Semiconductor prices fell by more than 30 percent at the start of this year, which is "inordinate" because demand is so strong.
Alarming price declines in some types of semiconductors have sucked the revenue growth out of the industry for 2007. The Semiconductor Industry Association (SIA) initially thought revenue would grow about 10 percent this year. Instead, the SIA now believes that revenue will hit US$252 billion, a 1.8 percent increase over 2006.
The average selling price of DRAM, the type of memory used in PCs, dropped 33 percent from December to April. Flash memory prices have declined by 35 percent, year-over-year, yet shipments have gone up 54 percent.
"This is inordinate," said George Scalise, president of the SIA in an interview on Thursday in the US. Ordinarily, prices might decline by 20 percent or so in a year. "This comes at a time with a lot of demand, which is what makes it so unusual."
The declines appear to be caused by companies seeking market share at the expense of profits. Everything else, after all, seems to be in order. The utilisation of factory capacity is running at about 80 percent. Demand for electronic goods is healthy and there haven't been unusual or dramatic shifts in manufacturing innovations. Shipment of chips remains high, too.
Current inventories aren't a problem either. Worldwide inventory comes to approximately US$3 billion, or just over 1 percent of annual sales, low by the historical standards of the chip industry.
"There are a number of new players trying to get market share," he said.
The rapid price deterioration started around March. The hard drive industry suffered through a similar drop.
Companies chasing market share is a big issue for DRAM, said Dan Francisco, a spokesman for memory maker Micron Technology. Several Taiwanese and Chinese DRAM makers have become more aggressive in market share goals recently, he asserted. (Similarly, Micron and Intel have formed a joint venture to grab a larger portion of the flash memory industry.)
The newer foundries, which make chips for companies that don't have their own factories, are also to blame, Scalise stated. Many of the newer foundries, which have been popping up in China, have more excess factory capacity than the average chip maker. To fill it up, they are giving discounts.
The bright spot is that this may be the low point. Demand historically picks up in the second half of the year, which will tighten supplies and, hopefully for the industry, pricing. The companies chasing market share also may eventually have to quit.
"You reach a point where you just don't go any further," Scalise said. "There is usually a pain point you don't go beyond."
The SIA predicts that the compound annual growth rate for the chip industry will average 5.5 percent barring unforeseeable political or economic turmoil from 2006 through 2010.
