Investors following the fortunes of the memory chip industry have had another bumpy ride this year, despite better expectations.
Since February this year 64Mbit Dram chips have plunged in price from $10 to just $5.60, shedding 44 per cent of their value. Just a few years ago, 64Mbit Dram would have cost $250.
"1998 was supposed to have been a good year," noted Chris Hsieh of Nomura Securities in Taiwan. "Instead it turned out to be one of the worst years in the industry's history. The market dropped by 28 per cent."
At the root of the industry's troubles has been massive oversupply. Racing to keep up with the IT revolution, the globe's memory chip manufacturers simply ended up swamping the market, forcing prices downward.
"There was massive over investment in the mid 1990s," said analyst Peter Tsao, head of regional technology for ING Barings in Taiwan. "We believe that the profit cycle has bottomed out," adds Tsao, before warning that, "there could still be a few more bumps in the road."
In the meantime, the industry landscape has substantially changed. The roller coaster of recent years has wrought a process of natural selection.
"My estimate is that about five major chip companies will survive this cycle, headed up by Samsung in Korea and NEC in Japan. The only American company likely to remain an important player will be Micron," says industry analyst Y J Shim of W I Carr in Seoul, South Korea.
Another challenge has been the galloping pace of technological change. Advances in IT have been so rapid that chip manufacturers must keep innovating just to keep up with the market.
"The semiconductor business is a one way street," said Chris Hsieh. "You have to invest in new technology or you're out of the market."
New technologies, while engendering heavy investments, enable manufacturers to cut costs while adding value to their products.
Chip wafers have advanced from being 0.3 microns in thickness to ones that are consecutively 0.28 microns, 0.25 microns and 0.23 microns in thickness. Each shift results in a 50 per cent gain in productivity, explained Shim. The next step for chip manufacturers is the production of wafers that are just 0.18 microns thick.
Alongside the physical properties of Dram chips, their capacity to store information is rising. 64Mbit Dram has already all but replaced the old 16Mbit chips and now the industry has set its sights on producing 256Mbit Dram chips.
Some industry indicators suggest there is indeed some sunshine on the horizon. The Semiconductor Industry Association recently reported that worldwide semiconductor sales in March were up 6.7 per cent on the previous year.
The association said the growth, "shows signs of continued industry recovery and a rebounding Asia Pacific market."
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