DRAM makers heat up technology race for next upturn

By Baker Li - Analysis

TOKYO (Reuters) - All personal computer memory chip makers are sharing the pain of the sector's worst downturn in history, but only those companies which can cut costs, while bringing out more profitable chips used in new games consoles and mobile phones, will benefit from a nascent recovery.

After a slump that lasted well over a year, chip prices are beginning to stabilize, while demand for a new crop of personal computers and handheld multimedia devices that require specialized chips signals the market is on the brink of recovery.

Market researcher iSuppli Corp is optimistic, saying it is likely to upgrade its rating on the computer dynamic random access memory (DRAM) market to positive. It has already raised its recommendation to neutral from negative.

Standard DRAM chips -- still the mainstay of these companies' revenues -- are commoditized items, making it tough for rivals to make their products stand out.

But companies, such as Samsung (005930.KS) and Qimonda QI.N, can also get an edge in the market for specialized, more powerful chips that go into smartphones, game consoles -- such as Microsoft's (MSFT.O) Xbox and Nintendo's (7974.OS) Wii -- and other mobile devices used for e-mail and multimedia functions.

"One must understand that we are very clearly moving away from commodity business and putting all our energy in the non commodity business," Qimonda Chief Executive Kin Wah Loh told the Reuters Global Technology, Media and Telecoms Summit.

Analysts expect sales of DRAM chips to fall by just over 10 percent this year, but after that, global sales are set to grow by a fifth, reaching $33.3 billion in 2009. specialized DRAMs should contribute about one-third of that total, say UBS.

CUTTING COSTS

For standard DRAM chips, chip makers need to cut production costs by employing more advanced technology.

Analysts say the biggest companies, the likes of Samsung, Hynix (000660.KS), Qimonda and Japan's Elpida Memory Inc (6665.T), are best placed to invest in the technology upgrades needed to make production more efficient, and therefore, cheaper.

"The most important task for DRAM companies this year is cutting costs, so they can make profits even with low prices," said Jae H Lee, an analyst at Daiwa Securities.

Most DRAM makers have posted losses over the past several quarters as chip prices have tumbled over 80 percent in the past year, but analysts say they should break even later this year and return to profits next year.

Investors had bought into better earnings prospects, sending shares of sector leader Samsung Electronics Co Ltd to an all-time high last week. Shares of No.2 Hynix Semiconductor surged to their highest level in more than seven months.

On the spot market, the average selling prices of both 512 megabit and 1 gigabit higher-speed double-data rate two chips are likely to rise 30 percent by September, according to online chip clearinghouse DRAMeXchange.

Samsung is already churning out DRAM chips using its latest 56-nanometre technology, or 56 billionths of a meter, and Hynix is introducing similar technology to produce DRAMs now.