Quick Recap of Supply and Demand in Memory

  I want to re-iterate a couple axioms of how memory pricing works. Half the people will say that I am crazy/wrong and it is no longer cyclical. The other half will say “yes we know… stop preaching”. This is for the first half
 

1)     In perfect balance (never happens). Demand = Supply and inventory is 4-6 weeks (including both customer and supplier). Supply and Demand  bit growth are both 18%. All is well

2)     If people think there will be a shortage, they (Big companies) will buy at least an extra 2 weeks of inventory and they will do this in one quarter. This causes an actual shortage of say 10-20%.

3)     Now there is a real shortage, Spot price and eventually contract price go up. But end unit sales may not have increased much.

4)     People will be put on allocation and ship dates are pushed out. Small companies need to pay Spot price as Samsung wont even take their calls anymore.

5)     This goes on until people get their fear based inventory levels on target. Really fearful companies may even double order knowing they can cancel at last moment.

6)     This continues for a while. demand is adjusted, prices slow adoption and people are not worried anymore. We are have higher prices and extra inventory

7)     Then Cell phone or Datacenter shipments flatten for some small reason and the fear of a shortage disappears. Google procurement is told to cut inventories by 2 weeks or more to get back to target.

8)     There is now a demand drop of 10-20% due to inventory adjustments on top of the 0-5% due to real demand change. Prices Drops and there is no reason to hold inventory so customers cut another week or two off of inventory targets. Suppliers cut prices to ship what they have

9)     Real end customer demand is down 5% and memory supplier demand would drop 20% if not for massive price cuts.

10)  Wait for perceived shortage to appear again.
 
Actual demand surprise was 0-5% but the impact to memory markets was enormous. And this DOESN’T include supply effect. Guess what happens when you build a fab when that initial shortage happens????

I will wait for the comment “its not a cyclical market anymore, this time is different… you boomers just don’t get it” (OK the last part is just something my kids would say)

Mark Webb

www.mkwventures.com