As the industry predicted, the first quarter of 2010 was one of the strongest quarters ever witnessed.
The forecasted production shortages on the latest chip technologies coupled with rapid technology transitions shortened the availability of older technologies. These factors contributed to a lack of supply in the market and a firm pricing on old and new technology components.
Despite the positive results, it seems that a sizable chunk of the growth achieved by most memory vendors in the first quarter was due to speculative purchases from customers who believed that “the only way is up”. This has led to a significant increase in inventory within the distribution channel at the beginning of the second quarter. This combined with the low value of the euro and British pound against the US dollar and poor economic recovery in Europe had a negative influence on the hardware sales in April and May, which may be seen as the recipe for a potential disaster.
Furthermore, the channel has seen a sharp decline in demand for motherboards, processors, and other hardware components. If speculators cannot sell this inventory above their replenishment cost, they will eventually dump their stock to obtain the cash flow they require. Several market tracking organisations have repeatedly in the last six weeks remarked that their price notations were based on unrepresentatively small numbers of transactions. Nevertheless, even if a broker does not sell anything at all, a quotation well below yesterday’s price can set tomorrow’s price expectation for the entire market.
PC OEMs, the biggest purchasers of memory chips, have driven a tough bargain with their suppliers lately. They have managed to negotiate a price increase of only 15% since the beginning of the year on DDR3 and a mere 8% on DDR2 compared to the lowest levels in the previous 18 months.
All of this is happening in a market rapidly transitioning from DDR2 to DDR3, possibly even faster than the semiconductor suppliers themselves, affecting the market in various levels:
· As PC OEMs struggle to accept even the relatively modest increases on the contract market, some have reduced the memory specifications especially in the price sensitive lower market segments to curb the price increases on consumer PCs, netbooks and notebooks. These changes lead to an increase in supply on the spot market, which can add to price pressure on the market.
· While more and more chip manufacturers are retiring their DDR2 production lines, the traditionally biggest customers have more or less stopped ordering these components all together, thus more DDR2 chips are available on the spot market, leading to price pressure.
· As the PC OEMs clearly state that all they want is DDR3 memory, those semiconductor manufacturers who can afford it are investing heavily in new production technology and additional capacity. This is expected to again lead to an oversupply in the medium to long term, with prices consequently falling.
Consequently the channel is well advised to monitor the changes in the market and plan memory purchases as needed, avoid making speculative purchases and excessive stock holding.
After the bloodshed witnessed during 2007 and 2008 the memory market had one headline in 2009, Survival. Not everyone survived, but those who made it through the year finished in a positive mood. At the beginning of 2010 optimism was the prevalent sentiment in the industry, memory prices had recovered from historic lows to levels that allowed positive gross profit margins for chip manufacturers and third party vendors again.
