A Strategic and Financial Analysis of the DRAM Industry
By
Matthew A. Lo
B.S.E Electrical Engineering
University of Pennsylvania, 2002
SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF
MASTER OF SCIENCE IN MANAGEMENT STUDIES
ARCHIVES
USEITS NSTITUTE
SS
Ly "
AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
1UN I~2i
JUNE 2012
LBRARIES
©2012 Matthew A. Lo. All rights reserved.
The author hereby grants to MIT permission to reproduce and to
distribute publicly paper and electronic copies of this thesis document in
whole or in part in any medium now known or hereafter created.
Signature of Author:
May 11, 2012
MIT Sloan School of Management
Certified by:
Michael A. Cusumano
SMR Distinguished Professor of Management
Thesis Supervisor
Accepted by:
(J
Michael A. Cusumano
SMR Distinguished Professor of Management
Program Director, M.S. in Management Studies Program
MIT Sloan School of Management
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2
A Strategic and Financial Analysis of the DRAM Industry
By
MATTHEW A. LO
Submitted to the MIT Sloan School of Management on May 11, 2012 in
partial fulfillment of the requirements for the degree of Master of Science in
Management Studies.
ABSTRACT
The manufacturing and development of Dynamic Random Access Memory (DRAM) is a large
global industry that involves various advanced technologies and significant capital expenditures.
The industry has seen tremendous developments over the past few decades allowing for rapidly
improving product performance.
The progression of the industry has also been a fantastic
model for demonstrating the basic laws of economics, including the economies of scale and
consolidation in high fixed-cost businesses.
The first part of this thesis provides a general overview of the DRAM industry, including a brief
history of the product and an overview of the essential technologies and its manufacturing
process.
In addition, the key business drivers of the industry are discussed and important
lessons from two pivotal stages in the industry, the rise of Japanese manufacturers and the
ascension of Korean producers, are presented.
The second part of this thesis provides a case study on one major industry participant - Elpida
Memory Inc.
A company overview is first given, and then recommendations regarding the
Company's future strategy and direction are presented.
Thesis Supervisor:
Title:
Michael Cusumano
SMR Distinguished Professor of Management
3
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4
Acknowledgements
First and foremost, I would like to thank my parents and family members for always
supporting me during all the challenging moments in my life.
I would also like to thank Professor Michael A. Cusumano for his guidance and
flexibility during the thesis writing process.
5
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6
Table of Contents
PART 1:
ANALYSIS OF THE DRAM INDUSTRY................................................
Section 1.1:
Industry Background.................................10
Section 1.2:
Technology Overview ................................................................
10
15
Section 1.2.1:
Technology Overview - DRAM........................................
15
Section 1.2.2:
Technology Overview - DRAM Manufacturing .........
15
Section 1.3:
DRAM Production Economics - The Importance of Technology ... 20
Section 1.4:
The DRAM Cycle......................................................................
25
Section 1.5:
Lessons from Japan's Success and Failure .................................
28
Section 1.6:
Lessons from the Korean Ascension...........................................
36
PART 2:
CASE STUDY:
ELPIDA MEMORY INC..........................................
42
Section 2.1:
Company Overview....................................................................
42
Section 2.2:
Strategy Recommendations.......................................................
49
Section 2.2.1:
Horizontal Integration .......................................................
49
Section 2.2.2:
Complimentary Asset Combination..................................
53
Section 2.2.3:
Utilize Private/Public Funds............................................
55
Section 2.2.4:
Leverage Relationships with Vertical Stakeholders...........
58
A ppendices.....................................
Appendix A:
.... . ------...........................................................
64
Detailed Financial Estimates ....................................................
64
B ibliography..............................--.............................................................................
7
65
List of Figures
Exhibit 1:
Global Sales For Selected Chips ...........................................................................
11
Exhibit 2:
Largest Semiconductor Companies.....................................................................
