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Toshiba Latest Casualty of DRAM Price Wars
Tsar writes: "ITWorld.com tells the story: Toshiba is getting out of the DRAM business. They had 6.2% of the world market last year, but soon their Manassas, VA facilities will belong to Micron, the Yokkaichi plant's DRAM production will be reduced to a trickle, and Toshiba will be out of the commodity memory market. Guess you can sell DRAM for a hundred bucks a gigabyte, but you can't make a living at it yet."
I think the plants are being sold, not closed...
CaptainAlbert,
I'm having a hard time understanding what you've written! You're saying that the DRAM market is hard to understand because once you have it, you don't want it anymore? But isn't this true of most goods? Also, the "wearing out" bit doesn't make any sense: I have a Maytag washing machine that hasn't worn out since the days when DECs had 64K of memory. This doesn't make the market for washing machines any harder to understand.
How does having a huge domestic market imply you'll be in constant over-supply?
Rather than some pseudo-economic reasons as to why the DRAM market is bottoming out, how about some real ones. First it is a commodity, so there is no chance of making an "economic profit" on DRAM. Second, the main market for DRAM, personal computers, it itself declining, causing a decline in the DRAM market. Third, better technology has made DRAM cheaper and cheaper. While in the early days of computing, the declining cost of RAM was matched by increasing volumes (ie every computer coming with more RAM). Recently, however, the cost to produce a megabyte has been decreasing faster than the avg. megabyte/computer has been increasing.
memory to lose money and go out of business?
The memory market is very homogenous - i.e. there's not much to differentiate between memory from one company and another. This means that the price is wholly dictated by the market. For example, say you own a chip factory. Lets say the market price of RAM has fallen below what it costs you to manufacture. What are you going to do? Your suggestion is to refuse to sell below your cost price. But now, nobody will buy your chips! They can get exactly the same elsewhere for less money. If you don't sell them, they will eventually become obsolete in which case you lose all your money, so you might as well sell 'em for whatever you can in order to minimize your losses.
At the same time you would cut production hoping that this will increase the market price.
The alternative is to enter into a price fixing cartel with other manufacturers. If everyone agrees not to sell below some price, you can hold the market price artificially high. This is illegal in many countries, and is also a fairly unstable situation. (Eventually someone decides they can make more money outside of the cartel so it breaks down.)
(Take all this with a large pinch of salt. I am not an economist, although I did economics 101 at Uni).
The submitter of the story makes the observation that you can sell RAM for 100$ a Gig, but you can't make a living doing so. I think this important because it really sets up what we as the consumers need to know, how much do you have to sell RAM for to make a living. From the looks of it - with Toshiba and Micron both losing money - the market is selling below cost. Does anyone know enough about the manufacturing process to offer an educated estimate as to how much these chips cost to create. We really need to know this because market consolidation will only go on for so long before the major players (Micron, Samsung) decide that losing money isn't cool, stop buying up floundering competitors, and start making money again. A little price war isn't so bad because it allows the market to patrol it's self. Eventually though, this will wear off, and we as consumers should be aware of where the market is going so as to not be completely floored when the price bounces off the roof.
What would make you think RAM prices would come back up again? RAM prices have been falling continuously since the beginnings of Moore's Law decades ago. Next thing you know, you'll be telling us to buy pentium IIIs before "the price rockets back up again."
Not that there aren't temporary fluctuations in the price of RAM, but the overall trend is down, down, down.
"Any connection between your reality and mine is purely coincidental." -Slashdot
"DRAM Manufactureres are losing money on every chip they sell".
Well THAT'S a load of bullshit. Then why are they selling?
"We'll sell you a million of them. That'll cost us a $1,000,000, but let's do it anyway."
It's NOT true.
Chip manufacturers MAKE money each time they sell a chip. And if they sold enough chips, they'd walk away with a tidy profit. And - SURPRISE - they do!
The problem is that they've expended lots of money building new fabrication facilities, and then, whoops!, the PC economy takes a hit. It isn't that DRAM prices got more expensive - it's that they over-invested in fabrication. And let me tell you - the plants themselves aren't the most expensive part - it's the people and managers that run them.
What's the answer? To sell off the facilities to those who won't be competitors. Heck, why sell something good to a competetor? Therefore, the entry into "vertical markets" by the likes of Toshiba, selling off the facilities to Micron. As long as there is no competition between partners, they're happy.
So what does this mean to DRAM prices? They might fluctuate a little, but the trend will continue downwards as real manufacturing costs are lowered and the technology improves.
In terms of market structure, prior to Toshiba's divesture I think 4 companies produced about 80% of the world DRAM supply. Is this level of concentration sufficient to maintain collusive behavior? It all depends.
In one commonly used model of price wars, the memory chip market is in fact collusive. A key assumption is that firms cannot perfectly predict demand conditions ahead of time. Suppose that you and I are the only two producers, and we agree to the following arrangement. In period 1 we both will charge $1. If at the end of period 1 the realized price is $0.90 or greater, we charge $1 in period 2. If it is less than $0.90 cents, we begin a punishment phase in period 2 and charge our marginal cost (and earn zero profits). The realized price may differ from the ex ante declared price because of weak demand for the product or because of cheating. Finally, if the punishment phase has been in effect for 3 periods, we then revert to charging $1; in other words, the punishment lasts 3 periods.
This may in fact characterize the DRAM market. Because of a fall-off in demand for memory late last year and into this year, prices plummeted. Hence, the four DRAM producers began a punishment-phase price war. In the past several months demand for PC's and DRAM has stabilized somewhat, and the firms (ex post) realize this. The price war is now over, and the firms are returning to a high-demand stage where the higher collusive price is charged.
Perhaps this sounds implausible to you, but in fact it is one of the most common models of collusive behavior in the economics profession. Of course, I've left out a ton of details, but the main point is clear: firms in an industry cannot perfectly observe demand, and so falling prices (whether due to low demand or actual cheating) must result in punishment. Once the punishment phase is over and demand returns to its normal level, the higher cartel price can again be charged.
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You are woefully misinformed. Micron doesn't want to sell below cost, they have to do that to maintain market share. Micron will definitely put smaller competitors (like Toshiba or TI) out of the business if they can, but they aren't as nefarious as you make them out to be.
The problem is there is too much capacity. Eliminating most of Toshiba's capacity will help, but not a great deal. There is simply no demand for new PCs (which is where most DRAM goes and you can check Gateway and Dell's performance if you doubt me) and without that driving the industry (as it did in 1999 & 2000) you're going to see over production. This results in higher inventory levels which represent tied up capital. So, either you sell the inventory at what the market is paying to free up operating cash or you lay off people and try to hope that your competitors will also slow down production and not steal your market share.
Since everyone at Micron making over $60K a year just took a 10% pay cut and the executives aren't getting paid, I'd say that they aren't doing this just because they weren't getting the profit margins they wanted.
The real problem with the DRAM market is that Hynix (who is also in negotiations with Micron) owes 7 Billion dollars on 2 Billion worth of assets refuses to go into bankruptcy. They continue to sell at even higher losses than Micron and Samsung racking more and more debt.
Hi!
In other words, there is a price war going on. And, if ITWorld's sources are correct, there is at least one producer who is making money manufacturing DRAM at these prices. Given that Micron is buying the DRAM plant (and running TV ads selling DRAM via Crucial), it seems clear that Micron a) thinks they can make money in the DRAM business, and b) thinks that they can use that plant in Virginia to make DRAM more competitively than Toshiba did.
Two points: