It’s time to pay the bill for the rising value of the yen and the years-long boom in semiconductor sales. The big memory-chip makers are gearing up for a series of price hikes, and the increases could add as much as 20 percent to the price of DRAMs and other key products by midsummer.
This isn’t just a blip. Capacity throughout the entire semiconductor industry is unusually tight, says Trina Garrett of Rioworks, and it will stay that way well into 1996. Eight-inch wafers are in short supply, SRAMs are scarce, and process equipment is hard to get. The situation threatens high-flying fabless semiconductor companies which can’t buy enough capacity, as well as margin-starved system vendors, which find themselves renegotiating long-term contracts. “We’ve got escape clauses and we’re going to invoke them,” says an executive for one of the largest DRAM suppliers. Analyst Erik Jansen of Alex. Brown and Sons says that smaller companies, or customers that experience spikes in demand, might not get the product they need–at any price.
DRAM prices have already started to climb. Orders booked in April jumped 5 percent across the board, says Dave Guida, president of Royal Technologies, a memory distributor in Austin, Texas. Prices for SRAMs, used to create a secondary memory cache, are climbing even faster. Five-volt parts increased 20 percent in mid-April, and 3.3-volt SRAMs–a must for Pentium systems–soared nearly 25 percent, says Jessie Sanini, president of BJS Electronics, a San Jose, Calif., distributor.
Who’s the villain here? There isn’t one. But the immediate cause of the crunch is easy to spot: the wild ride of Japan’s yen. Consider South Korea’s Samsung, the world’s largest memory maker. Samsung buys wafers, materials, and process equipment from Japan. “My costs are up more than 15 percent,” says Keith McDonald, Samsung Semiconductor’s senior vice president for sales and marketing. How much will Samsung pass along? McDonald won’t say. “But we’ll have to raise prices,” he acknowledges. Japanese compani es are even worse off. “The appreciation of the yen in the last weeks has been unprecedented,” says Bob Brown, executive vice president of Toshiba America Electronic Components. “No company can take costs down that fast.” Toshiba started raising prices in early April.
This was supposed to be the year supply caught up with demand. If that were so, chip makers might be eating their currency-related losses. But demand remains surprisingly strong. The burgeoning appetite for PCs and other electronic goods pushed sales of memory products from $14.8 billion in 1992 to $31.4 billion in 1994. Sales could hit $36.6 billion this year, according to the Semiconductor Industry Association. “Frankly, it fooled us all,” says Dan Hutcheson, president of VLSI Research, who predicted a s lowdown.
As it turns out, the industry can’t keep up. One reason: Chip makers are waiting longer for production equipment. Applied Materials has ramped up capacity by 40 percent per year for the last four years. But it hasn’t been enough, says Vinod Mahendroo, Applied’s voce president of corporate marketing. Lead time for steppers, the most crucial piece of equipment on the fab floor, has increased to an unprecedented 12 months to 15 months. The wait for other equipment is four to eight months, he says. No relief i s expected until year’s end.
Foundry companies can’t keep up with the torrid pace, either–even though they’ve poured billions of dollars into new plants and equipment. “We’re shipping 85,000 [6-inch equivalents] a month now. I could sell 20,000 more if I had the capacity,” says John Luke, president of TSMC-USA, which is spending $500 million a year to add capacity. “If I believe our customers, I don’t see equilibrium until mid-1997,” he says. And don’t be fooled by the seemingly huge amount of capacity coming on-line this year. Ram ping a big IC factory can take as long as two years.
In some respects, the fabless semiconductor companies have the most to lose. A recent Fabless Semiconductor Association survey found that members will need manufacturers to increase wafer production by nearly 75 percent by 1997. “The next nine to 12 months are going to be critical–some companies won’t survive,” says Steve Saller, executive director of contract manufacturing for SMOS Systems.
How will system makers react? Privately, some say the early round of price increases hasn’t been hard to bear, but bigger hikes could be another story. Others say they have the leverage to fight. For now, anyway, analyst Doug Kass, of the Viewpoint Group, in Santa Cruz, Calif., believes most OEMs won’t pass on the increases. “The real issue is, will prices erode to the point that they can’t continue to eat them?” he says. The margin crunch could come when Windows 95 and Pentium systems take hold and force OEMs to ship systems with 16M bytes of expensive main and cache memory.
The outlook: Expect price pressure to continue for the rest of the year. If the dollar stabilizes, the market should ease by late1996. But if the free-fall continues, watch out.