11
Exhibit 3:
Historical Global Semiconductor Sales ...............................................................
11
Exhibit 4:
DRAM Market Share by Revenue.........................................................................13
Exhibit 5:
DRAM Demand by Application ...........................................................................
13
Exhibit 6:
PC Breakdow n of Costs .........................................................................................
14
Exhibit 7:
Smartphone Breakdown of Costs .........................................................................
14
Exhibit 8:
Historical DRAM Percentage of Total PC Costs.....................................................14
Exhibit 9:
Silicon Ingot and Wafer Production ....................................................................
17
Exhibit 10:
Applying Photoresist and the Photolithography Process..................................
19
Exhibit 11:
DRAM Bits/Dollar..............................................................................................
21
Exhibit 12:
DRAM Size (half pitch in nm) .............................................................................
21
Exhibit 13:
Migration Status of DRAM Companies .............................................................
22
Exhibit 14:
DRAM Manufacturer's Technology Composition (Linewidth) ..........................
22
Exhibit 15:
Cash cost com parison .........................................................................................
23
Exhibit 16:
Variable cost comparison..................................................................................
23
Exhibit 17:
DRAM Variable Cost Comparison.......................................................................23
Exhibit 18:
Historical DRAM Technologies and Linewidth Trends.........................................23
Exhibit 19:
200m Processed Wafer Cost Breakdown ...........................................................
24
Exhibit 20:
Wafer Fab Construction Cost Trend ..................................................................
26
Exhibit 21:
Worldwide Semiconductor Industry Growth Rates ..........................................
26
Exhibit 22:
DRAM Cycle (1975-1995)..................................................................................
27
Exhibit 23:
DRAM Market Trends and Consolidation...........................................................27
Exhibit 24:
Changing DRAM Market Leadership ..................................................................
28
Exhibit 25:
DRAM Generation and Market Leadership.......................................................
29
Exhibit 26:
DRAM Share by Country ....................................................................................
33
Exhibit 27:
Japanese Computer Shipments .........................................................................
33
Exhibit 28:
DRAM Market Leadership - 1994-2005..............................................................37
Exhibit 29:
Samsung Semiconductor's Ranks in World Market Share From 1998 to 1992......37
Exhibit 30:
DRAM Yield Improvements over Successive Product Generations...........39
Exhibit 31:
Developing Product-based and Process-based Technologies in Parallel ...........
Exhibit 32:
Initiatives to Parallel Process and Technology Improvements...........................40
Exhibit 33:
Income Statement of Elpida..............................................................................43
Exhibit 34:
Balance Sheet of Elpida.....................................................................................
43
Exhibit 35:
Historical DRAM Prices ......................................................................................
44
Exhibit 36:
Elpida Manufacturing Plant Product Mix by Production Technology ................
45
Exhibit 37:
DRAM Industry Capital Expenditures and Cash Flow ........................................
46
Exhibit 38:
Elpida Competitors Total Capital Expenditures and Cash Flow.........................47
Exhibit 39:
Elpida Competitors Total Capital Expenditures and Cash Flow...........................48
Exhibit 40:
DRAM Prices After Qimonda Bankruptcy .........................................................
Exhibit 41:
Illustrative Micron-Elpida Merger Synergies.......................................................52
Exhibit 42:
Future Server-Storage Architecture with MRAM/NAND ....................................
8
40
50
55
Exhibit 43:
Illustrative Private Equity Returns.......................................................................57
Exhibit 44:
Illustrative Private Equity Financial Model.........................................................
58
Exhibit 45:
Apple iPad Bill of Materials ...............................................................................
62
Exhibit 46:
Estimated 2011 market share within PC SSDs ....................................................
63
9
ANALYSIS OF THE DRAM INDUSTRY
PART 1:
Section 1.1:
Industry Background
DRAM stands for Dynamic Random Access Memory and is one of the major
types of semiconductor products.
