factors include a
faster-than-anticipated shift to DDR over SDR by PC-makers, at the
same time that the seasonal third and fourth quarter inventory build
was occurring. Coincidentally, the DRAM situation in Fall 2002 was
similar to what happened in 2001. DRAM shot up, followed by the semis
and the broader market, and then down DRAM prices came again,
followed by the market. Once sufficient capacity was switched over
from SDR to DDR, and the seasonal inventory build had begun to slow,
DDR prices began to fall – as would be expected - beginning in
late 2002 and continuing well into the first quarter of 2003.

Anatomy of DRAM Pricing
DDR price increases could be considered to behave much like a soufflé â rising and falling on hot air. That is not to suggest that memory chip prices are not influenced by fluctuating levels of real PC demand; of course they are. But there is more to DRAM price patterns than ebb and flow of natural supply and demand.

To date, there seems to be little, if any, hard evidence of collusion. Still, the unison with which the large DRAM suppliers manage their pricing reactions is quite possibly more than coincidence.


Melanie Hollands has over a decade of experience covering the technology and telecommunications sectors, from positions held in business strategy (McKinsey & Co., Bain & Co.), corporate finance (Salomon Smith Barney) and fundamental equity research (Merrill Lynch). While at Merrill, she received an Institutional Investor All-Star Honorable Mention for her cover of the PC hardware and wireless stocks. She covers: PC/server hardware, storage, enterprise software and operating systems, wireless hardware and software, data networking, optics, semiconductors, semi capital equipment, and telecom equipment. She is currently President of Koala Capital, which focuses on trading/investing in technology stocks, and from time-to-time undertakes (on retainer) technology strategy and fundamental research projects.

Editor's note: The opinions and conclusions in this article are solely those of its author and may or may not be shared by OSDN editors and management.

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