Governments line up to bail out DRAM makers

DRAM makers are facing one of the worst downturns in their history and governments around the world are lining up to help companies through the mess.

Taiwan, Germany and South Korea all appear poised to offer some assistance to their DRAM chip makers. The need could not be greater. Long before the global financial crisis hit, DRAM makers suffered steep sales declines due to a glut of their chips.

DRAM prices are now at rock bottom and companies are cutting back production instead of making more chips at such steep losses. The next few weeks will be the best time in years to buy new DRAM.

But for DRAM companies and governments, problems have worsened. A few of these heavily indebted chip makers are running out of cash, and whereas a company failure would help rivals by wiping out some excess production and boosting prices, it could also have broader economic repercussions for the banks and investors that supported them.

"This industry is going through a critical stage," said Ben Tseng, a vice president at Taiwanese DRAM maker ProMOS Technologies.

"DRAM is a very important part of the PC industry supply chain," he added. Every PC requires several of the chips to store programs and data as they're being used. More DRAM is made every year than any other kind of chip in the world, so much so that the chips are traded on global spot markets just like commodities such as oil and gold.

The chip makers' problems are indicative of global woes. Easy lending terms and a bright view of the future prompted them to build too many new DRAM factories. Much of the new output was aimed at Microsoft's Windows Vista OS. The OS requires more memory per PC than older OSs, and DRAM companies hoped Vista would be a blockbuster, sending people scurrying to buy new laptops and PCs or to upgrade memory in existing machines.

But those hopes faded as Vista sales failed to meet expectations. A new reality set in. Without strong PC sales to soak up all the excess DRAM pouring out of new factories, chip prices plummeted and companies started losing money.

The financial crisis has added to DRAM misery by making loans harder to come by and prompting some creditors to ask for early debt repayment. Now the situation appears to be further worsening because economic woes in many countries are causing consumers to rein in spending, particularly on PCs, where most DRAM chips end up.

"The first quarter is likely to be the worst first quarter for the PC in its history," said Jenny Lai, analyst at CLSA Asia Pacific Markets in Taipei. She estimates that unit PC shipments will likely decline 20 percent to 25 percent in the first quarter.

Such a decline would spell disaster for some DRAM makers.

Taiwanese DRAM companies have been posting losses since around the middle of last year. Total losses this year for the five biggest memory chip makers hit NT$94.8 billion (US$2.85 billion) as of the end of the third quarter.

Germany's Qimonda AG made a net loss of €1.48 billion (US$1.95 billion) in the nine months to June 30, and has delayed latest quarterly earnings report pending a hoped-for deal with the German state government of Saxony. The company will run out of cash in the first quarter of next year unless it finds new investors or a strategic partner, or the DRAM industry takes a turn for the better, it said.

The IDG News Service is a Network World affiliate.