Semiconductor products generally refer to
products which include the etching of many (on the scale of millions or billions) of
integrated circuits (sometimes referred to as ICs or microchips) onto silicon.
These
integrated circuits could then be used for data storage, complex calculations, and other
uses.
Other types of popular semiconductor products include microprocessors such
as those manufactured by Intel or AMD, which perform the tremendous amount of
calculations for today's personal computers and servers, and flash memory, which
stores information on today's computers and mobile devices.
Exhibit 1 below shows
the major types of semiconductor products and their approximate market size and
Exhibit 2 shows the industry's largest participants.
The semiconductor industry has
seen tremendous growth over recent decades increasing approximately 12 percent per
year from 1983 to 2009, to reach total worldwide sales of $235 billion in 2009.1
Exhibit 3 below shows historical annual growth rates for worldwide semiconductor
products sales.
To give a very brief overview of the history of the industry, the first electronic
computers actually used vacuum tubes to perform the switching of electric currents
and the amplification of signals, instead of the miniaturized integrated circuits used in
1 Ma, 2010.
10
today's semiconductors.
However, these vacuum tubes were bulky, fragile and
The first general purpose electronic
consumed significant amounts of power.
computer, the ENIAC (Electronic Numerical Integrator And Computer), developed at
the University of Pennsylvania, required 17,468 vacuum tubes, weighed more than 27
tons and was took up approximately 1800 square feet.2
Global Sales For Selected Chips
Exhibit 1:
Exhibit 2:
Largest Semiconductor Companies
(Ranked by 2010 estimated sales. In billions of dollas)
o
D
JO
20
Special purpose logic
Anak
40
60
N)
11
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
W
"Acrcproceswc
Flash memny
Oploelectronics
Standard cell ogic
Dscate
Micro.cntener
a E200I
sensors
F2U
D-SP
ouhr
Semiconductor Industry Association and S&P.
Exhibit 3:
COMPANY (COUNTRY)
Intel (US)
Samsung Electronics (S. Korea)'
2
Toshiba (Japan)
Texas Instruments (US)'
Renesas Technology (Japan)
Hynix Semiconductor (S. Korea)
STMicroelectronics (Swltz.)
Micron Technology (US)
3
Qualcomm (US)
Elpida Memory (Japan)
'Revenues for semiconductor segment. 2 Fiscal years ended
3
March 30 of the following year. Fiscal years ended September 30..
memwy
E-Esimated. F-Fcrecast DRAM-Dyna-mic
random acceasrwncry DSP-Dig
signal Drocesscrs
Source:
Source:
iSuppli and S&P.
Historical Global Semiconductor Sales
60% -46%
42%
38%
40% --
32%
212
20% --
%5
-% -9%
0%-n
a
-20%
.32%
Source:
2
REVENUES
(61L $) -% CHG.
2009
2010 2009-10
24.3
32.19 40.02
17.50 28.14
60.8
10.32 13.08
26.8
9.67 12.97
34.1
5.15 11.84
129.8
6.25 10.58
69.3
20.9
8.51 10.29
4.29
8.85
106.2
6,41
7.20
12.3
6.88
74.2
3.95
-
IC Insights and Daw Ma.
http://en.wikipedia.org/wiki/ENIAC.
11
The development of smaller electric circuits allowed for rapidly-improved
computing products and the creation of the computer industry.3
In 1948, John
Bardeen, William Shockley, and Walter Brattain, invented the transistor, which replaced
vacuum tubes, allowing for computers of significantly smaller size, of less weight, and
using less power.
In 1956, these three individuals won the Nobel Prize in physics for
their invention of the transistor.
Further progress was achieved for computing when
in 1958, Jack Kilby of Texas Instruments combined the transistor with resistors and
Shortly afterwards, in 1971, Intel Corp.
capacitors to create an integrated circuit.
created the 4004 microprocessor, the first complete CPU on a single chip, and which
was used in a calculator.
