Can the Semiconductor Industry Get Out of the Rut?

The semiconductor industry, one of Korea's flagship industries, is stagnant. Since the beginning of the year, demand for the chips has been growing but prices are dropping sharply. The contract price for DRAM chips, the industry's main product, dwindled to less than US$2 as of September, from around $6 at the beginning of the year. It rallied at the beginning of the second half this year but immediately started to drop again.
The problem is there is no sign of recovery due to oversupply. Microsoft's new Windows Vista operating system is not resulting in replacement of the PCs as expected. New products such as digital cameras or MP3 players, which once exploded the demand for Flash memory chips, did not arrive fast enough in the market, so the semiconductor industry is struggling to find a new breakthrough.
◆ Structural oversupply
The worldwide semiconductor industry has aggressively increased production for the past two or three years. Samsung Electronics planned to build eight new production lines for $33 billion by 2012, including the 15th line which started operation last year. Hynix Semiconductor in April broke ground for a new production line in Cheongju, aiming to complete four “fabs” -- fabrication facilities -- by 2010.
This year, Taiwanese chipmakers including ProMOS Technologies and Nanya Technology started to operate fabs capable of processing 60,000 wafers -- the board from which chips are cut -- and 62,000 wafers a month. At the beginning of the year, the world's fifth largest DRAM chipmaker Elpida Memory started to mass-produce 70-nanometer DRAM chips for the first time in the world, and formed a joint venture with Taiwan's Powerchip Semiconductor to build four plants in Taiwan aiming at producing 240,000 wafers per month from 2011. The world's second largest Flash memory chipmaker Toshiba also started to mass-produce 56-nanometer NAND flash memory chips and the U.S. chipmaker Micron Technology established a joint venture with Intel, the world's top chipmaker, to compete with Korean firms.
◆ All bets are off
Lee Byung-joo, a research fellow at the LG Economic Research Institute, commented in a recent report, "Due to foreign chipmakers' aggressive investment in facilities, the position of Korean chipmakers which have led the world chip market, is now insecure." So far, each firm has made nearly a monopoly of each sector of the semiconductor industry ? for example, Samsung Electronics for memory chips and Intel for non-memory chips. These giants with the technology, money and production capacity have occupied the market, and when latecomers enter, the incumbents have cut prices to kill them. "This strategy works when the market is growing, but in a stagnant market or when consumers' needs change very slowly, it doesn't work," Lee said.
◆ Technology development can boomerang
Fast development in technology when demand is not that high can lead to oversupply, some experts say. Above all, Microsoft's Windows Vista has not generated a great deal of demand in the semiconductor industry yet. For stability reasons, there are few PCs with the Vista operating system in the market. The U.S. consultancy firm Forrester Research said last August that despite Microsoft's aggressive marketing, U.S. enterprises were slow to adopt Vista, and even the 2008 Beijing Olympics will apparently use Windows XP instead of Vista for its official PCs.
Under these circumstances, Samsung Electronics and Hynix Semiconductor, and even Taiwanese chipmakers that have been considered behind in the technology, have increased the memory capacity more than twice with nano technologies. Moreover, most chipmakers adopted the 300-mm wafer process which can increase production 2.5 times over the 200-mm wafer process. In other words, supply has gone up fivefold since 2000 by technology leap alone. "Fast technology leaps without demand brought about oversupply, miring the chipmakers in the current situation," says a Mirae Asset Securities analyst.
◆ Restructuring?
Industry watchers expect the oversupply to last until the first half of the next year. Then the gap between industry leaders such as Samsung and latecomers will widen again and bring about restructuring of the industry, as in the late 1990s.
Not everyone agrees. Repeated restructuring in the past, they say, was enough, and there now remain only a handful of chipmakers worldwide -- Samsung Electronics, Hynix Semiconductor (Korea), Infineon Technologies, Qimonda (Germany), Micron Technology (the U.S.) and Elpida Memory (Japan), leaving aside Taiwan and China, where the governments are strategically fostering the semiconductor industry. Thus any further restructuring would have to be more brutal and will damage the players too.
Keyword/DRAM and Flash memory
DRAM is an acronym for Dynamic Random Access Memory. Usually, DRAM is used for auxiliary storage in the computer. It can process data at high speed, but if the power is off, the input data all disappear. However, the data stored in Flash memory do not disappear even after the power is off. Flash memory is used for storage for digital cameras, MP3 players and mobile phones.
Source: (englishnews@chosun.com )