Worst over for memory sector but no golden days ahead

SEOUL/TAIPEI (Reuters) - After a crunching two-year slump, the memory chip industry seems to have finally found a floor, but looks unlikely to regain its former status as the technology industry's golden goose.

Worse still, some analysts think recent price rises have prevented a much-needed restructuring of the industry, leaving it over-crowded and still vulnerable to damaging boom and bust cycles.

"Except for the world's number one leader, Samsung Electronics (005930.KS), all other DRAM makers must figure out how to retain cash and survive," said Kenneth Lee, a vice president at Taiwan's Fubon Securities Investment Trust.

Some look unlikely to secure a long-term, stand-alone future.

Taiwan's government earlier this year set up Taiwan Memory Co (TMC) to promote consolidation needed to avert the collapse of the island's DRAM chip industry.

"We still think ProMOS (5387.TWO) will be forced to drop out of the game eventually because the company is not going to raise fresh money to upgrade its technology," Lee said. If ProMOS exits the market, the industry may see more stabilization, he added.

TMC announced a technology partnership with Elpida Memory (6665.T) of Japan in early April, but the company has given no updates since then.

The current memory chip downturn, which started in early 2007 and was compounded last year by the global recession, saw the price of some key chips drop 90 percent, well below companies' production costs.

Thanks to drastic output cuts made by chip makers in the face of colossal losses, prices finally stopped their free fall and some balance seems returning to the market for dynamic random access memory (DRAM) chips, widely used in personal computers.

"We will see the supply cuts taking a full effect in the second half, with demand and supply striking a balance," James Kim, vice president in charge of investor relations at Hynix (000660.KS), the world's second largest memory chip maker, told the Reuters Global Technology Summit in Seoul earlier this week.

CROWDED RACE

With the industry having slashed investments by about 50 percent in 2008 and 60 percent in 2009, analysts believe there is little risk of an imminent return of a supply glut.

Shipment growth for DRAM chips is expected to drop from more than 60 percent in 2008 to a mere 10 to 20 percent in 2009. Expectations for 2010 are hovering between 30 and 40 percent growth, which would still be well below the industry's past breakneck pace.

The problems facing cash-strapped Taiwanese, who would have a hard time suddenly ramping up output, also make a sudden a upsurge in production unlikely.

Some analysts believe demand could also improve, with computer sales likely to receive a boost from a strong push by Microsoft (MSFT.O) for its Windows 7 operating system.

"The second half of 2009 should mark the start of an upcycle, even if demand doesn't pick up dramatically," said Kim Ji-soo, an analyst at Goodmorning Shinhan Securities.

But others say the absence of a sweeping restructuring in 2009 is likely to keep the weakest players in the crowded race, with the potential of more price wars in the longer term.

"If you consider the cumulative declines in price, industry revenues today are down about 45 percent from 3-4 years ago," said Robert Lea, an analyst at UBS Securities. "

"The market has basically halved in size. No wonder it cannot support all the players."

(Editing by Lincoln Feast)