Why DRAM Chipmakers Need Their Own OPEC (bloomberg.com) 132
DRAM is just as much a commodity as oil. But manufacturers can only dream about the benefits of negotiating supply together. From a report: You've got to feel for the world's biggest suppliers of DRAM. Makers of these chips, which temporarily store information in PCs, smartphones and services, endured years of boom-bust profit swings and bruising competition long before the trade war began. The sector finally consolidated into just three companies holding 95% of global supply of DRAM. And yet earnings stability still eludes them. SK Hynix early Thursday posted an 88% drop in second-quarter net income, the lowest in three years and missing estimates. Investors cheered when the South Korean company concurrently announced that it will slow expansion.
SK Hynix supplies around 30% of DRAM. As much as manufacturers would like to tell you otherwise, these chips are all pretty similar, which is why they're considered a commodity. And with most commodities, like oil, prices shift with supply and demand. Profits, in turn, depend on balancing price and supply against the cost of the multi-billion dollar factories required to churn out these chips. It's no easy task. In fact, profitability is as much a function of game theory as capacity and cost management. If you cut supply while your competitor maintains output, prices may rise -- but most of that benefit goes to your rival and you miss out. If no one cuts supply even when demand is falling, then you're all likely to suffer lower prices, which could drag you into the red.
There's a collection of 14 nations well aware of how this works that came up with an ingenious solution: Sit down and negotiate supply together. Except they're peddling oil, not chips, and the Organization of the Petroleum Exporting Countries can't always see eye to eye.
SK Hynix supplies around 30% of DRAM. As much as manufacturers would like to tell you otherwise, these chips are all pretty similar, which is why they're considered a commodity. And with most commodities, like oil, prices shift with supply and demand. Profits, in turn, depend on balancing price and supply against the cost of the multi-billion dollar factories required to churn out these chips. It's no easy task. In fact, profitability is as much a function of game theory as capacity and cost management. If you cut supply while your competitor maintains output, prices may rise -- but most of that benefit goes to your rival and you miss out. If no one cuts supply even when demand is falling, then you're all likely to suffer lower prices, which could drag you into the red.
There's a collection of 14 nations well aware of how this works that came up with an ingenious solution: Sit down and negotiate supply together. Except they're peddling oil, not chips, and the Organization of the Petroleum Exporting Countries can't always see eye to eye.
