MarketWatch Commentary

At Smith we buy and sell memory every day. We handle DRAM, SRAM, Graphic RAM, Nand and NOR Flash. As the commodity manager for memory I can see supply and demand across components and across our global offices, which gives me a pretty complete world view of the memory market. Here's what I see for 2010:

• 2010 should see constant tightness and long lead times on most types of memory all year. The main two reasons are 1.) Due to the credit crunch, chip manufacturers reinvested less in 2009 to grow production capacity than in previous years. Although 2010 will see a return to high re-investment in this area, (a predicted $8-10B worldwide) it will not have an effect on production capacity until at least 4Q10. 2.) The wide array of products now available from chip makers makes it harder for them to forecast accurately, which is exacerbated by the continued introduction and successes of new products and fads or unforeseen failure or obsolescence of technology in the retail market; which increase or decrease expected demand accordingly.

• Over the last year almost every chip manufacturer has gone from a commodity "build-it-and-they-will-come" plan - where they build a bit of everything and hope the customer will come calling - to a "build to forecast, but forecast accurately" plan. That means fewer parts in excess on the end user shelves, longer lead times and stricter ASPs. Industrial and extended temps parts, odd cas latencies, slower speeds, and odd packages (BGA for DDR1 and SDRAM, since TSOP is the norm) will be the casualties in this plan, and become more and more scarce as we move further into the year.

I see these factors affecting the market of the various memory types in 2010 differently.

• Personal computer demand around the world continues to climb, especially in China and developing countries. Though the demand for desktop PCs is growing at a lesser rate than it did during 2009, the higher rate of laptop demand more than makes up for it. That, of course, means demand for DDR -- a mix of DDR2 and DDR3.

• At the end of 2009, DDR3 was used in about 25% of the new computers - PCs, laptops and servers combined - coming out. By the end of 2010, it should be up to 75-80%. While DDR3 will not have many other usages outside of this area, it will be the mainstream technology for most new PCs; PC3-10500( DDR3-1333) being the principal speed.

• Look for server demand to continue to pick up in 2010; many companies who have put off upgrading or re-invigorating infrastructure for the last couple of years really need to do so now, as software demands upon a network are at an all time high. New servers developed in late 2009 and 2010 will use DDR3 memory. However, DDR2 production cutbacks at the chip manufacturer level should make DDR2 server modules and components harder to come by. We've already seen open market demand increase and pricing up 5% in through January end.

• Already, DDR3 delivery is behind demand and that should continue during the first half of 2010. The estimate is DDR3 overall will be 2-4% short worldwide for the entire year.

• The introduction of memory hungry Windows 7 will also help increase the GB/unit in the PC arena.

• As I noted earlier, the rise of DDR3 will mean the demise of DDR2. Over 2010 it will drop from being in about 75% of the new computers to about 20-25%. But again, production cutbacks on the chip manufacturer level should make DDR2 availability tight.

• SDRAM PC133 demand should decrease some in 2010 vs. 2009, but with wafer start decreases and EOL-ing of highly popular configurations or accepted generation revisions, availability will be limited. Lead times and pricing will likely increase throughout the year from all MNFs. Already Samsung and Micron have plans to EOL their very popular 32x16 SDRAM, which should start causing some problems come March. So, though demand will be down in 2010, pricing and should stay high and lead times long all year.

• The Graphic RAM market is still in shortage due to the demise of Qimonda, but it is beginning to right itself. There are still shortages and long lead times and we expect to see that continue until at least mid-2010. Most MNFs however, have EOL-ed their multiple technology offerings to concentrate on gDDR3, which pairs best with current motherboard/PC needs. So builders must be highly aware of lifetime estimates in this area if creating new products.

• Nand Flash pricing has steadied due to production cutbacks and rising demand, a trend which should continue throughout 2010.

• Lower density NAND products, 1Gb and below, will all soon be going EOL one by one - starting at the smallest - and we could even see 2Gb & 4Gb go that route by the end of the year if chip production capacity does not increase. The continued introduction of new products using NAND as the main data storage also contributes to tightness on mid-range densities (8Gb-64Gb) and longer lead times. Fewer wafer starts on SLC product is causing longer lead times and tightness for NAND, and possible trouble in the industrial, aerospace, military and automotive fields.

• For NOR Flash, usages are continually shrinking, but it will continue to be hard to find in the open market. Continued monetary uncertainty at Spansion, talk of Samsung stopping production, and rumors of a Micron/Numonyx merger make the NOR market unpredictable.

Thus, I expect in 2010, memory chip makers will likely: Promote DDR3 for computing; cutback on general DDR1 and SDRAM wafer starts; level off DDR2; and make only enough NAND Flash to fulfill forecasted orders, promoting higher densities over smaller densities.

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The semiconductor industry has been faring better than many industries based on 4Q09 reports.  The 1H10 forecasts continue to show the tendency for pent up demand to be strong from consumer and corporate sales alike.  However, with the loss of almost two years of CAPEX investments to support fabs, the growth that we're engaging now may prove to be a tough challenge for the industry because of these "missed investments," as underscored by Bill McClean, President of IC Insights.

According to McClean, IC Insights research and data show that despite the "worst recession in 63 years (since 1946) in 2009, flat PC unit shipments were quite an amazing accomplishment. Moreover, cellphone unit shipments were down only 5%.  Now consider that both PC and cellphone unit volume shipments are forecast to increase at double-digit rates in 2010."  This begs the following questions from the recent McClean Report: "What effect will this have on the IC industry? Are we on the cusp of an all-out IC market boom for 2010?"

IC CAGRs are forecasted in the 9% range; ASPs and revenue are set to rise across the board for memory, even for DRAM;  increased demand is expected for PCs; and emerging economies' consumers are hungry for electronics.  Underscoring this positive reality is the recently released, strong, 9%  increase in North American-based semiconductor equipment manufacturers book-to-bill ratios, now at 1.03 for December, holding onto a 6-month rise. 

The 2010 forecasts are no longer just New Year's dreams.  While exciting and welcomed news, these forecasts pose interesting challenges for the industry that must now grapple with being able to meet what TSMC calls "urgent recent increases in customer demand."  TSMC has begun both new construction and capacity expansions at their fabs in Taiwan, increased R&D spending for 2010 by 25%, and plan to hire 3,000 new staff, "primarily engineers." 

Those companies who remain from the last round of survival of the fittest now have a new, positive battle ahead.  Economic indicators are up 1.1% for December 2009 and point to economic growth this Spring.  Are we really ready?!

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EMS for Europe has been very important, and therein are found some significant opportunities.  EMS forecasts are not stellar though (as reported in Manufacturing Market Insider (Vol. 19:11, November 2009) and citing forecasts from InForum market research).   Growth has started for EMS worldwide and looks to hold steady around the 5% range +/- from 2010 through 2013; it's just going to take three years to recuperate the losses from 2008-09. 

The lag in an EMS rebound needn't be seen as negative for Europe though; growth is growth, after all.  With EMS rebounding, albeit slowly, and Europe being heavily invested in EMS, particularly specialty or niche markets, there are noteworthy opportunities for European EMS to lead in new markets and sectors.  These opportunities and markets will be explored more closely in the upcoming MarketWatch Quarterly edition due out later this month!  Subscribe here to get your copy before public release.

The EU reaffirmed it's commitment to green policies at all levels during the UNFCCC's COP15 conference in Copenhagen, Denmark in December (see here for our commentary from COP15).  While that makes for nice political talk, it does have bearing on business markets, particularly semi.  One of the important ways in which Europe continues to be a world leader is in the consumer purchase power of highly efficient appliances and consumer electronics products. 

European governments are now providing reduced or no taxes on electric cars (meaning up to 180% reduction in high tax countries such as Denmark).  Couple this incentive with eager consumers for smaller, greener autos in light of the European auto sector having a better footing than, for example, the American auto sector, you realize quickly that there is ample opportunity for European auto to lead the global electric vehicle market.  Electric vehicles are an important market for semi, moving the percent of chips per vehicle significantly higher than traditional autos.

Will European semi rebound?  That's an interesting and very important question for many companies and for both the semiconductor and electronics industries.  There is vacillating investment in Russia, there are politico-economic reasons (see above) to believe new markets hold opportunities, and there is existing consumer support for products.  Although the pace will be staid, don't they say, "slow and steady wins the race"?

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November was another active month in memory trading, with prices on most types of products ending the month higher than they began.

