Analysis – Memory madness all over again

The news that Micron is cutting executive pay by 20% to deal with the fearful conditions in the memory market takes one back 25 years to the days when all American semiconductor companies made memory, and all had to deal with the vagaries of the market.

One remembers the 125% solution adopted by another US memory firm in the dog days of the ’80s, when it was decreed that everyone would work 25% longer to get project targets accelerated by 25%, for the same pay.

Micron has decreed that, in the wake of seven consecutive quarters of losses concluding with a $344m loss for fiscal Q4, making a $1.6bn loss for the fiscal year, that the execs shall take some of the pain.

Of course, unless they are paying their execs at Wall Street levels, the savings will make not a blind bit of difference. They are an insignificant factor in the equation.

The only thing that will make a difference, as memory makers know well, is to cut back on production. This is the only way to balance supply and demand and get prices to a reasonable level.

In a market which can swing from being worth $40bn to being worth $14bn within 12 months, there’s no way known to man to pre-plan sufficiently precisely to fit your factory capacity to the demand.

So an ex post facto cutting of output is the only way to cope with massive over-supply. But cutting back volumes is the last thing memory makers want to do. If you run a fab half full, you run it inefficiently. If you turn off a fab, you forego a big chunk of market share and give up any hope of getting a return on its cost.

This is why Hynix is closing down older, depreciated fabs as it brings up a new fab, while other memory makers, Elpida and Powerchip, have announced 10% memory production cut-backs and big capex cuts.

But everyone hates cutting back as much as a middle-American Congressman hates voting for a Wall Street bail-out. And the reason is similar – the mentality of the memory makers.

Last year memory manufacturers spent $35bn on new capacity. This year they’ll spend $25bn. The size of the memory market (DRAM + NAND) is around $43bn. The figures speak for themselves. It’s madness.

Ulrich Schumacher, former CEO of Infineon, once referred to the memory manufacturers as ‘modern galdiators’. Once you start seeing yourself as a gladiator, rather than an inky-fingered, balance-sheet, number-cruncher, there’s no limit to the pain you’ll take, and the blood and gore you’ll spill, before you take the wimpy way out of cutting output.

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