Less capacity means more stable chip prices

By Jim Carbone -- Purchasing, 3/6/2008 6:40:00 AM

Many semiconductor companies, especially memory IC makers, have announced plans to reduce capital spending this year. The reduction will mean capacity won’t grow as much as previous years. With unit demand expected to rise, there will be less inventory, and price declines should be less than last year.

But semiconductor buyers, especially those who don’t purchase memory ICs, should not be overly concerned with the decline in capital spending by semiconductor manufacturers and the impact on chip prices, especially in the first half of the year.

While the capital spending cutbacks will eventually result in tighter supply and firming prices, its impact will be felt primarily with memory ICs. DRAM prices will still fall, but not as much as last year when they dropped 35% on average. Some DDR2 DRAM prices fell 70% last year. Those price drops resulted from oversupply and efforts by chip makers to gain market share or protect the share they owned.

Memory suppliers have announced capital expenditure cutbacks in a bid to reduce the growth of supply and to slow down or stop price erosion, However, prices for some DRAMs still fell in January and early February, according to researcher DRAMeXchange, based in Taiwan. For instance, the average spot market price of a DDR2 400MHz 64Mb x 8 DRAM fell from $2.54 in early January to about $2.25 in mid February, according to the researcher.

Prices are falling because of high inventory levels, says Len Jelinek, director and principal analyst semiconductor manufacturing with researcher iSuppli in El Segundo, Calif. He says memory suppliers fill their factories with production lines and pump out product. When prices are low, “they gather inventory and wait for prices to turn around and that is the position they are in now.”

“Their lack of spending capital in the near term is their attempt to modulate that mountain of inventory down as well as stabilize pricing,” says Jelinek.

Some purchasing executives are worried about the lack of investment by chip makers because of the potential impact on supply and prices in the future.

“I am concerned about the DRAM industry,” says Greg Shoemaker, vice president of purchasing at Hewlett-Packard, based in Palo Alto, Calif.

“The supply base is in the midst of cutting back on their capital spending because they can’t afford it. They don’t have the cash or the financing to continue to invest at the same rate as the last several years because they aren’t getting the returns they need,” he says.

Also see, 2008: electronics pricing outlook