DDR2 pricing increased the first week of November, flattened out the second and third  weeks, and decreased slightly the last week. 667 materials  decreased the most, due to the falling demand of the slower speed, while 800 products held their value much better. The slight degradation of pricing can be traced to a couple of factors. The first is simple end-of-the-year softening, when OEMs are reluctant to hold inventory over from calendar year to calendar year and most of the products are bought for the holiday builds. The second is the re-entering into the market in greater amounts of the off-spec/non-major brands, like the Taiwanese manufacturers. Also in this mix is the production lost when Qimonda sold Inotera; those buyers are now shipping product from that source into the eTT/uTT and upgrade markets. The greater availability of the off brand products have given upgrade consumers a cheaper solution than the 5 majors they were basically forced to buy during the last 6 months.

DDR3 pricing saw an increase in pricing over the last month, and has flattened on most products during the US holidays. 1333 speeds are the high runners and have been lingering at a 15% premium over their 1066 counterparts. Module demand continues to increase on the PC side, as DDR3 continues to slowly replace DDR2 as the standard memory for new computers and servers.  More discrete chip inventory has found its way into the open market, as production increases at the chip manufacturers enable chips to get into the hands of the generic module makers.

DDR1 and SDRAM/PC133 continue to be harder to get as the lower densities and odd configurations head towards EOL and the manufacturing output capacity changes to more generic and newer technologies with broader ranges of use. Already we've seen popular parts configurations like 32x16 PC133 phased out without replacement from some of the major chip makers, and industrial or extended temperature tested chips are at the made-to-order stage, causing long lead times from chip makers.

Since Qimonda dissolved, Graphic DDR has been very tight, having only two viable options as vendors left, both of whom were already at full capacity and still running short of demand. However, with the normal slowing down demand of the year's end and the introduction into the market of more capacity from 3^rd parties, much of the delivery issues are working themselves out. There are still some common configurations that are tight and getting premium pricing, but that also should work itself out heading into the New Year.

NAND Flash has continued to see price increases and lead time extension on most MLC and SLC large block items. November saw a 10% price increase on several sizes 8Gb-64Gb, and industrial temperature items are garnering long lead times from the manufacturers. Demand also continues to rise as NAND finds it way into new technologies and hybrid ASICs and controllers, but with capacity running as high as it can, further price hikes and longer lead times are likely to occur for the next qtr.

Overall, December is shaping up to be as active as November.  That is, at least for the next couple of weeks - until holiday scheduling has its predictable calming effect on memory trading.

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DRAM pricing has been rising quickly over the past weeks due to the combined influence of a number of factors: 

• an uptick in demand from larger than expected need in China;
• the introduction of Windows 7; 
• recent and upcoming Asian holidays;
• new forecasting methodologies at the chip manufacturing level; and
• the expansion of DDR3 production at the expense of DDR2 production.

This has resulted in higher contract prices all around and a large rise in open market pricing - especially on DDR2-800 (PC2-6400) items. For DDR2-800, contract prices have increased about 20-25% and open market pricing approximately 30% since mid-August, with most of that increase occurring since September 1.

Riding on the heels of DDR2, DDR3 prices, after softening in late August, have rebounded by about 3-5% since September 1.  Upward pressure on both DDR2 and DDR3 pricing is expected to continue in the coming weeks. 

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It was the fabs' dramatic CAPEX reductions that truly ignited my cause for concern many quarters ago (as discussed in this MarketWatch Quarterly article) and made even more worrisome when utilization levels went below 50%.  It is now with a sigh of relief that the situation is truly coming full circle (see this MarketWatch Commentary post also).  Recently, fabs have been posting forward looking schedules to begin the ramp up of 40nm process technology at the end of 2009 - see this early MarketWatch Quarterly article for details on this technology.  This puts 40nm on track for 2010 release and for 2011 as a main process technology.

While overall global capacity even at the 40nm-scale, at this point, is not expected to increase given the continued muted, although rebounding, consumer demand, the cost savings for the fabs by moving to 50nm and then on to 40nm are significant.  DigiTimes 8/17/09 reported Micron's estimates of lowered production costs by 50% for 50nm and an additional 30% for further migration to 40nm.

