Friday, February 6, 2009

The DRAM Debacle Part I

Years of over-investment, particularly in Asia, has led to the DRAM debacle. The global financial crisis has exacerbated what already was shaping up to be one ugly example of excess capacity. Kudos then to the European Commission for telling Qimonda to buzz off (link here). Of course, it appears that Infineon's wise decision to refuse to throw good money after bad played a key role in preventing a Saxony state-led bail-out for Qimonda.

In contrast to these wise choices, the Japanese government still seems to think that DRAM is a critical technology for the rest of its electronics industry (I guess they are stuck in the 1980s or maybe the 1970s) and is preparing to bail out Elpida (link here). At the very least Elpida is probably viable given its scale and technology so the Japanese government is not throwing money down some hole.

One cannot say the same thing about Taiwan's industry. Taiwan's DRAM makers have never attained the scale to support independent technology development so they have remained dependent on foreign partners for technology and been stuck in the low margin DRAM foundry business. Eight years ago two electrical engineering profs at MIT and I pointed out that Taiwan's DRAM sector was underperforming and would continue to fare worse than Taiwan's foundry and then-emerging TFT-LCD sectors given the levels of patient capital needed to attain the scale economies necessary to support continuous innovation in DRAM. The key problem is the mismatch between these capital requirements needed for a successful entry into the DRAM industry and Taiwan's financial system, which is geared more to supporting smaller scale investments with shorter time horizons (link to our early working paper here--the final version was published in Industry and Innovation later in 2003 due to the lightning speed at which academic journals review manuscript). Today Taiwan's government still won't face the facts and give up on this asset-destroying sector. Instead, the state has rolled over loans to the DRAM makers as it contemplates more comprehensive aid packages (to be detailed in my next post).

Of course, the Koreans are not completely blameless either. Some believe that the Korean government's willingness to back Samsung's massive investments irrespective of market prospects is what caused the DRAM glut in the first place (link here). Of course what Korea did Taiwan did as well except on a smaller more fragmented scale.

One has to feel sorry for Micron as it finds itself in the middle of this mess. According to an electrical engineering prof at a major West Coast university who has consulted with Micron intensively over the years, the firm has really made great strides in its manufacturing efficiency in recent years, but this consultant fears that this progress will be all for naught as Micron's overseas competitors receive massive state subsidies and push it out of the DRAM business. Then again, with rumors circulating that Micron is looking to buy Spansion, maybe Micron can still diversify away from this firestorm instead of being consumed by it.

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