In 1974, Intel released the 8080 processor, which was used
in many early microcomputers such as the MITS Altair 8800 Computer and Processor
Technology SOL-20, and in 1975, IBM released its IBM 5100 Portable Computer and in
1976, Apple Computer released its Apple 11.
DRAM was invented in 1966 by Robert Dennard at IBM, and in October 1970,
Intel released the first commercial DRAM product, the i1103, which sold for $21.4
following year, over 100,000 units of DRAM were sold for commercial uses.5
The
Today,
the DRAM market is significantly larger, accounting for $39.2 billion in sales and 14.7
billion units (1 Gb equivalent) in 2010.6
Exhibit 4 below shows the largest DRAM
manufacturers today with four companies, namely Samsung, Hynix, Elpida, and Micron,
claiming over 90% of industry revenue.
Samsung, alone, has about 42% of industry
3 Montevirgen, 2011.
Ma, 2010.
s Ma, 2010.
6 Park, J., chadha, R., chang, N., et al., 2011.
4
12
revenue.
DRAM is commonly used as a form of temporary memory storage in various
electronic products including computers, servers, mobile phones, video game consoles,
digital televisions and DVD players.
Exhibit 5 below shows DRAM consumption by
application, with computing applications making up approximately 50% of DRAM
demand.
Exhibit 4:
Rank
1
DRAM Market Share by Revenue
Company
Samsung
2011
Revenue($M)
3,405
Exhibit 5:
DRAM Demand by Application
Industrials,
7%
Share(4
42.1%
2
Hynix
1,862
23.0%
3
4
5
6
7
8
Elpida
Micron
Nanya
PowerChip
Winbond
ProMOS
Others
TotalMarket
Communications,
1.172
861
381
140
121
105
46
8,092
14.5%
10.6%
4.7%
1.7%
1.5%
1.3%
0.6%
100.0%
14%
Consumers, 5%
Computers, s0%
Peripherals,24%
Source:
Kim, 2011.
Source:
Kim, 2011.
It should be noted, however, that even though the DRAM market is quite large,
relative to other electronic components in an end product, DRAM makes up a relatively
small percentage of total costs.
As can be seen in Exhibit 6 below, in a mainstream
laptop computer, DRAM costs current make up about six percent of total component
costs.7
This percentage is slightly below historical values, as Exhibit 8 below shows
that over the past decade, DRAM costs have made up approximately 7.5% of total PC
component expenditures.8
Smartphones have been a recent popular product and
now make up a significant end market for DRAM.
8
Park, J., chadha, R., chang, N., et al., 2011.
Park, J., chadha, R., chang, N., et al., 2011.
13
However, like personal computers,
DRAM costs only make up about four percent of total component costs for a
smartphone, as can be seen in Exhibit 7 below.
Exhibit 6:
PC Breakdown of Costs
CPU
Motherboard Components
IDRAM (ave. 3.8 GB/hox)
Hard disk (500 GB)
DVD-ROM Combo/RW
Keyboard/pointing device
Battery
Power Adapter
Casing
Operating System
LCD Panel (15.1 in)
Other
Total Component Cost
FOB Price
Brand Margin
Retailer Margin
Street Price
Mid 2011
% of Total
Amount
21.1%
$90
71
16.7%
.6.3%
- 27
9.4%
40
9.4%
40
3
0.7%
20
4.7%
6
1.4%
4.7%
20
45
10.6%
44
10.3%
20
4.7%
$426
100.0%
$450
10.0%
15.0%
$600
Amount
Processor
Camera
DRAM
NAND Flash
Wireless Section
User interface/sensors
WLAN/BT/FM/GPS
Power Mgmt
Battery
MechanicaVElectro-Mechanical
Box contents
Display
Touch Screen
Total Component Cost
$15
17.6
9,f
38.4
23.54
6.85
6.5
7.2
5.9
33
7
23
14
$207
Manufacturing Cost
BOM + Manufacturing
8
$215
Retail Price with Contract
$299
Historical DRAM Percentage of Total PC Costs
uss
in2
12
Smartphone Breakdown of Costs
Source: IHS'iSuppti andCNET.