Meanwhile, TSMC and UMC continue to run at 80% utilization levels again - more good news given the extreme lows just a few months ago.  Both offer that order visibility is good and holding in positive territories.  UMC, as reported by DigiTimes 8/13/09, has also released its move to 40nm process nodes during the end of 2009, adding that CAPEX levels are up and new equipment to further support the next generation technology is purchased.

Others in the Taiwan DRAM production arena are actively seeking funding to increase their production levels.  DigiTimes 7/20/09 speculated that this is in anticipation of DRAM price rebounds during 2H09 - let's hope they're right...

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As we become well entrenched in the halfway mark for 2009, the promises of 2H09 showing relief and recovery are happily bearing fruit. 

News from the wire and in the markets is showing not only truly healthy inventory levels for memory, but even more importantly, strengthening demand to the point that ASP increases are holding for both DRAM and NAND.  In DRAM, DDR2 pricing has been rising as supply is tightening with back to school orders and shorts helping to support 10% rises in DRAM pricing over at least the immediate-short term (see this Circuits Assembly article for publically available details).  Also, on 5 Aug. 2009, DigiTimes cited DRAMeXchange as stating that "DRAM revenues grew 27.1% sequentially to US$4.04 billion in the second quarter of 2009, when the average price at the contract market went up by 23% [...] which attributed the price rally to suppliers' production cutbacks and PC OEMs replenishing inventories."

NAND is also doing well, particularly flash for cell phones.  We've been watching the cell phone market for a while, see also the recent MarketWatch Quarterly here and here, so while this doesn't come as a surprise to regular readers, it's certainly welcome news.  The best part of this news is iSuppli's 2008-2013 forecast of a sixfold increase in global sales.  Wow.  Even more astounding is their prediction of a CAGR of 41.4% for the 2008-2013 period, as stated here).  All this based on the nearly fivefold increase in NAND storage amounts in the average cell phone from 1Gb to almost 5.8Gb for the same period.

But wait, there's more!  It's not just memory that's having a good run in the markets, some TFT LCDs are also showing strengthening revenue numbers, according to Circuits Assembly, "large-area (10" and larger) TFT LCD shipments reached 130 million units in the second quarter, up 10% year-over-year and 42% sequentially, says DisplaySearch."  Furthermore, "'We expect that strong demand will push panel shipments to another record high in the third quarter. However, strong panel shipments in some cases are due to downstream players piling up inventory, so we believe it will be necessary to watch the supply chain inventory situation closely at the end of the third quarter,' said David Hsieh, vice president of DisplaySearch."

All interesting and good news with some legs that ought to carry us forward.

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Mark DeVoss, Senior Analyst for Mobile and Emerging Memory Technology, reported that mobile devices are certainly an important growth area, showing a compound annual growth rate (CAGR) forecast from 2008 to 2013 of 4.6%.  Given the recent year, and the rebound still to come, that is a good number.

In concert with the broader mobile sector outlook, of particular focus and interest are the data that inform the trajectory of the components that comprise the mobile handsets.  While the mobile sector itself is certainly a driver, the component architecture will tell us more about the direct impact and forecast for subsectors within the semiconductor supply chain.

To summarize the iSuppli findings, while NOR memory dominated the 2008 mobile handset component market, the trend is obvious and steep in the movement away from NOR and pSRAM and towards NAND and DRAM solution sets.  According to DeVoss, data supporting this trajectory are found in the declining ASPs and flat megabyte shipment levels for NOR and pSRAM, while there is an increase in NAND and DRAM megabytes shipped over the same period.  Furthermore, as DeVoss presented, the NOR versus NAND based mobile handset units from 2008 to 2009 show a striking trajectory:

A final point, though not the only other one raised, is the impact of memory on the bill of materials (BOM) for mobile handsets.  As DeVoss notes, memory is having a lessening impact on BOM for mobile handsets as prices have decreased per megabyte, equating to a lower memory ASP overall.  Meanwhile, other features of the handset, such as display, graphics, and similar types of "touchy-feely" differentiators, are picked up by consumers as being increasingly important and are increasingly costly compared to memory.

iSuppli finds that NOR and xRAM based solutions are loosing out to NAND + mobile DRAM (mDRAM), multi-chip package (MCP), and package on package (PoP) solutions for the mobile handset sector. 

Interesting findings and an interesting report, as always, from iSuppli.  We'll be watching how these forecasts continue to play out in memory, the mobile sector, and as possible trends across the industry.

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