Memory Slump Eases Some for Kingston

Orange County Business Journal, Mar 16-Mar 22, 2009 by Tolkoff, Sarah

Kingston Technology Co. and other makers of memory products may be turning a corner after a tough 2008.

Fountain Valley-based Kingston, which makes memory modules for computers and cards for consumer electronics, was hit last year by falling prices for its products amid an oversupply of memory chips and slumping demand for computers and gadgets.

Kingston buys memory chips and assembles mem onto circuit boards mat are used for shortterm data storage in computers. The company also makes memory cards that store pictures, songs and other data in consumer electronics.

Prices for memory chips, made by big chipmakers in Asia and Europe, have been in a freefall since last year, crimping sales and profits for Kingston and others. As the price of memory chips fall, so do prices for Kingston's products.

In 2008, the price for the most common memory chips, known as dynamic random access memory, or DRAM, fell by 55%, according to Nam Hyung Kim, an analyst at El Segundo-based market tracker iSuppli Corp.

Prices fell roughly 40% during the fourth quarter alone.

But now DRAM prices are showing signs of recovering, industry watchers say.

February prices are up about 30% from December, according to iSuppli.

ISuppli's Kim is expecting average selling prices to see an 11% decline in the first quarter from a year earlier-better than the 40% and 50% yearly declines seen in recent months.

"The first quarter seems to be much better," Kim said. "We saw some price stabilization in the spot market earlier this year and we expect a slight price increase during the second quarter."

Price Fallout

The chip glut has taken a toll on Kingston, the biggest maker of memory products with roughly 25% of the market.

On the surface, it might seem lower chip prices would benefit memory products makers, since their biggest material cost is lower. But that's not the case.

"What happens to company a like Kingston is that it's wonderful to have the lower prices, but along with that comes a lower selling price," said Mike Sager, the company's vice president of corporate communications.

When memory chip prices fall, computer makers demand lower prices for memory modules, while prices at electronics stores fall in tandem. It also cuts the value of chips on hand in Kingston's stockpiles.

"Everyone knows what the going rate is for DRAM," Sager said. "If our price is too high, people won't buy it from us."

Kingston gets squeezed as its costs stay the same and profits shrink.

"We make the same percentage in terms of margins," Sager said. "The problem is that 5% of a dollar isn't as good as 5% of five dollars. The cost of our buildings and labor stays fixed, so it makes it more difficult for us to tum a profit."

The company last week reported a decline in yearly sales for the first time in half a decade.

Kingston posted 2008 revenue of $4 billion, down 11% from 2007. It doesn't disclose profits or any other financial details.

The company is starting to see some signs of a market turn, as indicated in the recent uptick in DRAM prices.

"We started to see a bit of turnaround in January," Sager said. "It looks like there is some type of recovery going on but our crystal ball is no better than anyone else's."

Some memory chipmakers, such as South Korea's Samsung Group and Hynix Semiconductor Inc., have cut their production in a bid to reduce a glut of cheap chips.

"Inventories are very fluid and fluctuate easily," said Sam Caldwell, memory analyst for iSuppli. "A lot of chipmakers that had built up inventories had to reduce production in response to the lower prices. That's a big part of the equation, but the market is very sensitive right now."

It's a tough move for chipmakers.

"The DRAM chip manufacturers are in a constant battle to cover their costs of production," Sager said. "Even if the market is oversupplied, they continue to manufacture chips."

Consolidation

Prices may stabilize after a few struggling Taiwanese chipmakers earlier this month were forced to consolidate to survive. The tiny island was home to some half a dozen DRAM makers.

Earlier this month a few of them combined to form Taiwan Memory Co. and took an $860 million bailout from the government in Taipei.

The new company is a sort of consortium of chipmakers with the government owning a roughly 50% stake.

The newly minted Taiwan Memory is looking to share technology and nab investments from other, healthier DRAM makers, including Japan's Elpida Memory Inc. and Idaho's Micron Technology Inc.

Last month, Kingston cofounder and President John Tu told Reuters that his company "wants to play a helpful role" in the consolidation, but didn't elaborate.

Kingston has a practice of working with its memory chip suppliers, including helping them out if they fall into dire straits.

Kingston helped back a new loan for Taiwan's ProMOS Technologies Inc., which now is part of Taiwan Memory, according to Reuters.

The move was meant to help "preserve our good historic relationship," Tu told Reuters.

A spokesperson for the company said Kingston "obviously has a very strong interest in what happens because we are a big consumer of DRAM chips" but said it's "not involved in the formation of the Taiwan Memory Co."