LONDON — DRAM manufacturers are severely overreacting to the current downturn in the market, notably as regards slashed capital spending, that will leave the industry unable to meet strong anticipated demand come 2010 and 2011, according to market research group IC Insights.

This, they warn, will lead to surging average selling prices (ASP) for DRAMs beginning in 2010.

This cyclical trend is nothing new, of course. As IC Insights notes, the DRAM segment has been the leading example of extreme market volatility in the IC industry.

Although the suppliers made some strides toward maturity in the early 2000s, in 2006 and 2007 "they reverted to their past bad habit of overspending for new production facilities. This overspending resulted in the disastrous conditions currently being felt in the DRAM market," which the company suggests will see a 20 percent decline this year.

In 2006, the researchers suggest, there was a booming DRAM sector, with unit growth of 14 percent over the previous year, a 17 percent hike in DRAM ASPs, and overall market growth of 32 percent.

The reason for this overall growth was, IC Insights recounts, under-spending in the previous two years. Having been burned by years of losses and competitive pressures, the DRAM suppliers began to rationalize their capital spending outlays, with total 2004-2005 DRAM capital expenditures put at $19.3 billion.

IC Insights says that as the DRAM market took off in 2006, rational thinking went "out the window" and big spending was the new mantra.

Then, in 2005-2006, this capex increased to a massive $34.3 billion, up 78 percent on the previous two-year total.

"It is easy to see why the 2008 DRAM market is in such a slump," note the researchers. They add that the ingrained overreaction "personality" of the DRAM producers is once again coming to the forefront.

Thus, DRAM makers' outlays and capex in 2008 is running at $9.6 billion, and the estimated figure for next year is put at $7.3 billion, or $16.9 billion for the two years.

This, they note is 12 percent less capex than spent in 2004-2005.

So, the researchers suggest that after the global recession-induced slowdown in 2009, pent-up demand for DRAM-rich electronic systems in 2010 and beyond is highly likely to cause DRAM unit prices to surge (this surge could actually begin in the second half of 2009). This jump in prices will once again give the DRAM producer renewed confidence, leading to moderate increases in DRAM spending in 2010 and big DRAM capital expenditure increases in 2011.

"Of course, the size of the capital expenditure outlays in 2010-2011 will determine how long the DRAM market 'recovery' lasts the next time around," concludes IC Insights.

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