Memory industry trend
The increasing adoption of AI (artificial intelligence) and AR/VR (augmented/virtual reality) in Smartphones, industries, and gaming is driving memory content in the data center, mobile, embedded, and graphics spaces. This diversified market base confirms that the strong demand for memory is here to stay.
The memory market is highly consolidated yet very competitive, keeping Micron Technology (MU) on its toes, ready to innovate and move to more advanced technologies.
Competition in oligopoly market
Memory is an oligopoly market, in which a few players command the lion’s share. The increasing consolidation in the memory market is a double-edged sword for Micron; while it gives suppliers greater pricing power, it also creates larger and stronger competitors who are difficult to beat.
Samsung (SSNLF) is the largest DRAM and NAND maker in the world in terms of both scale and technology. Samsung has already started mass production of 1Y (10-nanometer) DRAM, while Micron plans to start mass production of 1Y DRAM in 2019. However, Micron has reduced the technology gap from 17–19 months for 1X to 6–8 months for 1Y DRAM.
In the case of NAND, Micron is looking to beat Samsung with the 3D XPoint technology it’s developed in collaboration with Intel (INTC). However, it’s unclear whether 3D XPoint technology will help it keep pace with Samsung.
We can see that suppliers are competing for the most advanced technology and market share. The growing memory opportunity might encourage suppliers to break their discipline and boost capacities to meet market demand while prices are still high. If this happens, it would only exacerbate the cyclical downturn.
Impact of eroding memory prices
If memory prices fall and Micron fails to gain cost competitiveness over Samsung and SK Hynix, Micron will lose its pricing power and see its earnings hurt significantly. Falling memory prices would also hurt other memory makers, which would have to sell at lower prices. This would affect memory chip manufacturing equipment suppliers Applied Materials (AMAT) and Lam Research (LRCX) as chip makers would stall their capital spending until prices recovered. In this competition, customers such as Cisco Systems (CSCO) and Hewlett-Packard (HPQ) would stand to benefit because they could procure memory chips at lower prices.
Another major threat looming around memory chip makers is the entry of China into the market. We’ll look into this in the next article.