SEOUL Battered Asian memory chip makers will get some respite from oversupply in the long term after German chipmaker Qimonda filed for insolvency but the industry's recovery depends on a pick-up in demand.
Makers of dynamic random access memory (DRAM) chips, used mainly in personal computers and increasingly in mobile devices and game consoles, are fighting a long supply glut and falling demand in a global downturn that is causing them to lose money on each chip they make.
Although the direct impact on chip supply would be limited, Qimonda's troubles should give investors a reason to focus on leading players, such as Samsung Electronics, Hynix Semiconductor and Elpida Memory.
"The Qimonda news is like rain after a long drought," said Jay Kim, an analyst at Hyundai Securities in Seoul.
Qimonda, ranked as the world's fifth-largest memory chip maker in the second quarter of 2008, filed for insolvency on Friday as a result of huge industry price drops and a credit squeeze.
"Qimonda has reached a limit. This will underscore the strength of makers in the relatively superior position, even in the weakening market," said Kim, who upgraded his rating on the world's top memory chip maker Samsung to "buy" from "market perform" on the news about Qimonda.
Elpida's shares were up 4 percent on Tuesday in a broader market rally, after jumping 6.4 percent on Monday, as some analysts pointed to near-term gains for the sector. The South Korean stock market resumes trading on Wednesday while the Taipei market resumes next Monday after holidays.
The sector has taken a beating. Since mid-2008, Samsung is down 29 percent, Hynix 72 percent and Elpida 84 percent while Taiwan's top DRAM maker Powerchip has dived 64 percent.
Last week, Samsung posted its first ever quarterly loss as its memory chip and display units buckled under the weight of diving prices, highlighting the pain faced by technology groups as consumer demand withers in an economic downturn.
CONSOLIDATION THE BUZZ WORD
Qimonda's insolvency filing will help prices of key DRAM chips to rise to vendors' cash cost levels, electronics components research firm DRAMeXchange said.
Over the past few months, some DRAM makers have teamed up to cut costs, while some of the smaller players are likely to exit the business, which is facing its worst ever downturn.
"The Qimonda move is simply one more step toward the inevitable process of consolidation in DRAM," Jim Handy at research firm Objective Analysis said.
Whether Qimonda exits the DRAM business or will be taken over by others, "we anticipate that, by the end of 2009, there will exist at least one less DRAM maker," Handy said.
Producers including No 2 DRAM maker Hynix, have sought funds to weather the downturn, while talks to consolidate Taiwan's DRAM memory chip industry is heating up amid hopes the government would broker a consolidation.
Qimonda's failure will have a limited impact on overall chip supply. In the third quarter of 2008, the German firm held 9.7 percent of global DRAM shipments in its branded sales, but its own production represents only 5 percent of the DRAM market when excluding production by partners, according to iSuppli.
(Additional reporting by Doug Young in TAIPEI; Editing by Anshuman Daga)