Margins on the Upswing, DRAM Profitability Hits New Heights

October 21, 2013 -- The global market for dynamic random access memory (DRAM) continued its winning streak in the second quarter as manufacturers reported improved operating margins because of higher average selling prices (ASP), according to a new DRAM Dynamics brief from IHS Inc.

Operating margins climbed to a lofty 27 percent during the April to June period, up from 11 percent in the first quarter. The most recent performance was the highest of the last 10 quarters, exceeded only by the 33 percent level attained in the third quarter of 2010.

It now also means that operating margins have climbed two straight quarters after six successive periods of decline. The increase in operating margin during the last two quarters stemmed from the encouraging rise of DRAM ASPs. After 10 quarters of continuous contraction, DRAM ASPs jumped 4 percent in the first quarter, and then powered up another 12 percent in the second quarter, boosting operating margins in the process.

The spectacular run so far can be attributed to a markedly changed industry. The DRAM business today is vastly different from what it was two years ago, when ASPs sometimes plunged by nearly a third within a single quarter. For the past two quarters, however, DRAM suppliers have been enjoying the fruits of industry consolidation with only three major players now left in the market. The resulting realignment in capacity has brought stability.

Strict capacity management is also playing an important role in the industry’s improved fortunes. While oversupply was a recurring problem in the past, DRAM suppliers have been at pains to rein in any overexuberance in production. The tight controls have steadied conditions in supply and demand, and the positive margins enjoyed in the first half of the year should continue for the rest of 2013, IHS believes.

The best operating margins in the second quarter belonged to South Korea’s SK Hynix at an impressive 33 percent, and to Elpida Memory of Japan at an equally remarkable 32 percent. Both were superior to the 28 percent margin posted by top DRAM producer Samsung.

Three suppliers whose margins were in negative territory in the first quarter turned positive in the second quarter. These included Micron Technology of Idaho, Elpida’s new owner, up to 12 percent; Inotera of Taiwan, reversing its decline to reach a powerful 27 percent; and Winbond Electronics, also of Taiwan, which had the lowest margin growth at 6 percent.

Two other Taiwanese producers offered contrasting results. Nanya Technology enjoyed a minimal uptake in margin, up just 1 percent, as costs increased due to changing product mix. Meanwhile, Powerchip Technology posted much better results with the third-best margin overall at 29 percent.

The DRAM industry is in fine form and strength at present, a notable turnaround coming from a major bust in 2011 followed by a milder downturn for most of 2012, Even with a languishing PC market on the horizon, DRAM suppliers are being savvy, and the vastly improved results are telling.

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