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Steep memory hike unlikely to affect retail PC prices

Profit margins too small to absorb increase

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The sharp rise in prices of 64Mb DRAM, the most commonly used computer memory chip, will have a relatively small impact on the retail prices of computers, industry sources say. Analysts predict that at worst, some low-end products could be affected -- because profit margins are too narrow to absorb the DRAM price increase. Spot market prices of 64Mb DRAM chips have tripled in the past three months, rising from about $4 to almost $13. Industry watchers were initially baffled by the sharp rise in prices, which apparently began with unfounded rumors of production problems at major DRAM maker, Micron Technology. However, most industry observers now agree: prices had fallen so low earlier this year that manufacturers switched production to more profitable products. A slight rise in demand was then enough to cause shortages and a price increase. "First of all there's a shortage of flash memory," said Jason Tuan, deputy head of research at Taiwan Securities, "due to the strong demand from mobile phone handsets, so quite a few large Japanese memory manufacturers transferred capacity from DRAM production to flash memory." Tuan, and others believe that US-based Micron, probably the world's largest DRAM maker, has had a significant influence on prices this year. The company built up an excess of unsold memory chips earlier in the year. In the second quarter, Micron solved its inventory problems at a stroke by supplying a "significant amount" of 64Mb DRAM to computer maker, Compaq, at very low cost. "In the second quarter," Tuan said, "the 64Mb DRAM priced dropped close to $4. At that time, most DRAM producers could not make any profits at all". Most DRAM makers have suffered significant losses in the past two years. In June, analysts estimated that manufacturers had to sell each memory chip for $5 simply to break even. "At that time," Tuan continued, "producers who transferred their production to 128 Megabit DRAM could earn more than 50 percent gross margin. So quite a number of the leading manufacturers increased their capacity allocated to 128Mb products. Therefore, in the third quarter, when the 64Mb price stabilized, and started going up, many companies had already moved into higher end products... supply could not catch up with demand, and inventory went down very quickly." The effect of the memory price rise on notebook computer prices is "pretty minimal", said Andrew Lin of Jardine Fleming Securities in Taipei, "because DRAM [cost] is not really a huge input to notebook costs. For example, for Acer's popular models, like the 510, DRAM is only about 7.5 per cent of the [material] cost." This is negligible compared to more important components like the LCD screen, which can be 40-50 per cent of material costs. The effect on overall notebook costs, Lin estimates, is around one to two per cent. "Desktop PC systems might see a slightly bigger impact," Lin believes, "since material cost is a lot lower compared to notebooks, but then again it's still minimal -- two to four per cent." However, some desktop PC makers have operating margins of only two or three percent, Lin said. "That hurts, but from what I know they all have long term relationships and contracts with [memory manufacturers] they've all more or less secured a supply of DRAMs... They're buying in such big lots from DRAM producers -- they usually have pretty good bargaining power." ®

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