With $5.53 billion debt, Elpida filed for bankruptcy protection at Tokyo District Court and to affect 2012 DRAM market

TAIWAN: Japanese DRAM maker Elpida’s announcement on seeking bankruptcy protection today (February 27, 2012) came as a shock to the long-suffering DRAM industry. The extent of the repercussions to the industry no less than Qimoda's exit from the DRAM industry in 2007.

While “bankruptcy protection” does not equate bankruptcy, and Elpida can continue its production, this move has already affected the DRAM market development. Unlike the Taiwanese DRAM makers, who are lagging behind in core technology, Elpida was not falling behind the manufacturing technologies, and it was also the largest DRAM supplier in the spot price market, holding an irreplaceable market position.

Elpida could not turn around its worsening contract price market’s client structure, and it was forced to catch-up in terms of its product lines with other first-tier DRAM makers; as a result, Elpida faced financial difficulties during this wave of DRAM industry downturn. Based on Elpida’s financial statements, its total loss was close to $5.53 billion. Its soon to expire short-term loan also highlights the fact that the company’s debt-ratio reached 70 percent, with its financial health already in jeopardy.

With the Japanese government stepping in to negotiate with the Japanese firm Toshiba, and talks of potential strategic alliance with American maker Micron were in the works, and Elpida also actively sought out its strategic partners and OEM clients for prepayments, to demonstrate their aggressive will to continue operation. However, the DRAM industry has been suffering from the long-term oversupply; as such, Elpida’s move to files for bankruptcy protection, reflecting the fact the dire imbalance that has plagued the DRAM industry over the years was the main cause for Elpida’s inability to survive.

In terms of Elpida’s technological capacity, the company has transitioned into 30nm as its main manufacturing process starting 2012, and its 25nm development was nearing completion, making it almost on par with other first-tier DRAM makers. It has never exhibited any signs of falling behind its industry peers. In terms of its strategic plan for its new product line, Elpida also put significant effort the 4Gb DDR3’s launch schedule, LPDDR2 and the future mainstream packaging 3D-IC). These efforts placed the company in a leading position among first-tier industry peers.

The only missing link was its lack of a NAND Flash production line. As such, despite being on par with other first-tier competitors in the mobile DRAM production technology, it was not able to push forth the Multi-Chip Packaging market share nor could it be involved in other products that are in oligopoly. As a result, it could only continue to depend on PC DRAM, which is easily affected by the economic trends and not able to avoid its impacts.

According to TrendForce research, in terms of PC DRAM, Elpida held 12 percent market share in its 4Q11 revenue, which was a mere 0.1 percent lower than Micron, placing it as the top four global PC DRAM maker. Its market share was greater than the total market share of all Taiwanese memory manufacturers. As for mobile DRAM’s revenue in the same period, its market share reached 17 percent, ranked number three globally.

Elpida’s technological capabilities and market competitiveness are both relatively superior to the bankrupt Qimonda. If Elpida exits the market despite its restructuring efforts, the repercussions to the DRAM industry are bound to be substantial.

According to TrendForce research, since 2012, 4GB prices have stopped dropping, and the industry consensus was that DRAM price downtrend has reached it all time low. It was expected that the average selling price will gradually move up in 2012. As such, Elpida’s ensuing decisions, be it how it will tackle its Hiroshima plant’s existing production capacity or its future strategies for its subsidiary Rexchip, will have critical effects on the whole industry; both decisions would be closely monitored by the industry.

If Elpida exits the market, there is no doubt that the DRAM spot and contract prices will be affected. Moreover, Elpida has already established itself as a major mobile DRAM suppler for smart phones and tablets; should it exits the market, only Samsung and Hynix will remain in the mobile DRAM market, resulting an on oligopoly market. The continuous expansion of Korean makers, with Samsung taking up over 50 percent of the market share, is a potential concern for PC OEM and hand-held devices makers’ supply chain management. In the long run, as per TrendForce’s earlier forecast, DRAM industry’s shift towards oligopoly is inevitable, and Elpida’s exit will only expedite the industry’s transformation.