A steep drop in prices for memory chips,the building blocks for memory circuit boards made in large part in Orange County,shows no sign of changing course this year.
The falling prices have squeezed profits and crimped sales growth at memory board makers such as Fountain Valley’s Kingston Technology Co. and Irvine’s Netlist Inc.
A first-quarter buildup of unsold memory chips amid weak demand by computer markers has market watchers predicting the price for memory chips will fall by nearly half by the end of the year from late 2006.
In the first quarter, prices for dynamic random access memory,DRAM in tech speak,fell 25% from the fourth quarter, according to Semico Research Corp. in Phoenix.
They fell another 20% in April alone, Semico said.
Memory chips from big producers such as Samsung Corp. and Hynix Semiconductor Inc. are the key part of memory boards from Kingston and others. The boards are used for short-term data storage in computers, networking gear, mobile phones and consumer electronics.
On the surface, it might seem lower chip prices would benefit board makers, since their biggest material cost is lower. But they don’t.
When memory chip prices fall, computer makers demand lower prices for memory boards, while prices at electronics stores also fall in tandem.
“Price drops can have a major impact on us depending on how much inventory we are carrying,” said Al Soni, vice president of strategic alliances for Kingston, the largest memory board maker. “When the prices fall like what we’ve seen in the last few months, our inventory depreciates in value every day.”
Last month, Netlist, one of the few publicly traded memory board makers, warned about results for the first and second quarters because of the memory glut and slack demand from server makers.
Varied Impact
While all board makers likely are feeling pain, the degree may vary by company size, said Bob Merritt, a Semico analyst based in Dana Point.
Smaller companies tend to buy memory chips on the spot market, taking advantage of lower prices, according to Merritt.
Kingston and other big players buy chips in bulk under contracts with set prices. About 60% of board makers get chips through contracts, he said.
“The companies in Orange County involved in making modules for the secondary market are able to follow these market changes quicker than the bigger companies that buy on the contract size,” he said.
Kingston is among the top four buyers of memory chips, the company’s Soni said. It strikes contracts with chipmakers on a weekly basis, he said.
The company can buy more or less depending on prices on a given day, he said, though often it gets locked into a price for a big order.
“We thought the market had bottomed out but we continued to lose money,” Soni said.
Kingston and others can’t raise prices to make up for it since computer makers and others know the cost of each chip and will take their business elsewhere.
“They are very much in tune with the market,” Soni said. “It doesn’t give us an opportunity to make big margins.”
The best the company can do to recoup its losses is try to “cost average the inventory downward,” Soni said.
As Kingston buys cheaper chips, the average price per chip it has goes down, softening losses.
Smaller players could look to gain market share in what stands to be a tough year, Semico’s Merritt said.
Other local players include Irvine’s U.S. Modular LLC, Rancho Santa Margarita-based Viking InterWorks Inc., part of Sanmina-SCI Corp., and Santa Ana-based STEC Inc., formerly SimpleTech.
Nearly all of the major board makers are here, except for Smart Modular Technologies Inc. in Fremont and PNY Technologies Inc. of New Jersey.
For smaller companies, the hope is that lower prices spur more sales.
STEC, which buys memory chips and packages them into flash memory cards for industrial uses, has seen more buying, according to Pat Wilkison, vice president of marketing and business development.
“It’s been fantastic for us,” Wilkison said. “It’s great for our customers because pricing declines allow you to get a whole lot more.”
Like others, STEC has had to lower prices, Wilkison said. But there’s usually a lag that allows room for profits, he said.
Chipmakers Hurting
If there’s any consolation for board makers it’s that chipmakers themselves are getting the worst end of the price crash.
Most are selling chips at cost or below,usually somewhere around $2 a bit for 512 megabyte chips, which is the industry standard, Merritt said.
There are only a handful of memory chipmakers.
South Korea’s Samsung has the biggest chunk of the market at 24% in 2006, according to Semico.
“We will see a slowing of the price decline and a fairly stable decline of prices for at least the back half of this year,” Semico’s Merritt said.
