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Industry Report

Industry reports, briefs and video-clips issued by Samsung Economic Research Institute

Will the Semiconductor Market Recover in the Second Half?

Will the Semiconductor Market Recover in the Second Half?

JEONG Dong-Young

July 25, 2008

Transcript

Welcome to our video program. I am Dong-Young Jeong from the Technology and Industry department.

Memory chips are a mainstay industry in Korea, and one of the industries where Korean firms have gained the most ground against their Japanese counterparts. In Japan, however, local semiconductor manufacturers are showing signs of a recovery after a virtual “lost decade” of stagnation. Things are less rosy in Korea, where the semiconductor industry has recovered somewhat from the slump in 2007 but remains below expectations. Accordingly, related industries have begun to express concern on prospects for the industry. Today, we will review the current status of the semiconductor market as well as its prospects throughout the second half of the year.

Let's look at the price trend in semiconductors from a supply and demand perspective. The price of 512 mega-bit DDR2 DRAMs, which fell to 95 cents in January 2008, reversed course and rose upward from mid January. After prices fell back in May, prices have stayed around US$ 1 ever since.

The prices of 8 giga-bit MLC (Multi-level Cell) NAND flash memory, which had fallen down to US$ 2.5 in April, bounced back to US$ 3.4 in May. Prices started to swing down sharply from late May again. Since then, prices have been moving laterally around US$ 2.3.

Current memory prices are experiencing only limited movement. What will be the prices of semiconductors in the future? Simply put, the prices of memory will likely bounce back somewhat, but dramatic rises are not in the cards. Let's go over the reasons for this in detail.

First, there are no favorable factors to boost demand for DRAMs. DRAM prices have risen because second tier DRAM makers, which suffered losses when DRAM prices plunged in 2007, reduced DRAM capacity expansion in the first quarter of this year.

Under these circumstances, PC OEM companies purchased large quantities of DRAM in preparation for high PC demand in the second half. This exerted upward pressure on spot prices of DRAM, pushing them up to $1.05. Now, as PC companies have built their inventories, DRAM prices have fallen down to under US$ 1 and are currently moving in a small band.

Another reason for the slower-than-expected recovery in semiconductors is that PC manufacturing is more dominated by a few companies. Recently, the laptop computer market has been growing fast. As it claims over 40% of total PC demand, PC manufacturers have fallen into fierce competition. Furthermore, there is a phenomenon where rich companies grow ever larger while marginal players lose market share. The market share of top level PC brands continues to increase while that of second tier PC manufacturers is experiencing a slump. As top-level PC manufacturers secure stable supplies of high quality DRAMs by increasing DRAM contract volume, the contract prices of DRAM have risen slightly. However, the overall demand for DRAM in the spot market fell, causing DRAM spot prices to drop.

In addition, the slowdown in the global economy in the third quarter will continue to exert a negative influence on the PC market. This is considered another limiting factor in the growth of the DRAM industry.

Of course, there are some factors to improve the current imbalance of supply and demand gradually in the second half. On the supply side, there will be a full-scale switchover in DRAM processing in the industry and leading DRAM makers will likely increase production aggressively. However, DRAM supplies will not increase sharply as leading DRAM makers are expected to reduce old production facilities, while second tier DRAM makers will reduce investment to deal with mounting losses and to upgrade from current processing technology. Accordingly, the imbalance of supply and demand is likely to improve slightly in the second half compared to the first half.

In a nutshell, the memory chip market will improve only slightly, causing Korean memory chip makers to face some difficulties. Also, companies willing to change processing technology from trench technology to stack technology, such as Infinion and Nanya, will suffer more in the second half.

Korean chip makers, as the current leaders in the memory chip market can still establish a more solid foundation by treating this crisis as an opportunity and upgrading their competitiveness and technological skills.

Thank you for watching. I'm Dong-Young Cheong.

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