Source: J.P. Morga
Exhibit 8:
Exhibit 7:
IA
A.
9,
3Q01 3002 3003 3004 3005 3006 3007 3008 3009 3410 3011E
- Desktop PCs NB PCs Average inthe past10 yean
Lorgan estimates.
Source: Company repotsJP, M.
14
% of Total
7.2%
8.5%
4.4%
18.5%
11.4%
3.3%
3.1%
3.5%
2.8%
15.9%
3.4%
11.1%
6.8%
100.0%
Section 1.2:
Technology Overview
Section 1.2.1:
Technology Overview - DRAM
9
DRAM is a type of integrated circuit that stores data in a digital form.
Many
references describe the operations of DRAM with an analogy to a leaky water bucket.
A DRAM memory cell, which consists of one transistor and one capacitor etched onto
silicon, stores a bit (either a "1" or "0") by filling the cell with electric charge.
Capacitors, however, lose charge - hence the analogy to a leaky water bucket, which
loses water - so the DRAM cell needs to be constantly refreshed.
cells are refreshed at least every 64 ins.
Typically, DRAM
It should be noted that because DRAM needs
to be constantly refreshed with electric charge, it is commonly referred to as dynamic
memory (as opposed to other forms of static memory) or volatile memory.
It should
also be noted that because DRAM needs to be refreshed, it cannot serve as a form of
permanent storage, because it will lose its contents when it does not have access to
electricity.
However, because the design of DRAM is relatively simple, requiring just
one transistor and one capacitor, it is one of the cheapest forms of memory and can be
manufactured at very high densities.
Section 1.2.2:
Technology Overview - DRAM Manufacturingo
The production of DRAM requires numerous steps requiring very expensive equipment
operating at extraordinarily-small dimensions.
As will be discussed in detail later on, DRAM
9 Shih, 2009.
1 Ma, 2002; Montevirgen, 2011; and Intel corporation. 2011.
15
manufacturing requires extremely high end technology and specialized equipment, yet DRAM
products are viewed as commodities and sold for relatively cheap prices.
In November 2011,
Yukio Sakamoto, chief executive officer of Elpida, one of the world's largest producers of DRAM,
commented that, "Elpida is using the state-of-the-art production technology, yet the finished
products are sold for half the price of a rice ball.""
Overall, the general process of DRAM
production requires etching a circuit design onto an extremely pure silicon wafer, through
photolithography or photomasking, where light is shown through a photomask imprinting a circuit
design onto the silicon wafer. The exposed silicon is then treated with chemicals to alter the
electrical character of the silicon.
After additional cleaning and chemical treatments, a
diamond-edge cutting saw is used to cut the wafer into actual chips, which are then tested and
packaged.
A more detailed description of DRAM production includes the following steps:
-
Wafer preparation:
All DRAM manufacturing begins with an extremely pure circular sheet of
silicon, or a wafer.
This wafer is cut from a silicon ingot, which is produced from purified,
melted silicon.
The ingot is usually made from adding a seed crystal to melted sand to grow a
large silicon crystal.
This silicon needs to reach a purity of 99.9999999% (commonly referred
to as nine nine's purity) to qualify as Electronic Grade Silicon.
In the past, these ingots were
40 or 50 mm in diameter, but today most DRAM manufacturers work with wafers of 200 or 300
mm in diameter.
As will be discussed later, DRAM companies have sought larger wafer sizes to
reduce production cost per memory chip.
Some DRAM manufacturers are currently preparing
to upgrade their facilities to handle 450 mm diameter wafers.
