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December 8, 2006 12:13 am

Chipmakers’ Vista could be too sunny

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Memory chipmakers have spread a lot of optimism in recent months. If some industry leaders are to be believed, the increased memory required by Microsoft’s long-awaited Vista operating system will create a boom for a notoriously cyclical sector.

However, the upsurge looks like it may come at a price. Most analysts agree that, even though the higher memory density is likely to spur shipments, the extra production capacity many memory makers are planning to build to feed that demand will drive prices down.

Janardan Menon, chief semiconductor analyst at Dresdner Kleinwort, even warns that the Vista hype has “grown dangerously” and that prices of D-Ram will crash next year just as they did after the launch of Windows 95 and Windows 2000.

Merrill Lynch analysts are more optimistic than most. But they expect a 22 per cent D-Ram price slide in 2007, followed by another 28 per cent drop in 2008.

Everyone agrees that Vista will eventually result in larger D-Ram shipments. However, the views on how quickly and under what conditions this will take place differ widely.

Samsung, the world’s largest memory chipmaker with a 31.2 per cent D-Ram market share, expects the launch of Vista to expand the global D-Ram market by 17 per cent in 2007 to be worth about $35bn.

Chu Woo-sik, the head of Samsung’s investor relations, says the launch of Windows Vista will increase memory consumption per PC from 0.8GB to 1.2GB. Accordingly, the company planned to strengthen its D-Ram business with higher than industry average bit growth of 65 per cent next year, he said.

Samsung expects its Vista-ready PC shipment to see a 13 per cent increase in the fourth quarter compared with the third quarter, and shipments to grow more than 90 per cent next year.

Hynix, which takes up about 16.3 per cent of the world D-Ram market, also paints a rosy picture for 2007, predicting demand for D-Ram chips will increase by 55-60 per cent next year.

Powerchip, Taiwan’s largest memory chipmaker, is also optimistic. “We can already see the positive effects from Vista because the high season is almost over and prices are still holding up,” says Eric Tang, vice-president.

But industry observers caution that demand from end-consumers for the Vista-ready PCs with more memory might take off only slowly.

“As always, the standards are growing first and demand will trail that growth,” says Roger Chu, an analyst at DRAM Exchange, a market research house in Taipei.

He expects only heavy users to snap up Vista-ready PCs when the operating system becomes available to consumers early next year. “The others are going to wait for the system to become more mature and stable, so we’ll see a more gradual demand growth through 2008,” he says.

Such a pattern would be severely at odds with what chipmakers are preparing for.

Led by Samsung, the industry has aggressively increased its capacity expenditure plans. Current capacity expansion plans, if implemented, would translate into 65 per cent bit growth next year.

This is where the problem lies, according to Mr Menon. “D-Ram is a spot market traded commodity and its price is as much a function of expectation versus reality as of actual demand supply balance,” he says.

“The bulls like Samsung may very well be right and PCs may end up shipping out with 2GB of D-Ram before the end of 2007, but it will happen only after a major collapse of over 50 per cent in D-Ram pricing next year.”

Mr Menon argues that the bull’s case centres on the questionable logic that, although Vista requires about 1GB of D-Ram to run properly, demand will actually be for 2GB from the moment of Vista’s launch in January 2007.

The problem with this is the current high D-Ram spot price level.

At 2GB per machine, the D-Ram element would represent too high a proportional cost of PCs, forcing PC makers to either absorb this themselves or pass it on to customers.

However, there are many variables influencing the outcome.

Mr Tang argues that there is more room for a higher D-Ram price component in the total PC cost because other component prices have come down. “Traditionally, we used to have a ceiling at 10-12 per cent for D-Ram versus the total cost,” he says. “But in the past six months, the intense competition between Intel and AMD has driven CPU prices down, and LCD prices are also falling. This space can be taken up by D-Ram.”

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