Will rising Dram prices mean less memory?

PC manufacturers are uncomfortable with price hikes

Rising (dynamic RAM) prices could mean bad news for users who hope to find cheap computers packed with lots of memory.

A three-month rally in memory prices is causing discomfort among PC makers and may lead to cuts in the amount of Dram shipped with some low-end PCs if prices continue their push upwards, industry observers have warned. 

If memory prices rise too much, PC makers would be faced with a choice of either reducing the amount of memory in some systems or raising PC prices. If memory cuts are made, users will have to pay extra to increase the amount of Dram inside their PCs.

On Tuesday, spot pricing in Asian markets for a 256Mbyte module containing 266MHz DDR (double data rate) Dram was around $39.50, according to market analyst ICIS-LOR, which tracks memory pricing.

By comparison, the same modules were selling on the spot market or around $28.25 on 1 january and for around $25.00 on 1 April 1, 2003.

Spot prices for other memory types, such as Sdram (synchronous Dram) and 333MHz DDR, have also shown significant gains during the same period. Contract prices, which represent the bulk of memory transactions, have also been rising but the change has not been as steep as in the spot market.

At Samsung, the world's largest Dram producer, customers are "uncomfortable" with the increase in memory prices, said Kim Il Ung, vice president of the company's semiconductor business.

The price rise threatens to slow down the trend of increasing the amount of memory that original equipment manufacturers ship with each PC, Kim said.

Samsung's 10 largest customers shipped an average of 440Mbytes of Dramwith each PC during the first quarter of 2004, an increase of 15% over the previous quarter, Kim said.

Kim estimated that PC makers could reduce the average amount of memory per PC if prices for a 256Mbyte DDR module rise above $42 but conceded Samsung is not certain exactly where the breaking point lies for PC makers.

"We are trying to make a survey of what will be the breaking point of megabyte per system in terms of pricing," he said.

Looking ahead to the second quarter, Kim expected memory demand to remain strong because of healthy corporate demand for PCs and demand for DDR2 memory. But supply will remain tight because of low production yields of DDR2 chips and problems encountered by manufacturers migrating their memory production to more advanced production processes.

The surge in spot prices for Dram chips and modules has caused panic among PC makers, according to Nam Hyung Kim, a principal analyst at iSuppli.

"If the price increases are too sharp, they could serve to depress Dram sales in the second half of the year. PC OEMs may cut the average Dram content in their systems to accommodate the higher cost," he added.

Intel is also watching the rise in memory prices.

"There's a lot of rumblings right now that memory prices in general are going up and we're still trying to run ourselves through it," said Louis Burns, vice president and general manager of Intel's Desktop Platforms Group.

"I don't see it as a big issue [but] we're paying very close attention," Burns said.

Gartner prinicipal analyst Andrew Norwood downplayed the significance of rising memory prices, noting that Dram makers have laboured through an extended downturn and are now in the midst of a recovery, reflected by higher memory prices.

Moreover, this is not the first time that OEMs have been faced with the possibility of reducing Dram content to avoid raising PC prices, he added.

The business model of PC makers is based on declining component costs, which allows OEMs to offer PCs with greater performance at the same or lower price, he said. However, the Dram market sometimes bucks this trend with higher prices, as is happening now. Norwood noted that PC makers have benefitted from low memory prices in recent years.

"Every PC sold over the past two years has had about $30 of free Dram in it," Norwood said, explaining that many memory makers have been forced to sell memory chips at cost or at a loss in recent years.

"The PC OEMs have really had it good over the last two years and it's time they stopped getting a free ride." 

With OEMs keeping an eye on rising memory prices, there are signs that the upward pressure on memory pricing may have already abated somewhat.

"End users appeared to have picked up sufficient parts over the past weeks to tide them over immediate requirements and were said to be keeping to the sidelines for the moment," ICIS-LOR said, commenting on developments in the memory market last week.

On Tuesday, activity on the Asian spot market showed signs of picking up again as prices remained steady and Dram sellers indicated they were unlikely to fall because of tight regional supply of memory, it said.

With some prices having stabilised or even fallen in recent weeks, the big question is what happens next.

"In terms of future pricing trends, the major question now is whether spot buyers and system manufacturers are going to buy more Dram at the present high prices, or wait for a downward adjustment," iSuppli's Kim said, adding that present spot market prices are "overheated" and should start to drop next month.
However, any respite from higher memory prices may be brief. ISuppli expected to see a Dram shortage during the second half of the year, as demand for memory outpaces increases in production capacity.

Market analyst IDC also expected to see a shortfall in supply of memory later this year. In a February report, it predicted a supply shortage of 4% to 5% during the fourth quarter as suppliers shift production capacity to non-Dram memory types to diversify their sources of revenue and boost profits. However, IDC said it did not expect to see PC makers reduce the average amount of Dram shipped with each computer.

The average amount of memory shipped with each desktop computer will rise from 438Mbytes during the first quarter - a figure that is close to Samsung's estimate of 440Mbytes - to 472Mbytes in the second quarter, IDC said.

The second half of the year will also see increases in the average amount of memory to 500Mbytes and 528Mbytes during the third and fourth quarters, respectively, it added.

These increases in average memory per PC could be slowed down if memory prices remain high, said Soo-Kyoung Kim, program director for semiconductor research at IDC and author of the February report.

IDC's Kim expected memory prices to fall off somewhat during May before rising again in August and September. The price increases are the result of supply-related problems, rather than demand, and memory makers are expected over the coming weeks to heed the calls of OEMs to adjust their production to meet demand, he said.

OEMs can hold out in the face of higher memory prices for several more months before adjustments will be needed to PC memory configurations, he added, but if prices remain high through the third quarter, OEMs will be forced to make some changes, particularly at the low end of their product lines.

Even so, Gartner's Norwood did not expect OEMs to cut significantly the amount of Dram shipped with low-end PCs and noted the amount of Dram will rise again before too long.

Sumner Lemon writes for IDG News Service

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