Chip memory madness strikes again

COMMENTARY--Memory prices have nearly tripled since November, leading computer makers like Apple Computer to raise their prices. Meanwhile, Micron Technology is bidding to become the largest supplier in the world, a status not enjoyed by a U.S. company since the mid-1980s.

Some say these disparate events may signal a historical rebirth of one of the most important sectors of the tech industry. But they also serve as a reminder that manufacturing computer memory isn't really a business. It's more like a bad gambling habit.

The rapid, spiraling and often unpredictable memory market has vaulted companies to the forefront of the industrial world. Intel came to prominence by inventing DRAM (dynamic RAM), the basic memory chip still used in PCs. And Samsung's name is synonymous with the stuff.

But the memory chip market has also tripped up a number of big names. Hynix Semiconductor, formerly Hyundai Semiconductor--and until recently the second-largest memory maker in the world--is now casting about for strategic partners while manufacturers in Taiwan and Japan are closing factories. Rambus, a memory designer, came close to a situation where it could have received $1 to $2 for every PC sold. Not bad for a company with about 200 employees. The industry veered, and Rambus is now yesterday's news.

The harrowing thrill ride arises out of a dangerous mismatch between the efficiency of the market and the costs of staying in it. Prices fluctuate with every minor flutter in demand. What's more, contract prices between large multinationals, which are supposed to be stable and long term, get renegotiated every two weeks.

Satisfying demand requires risking billions of dollars on real estate, construction costs, equipment and salaries. In 1995, when analysts were predicting a massive worldwide memory shortage, nine new fabrication facilities broke ground. Sixteen more got started in 1996. The ensuing glut didn't begin to moderate until early 2000, only months before the PC slowdown plunged the industry into its worst decline.

Can't companies just slow their production by 50 percent in a downturn? Not really. Curbing production might raise retail prices, but it would guarantee that operating costs skyrocket because the expense of a $2 billion factory would then get spread over half as many wafers. If competitors fail to likewise curtail their production--likely in the face of a competitor's retreat--you lose.

Can't memory makers fluidly adjust their work force? Again, the answer is no. Fab workers at some Asian companies actually live in dorms--women on one end of the industrial park, men at the other--so temps are out of the question.

"With the economics of the memory market it is just not attractive. You can't just idle your fab," said Tom Quinn, vice president of marketing at Samsung. "The only way to make it is to reduce your costs, and the only way to reduce your costs is to shrink your die, and to shrink your die you've got to invest."

In other words, double down. On any two cards.

To top it off, there's the lurking specter of skullduggery. Somewhere, somehow, someone is getting stabbed in the back. Indeed, Dell Computer CEO Michael Dell publicly attributed a recent price increase to "cartel-like behavior by a couple of DRAM suppliers."

In response, he opened up relationships with Nanya, a small Taiwanese manufacturer. "You'll see us trying to encourage competition," Dell said.

So what happens next?

The effects of Micron's most recent acquisitions will soon manifest themselves. In December, the company bought Toshiba's DRAM operations. More recently, Micron broke off negotiations to take over Hynix. Interestingly, Micron once filed a bitter international dumping complaint against Hynix, leading some to wonder whether the latest break is a negotiating tactic. If it isn't, Hynix may have to go into receivership, where Micron would be able pick it up for a song.

If it can successfully incorporate the Toshiba fabs, and pick up Hynix's operations, Micron will become the undisputed market leader. With its low-cost manufacturing techniques, the company could then establish itself as one of the four or five integral component suppliers in the PC business.

All hell might also break loose. The escalation in price occurred because PC makers were putting more memory in their PCs. They have since reversed course. Although analysts are skeptical about further "de-featuring," considering the memory demands of Windows XP, PC execs say they can continue to cut back.

China has also signaled interest in entering the semiconductor market, a move that would easily trigger another slump, according to some chip executives. Who knows? Micron could find itself renting out all this new factory space to craft fairs or petting zoos on the weekend.

The only guarantee is that there's going to be a lot of blood left on the floor before all this is over.

Department Editor Michael Kanellos runs the Enterprise Computing and Personal Technology sections at CNET News.com. His writing has been published in the Chicago Tribune, Escape Magazine, and other publications.