Previously in this series, we observed that DRAM (dynamic random access memory) is Micron Technology’s (MU) primary product. The Hewlett-Packard Company (HPQ) is a good example customer of Micron’s DRAM products. But any decline in DRAM prices will have a negative impact on Micron’s profit margins. Let’s look more into what influences DRAM prices and how exactly they affect Micron’s profitability.
Who controls DRAM prices?
DRAM is a commodity and hence exposed to a price war between suppliers. The DRAM market is dominated by three players—Samsung Electronics (SSNLF), SK Hynix, and Micron—that together hold 92% of the total market share in DRAM. In such a concentrated market, prices can be stabilized through mutual consent, but costs cannot. Hence, the low-cost manufacturer holds the power in determining prices.
Samsung dominates DRAM
In the current market scenario, Samsung operates at the lowest cost, followed by SK Hynix, and then Micron. This is because Samsung has been producing DRAM on 20-nm (nanometer) process since March 2014, while Micron has been producing DRAM on a 25 to 30-nm process. Using a lower nm process, a plant can produce more chips on a single wafer at a reduced cost. However, transitioning to a lower process like that requires huge investments.
DRAM prices and gross margin
If DRAM prices decrease faster than Micron can reduce its costs per gigabit, the company’s gross margin feels dramatic effects.
The above table shows that the company’s overall gross margin declined as the average selling price of DRAM fell. However, in fiscal 2013, gross margin rose by a whopping 90% on a YoY (year-over-year) basis because Micron’s DRAM capacity almost doubled after the acquisition of Elpida. Fiscal 2014 saw DRAM prices rise due to a supply shortage because two of SK Hynix’s DRAM plants in China (MCHI) were destroyed in a fire in September 2013.
DRAM prices have one of the biggest impacts on Micron’s gross margin. Later in this series, we’ll examine other factors that affect the company’s annual gross margins. We’ll also look at other strategies Micron has used to cope with falling DRAM prices.
The iShares MSCI South Korea Capped ETF (EWY) has 19.16% exposure in Samsung Electronics and 3.58% in SK Hynix.