(Bloomberg Opinion) -- 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 Inc. 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. Still, it’s better than nothing – if you’re an oil producer.
Unfortunately, technology companies can’t get away with this kind of collective bargaining. They’ve tried. Antitrust regulators frown upon such practices and in the past have meted out hefty fines and thrown executives in jail for doing so. More recently, China started looking at Samsung Electronics Co., SK Hynix and Micron Technology Inc. to see if they conspired to prop up prices.
Beijing has another reason for cracking down on the big players: China is determined to break into the DRAM market itself, as part of its long-term goal to be technologically independent. In line with this strategy, government-linked Tsinghua Unigroup Co. last month announced a new DRAM group, to be led by Taiwanese industry veteran Charles Kao.
This news ought to have the top three players on tenterhooks. They know that while China’s semiconductor technology lags far behind, the nation has deep pockets and unlimited determination. When such capacity does finally come on the market, the world could face huge oversupply subsidized by the Chinese government and to the benefit of the new entrant.
That sounds kind of unfair to the remaining players in Survivor: DRAM Edition, especially given they don’t have their own OPEC to complain to.
To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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