1 Culpan 2011.
16
A 300 mm wafer typically
weighs approximately 100 kilograms (or 200 pounds).12
After a pure silicon ingot is prepared,
a specialized cutting saw is then used to slice the ingot wafers, which are polished to have a
mirror-like surface.
Exhibit 9:
Exhibit 9 below shows the different steps of ingot production.
Silicon Ingot and Wafer Production
Ingot from Melted Sand
Source:
-
Finished Ingot
Ingot Slicing
Intel.
Wafer Processing:
After cleaning the silicon wafers, ultrapure silicon is grown as a thin layer
on the wafer surface as an epitaxial layer (or "epilayer").
This layer allows for improved
performance in the subsequent fabrication procedures, which require the wafer repeating a
cycle of processing steps 16 to 24 times to build up to 25 layers of materials for a
semiconductor chip.13
Each semiconductor manufacturer has its own proprietary method of
producing its chips, but wafer processing generally includes the following steps:
0
Layering - thin layers of insulating, semiconductor, or conductive materials are placed on
the wafer surface through a variety of methods.
Some manufacturers use growing
techniques, such as oxidation, which is similar to the process of rusting.
deposition methods, such as chemical
vapor deposition
(CVD),
Others use
where gaseous
compounds in a high heat and low pressure environment allow for a thin film to be
12
13
Intel Corporation, 2011.
Montevirgen, 2011.
17
deposited on the wafer.
Another common deposition approach is sputtering, or physical
vapor deposition, which utilizes a physical process where charged argon gas atoms
dislodged atoms from a target material and onto the wafer's surface.
M
Patterning - the wafer is coated with a light sensitive liquid, called photoresist, and then
placed into a stepper with a photomask, a quartz plate which holds the desired circuit
designs.
UV light is then shown through the photomask (similar to a stencil) in a process
called photolithography or photomasking, and the parts of the photoresist that are
exposed to UV light become soluble.
A lens is typically used while projecting the circuit
design onto the wafer, which will hold a design that is four times smaller than the design
on the photomask.1 4
The stepper then moves the wafer to print the circuit design on
another part of the wafer.
Solvents are then used to remove the photoresist exposed to
UV light, and the remaining photoresist is removed with another solvent, in a process
called stripping.
Exhibit 10 shows the application of photoresist and the photomasking
process.
14
Intel Corporation. 2011.
18
Exhibit 10:
Applying Photoresist and the Photolithography Process
Applying Photoresist
Source:
"
Photolithography Process
Intel.
Doping - doping atoms are then applied to the wafer to create electronically active areas.
Two common methods of doping include thermal diffusion, where a dopant source
material is vaporized and then deposited onto the wafer surface, and ion implantation,
where ions are physically placed onto the wafer.
"
Heat treatments - the wafers are then heated and cooled to purify or repair the wafer.
For instance, in a step called anneal, the wafer is heated to above 700 degree centigrade
to repair the damage from ion implantation.
-
Wafer Cutting and Packaging.
Finished wafers are then cut into pieces, called dies, and tested.
Typically more than one thousand chips can be produced from a 200 mm wafer, and
approximately 2,400 chips can be manufactured from a 300 mm wafer.15
takes chips which have passed quality tests for final packaging.
A die bonder then
A wire bonder connects gold
or aluminum wire between connections on the die and the final package to allow for electrical
connectivity.
15
Montevirgen, 2011.
19
Section 1.3:
DRAM Production Economics - The Importance of Technology16
Over recent decades, DRAM manufacturers have invested tremendous sums of
funds into technology development to keep their products competitive.
Significant
portions of these capital expenditures have gone to putting more stored bits on a chip,
allowing for increased storage per dollar for customers.
Exhibit 11 below shows the
exponential increase in storage capacity per dollar as of 2009.
To increase storage capacity per dollar, one method the DRAM industry has
focused on is decreasing integrated circuit linewidths, or the distance between
transistors, on each chip, producing denser chips for a given chip size.
As the linear
distance between transistors decreases, the area a transistor occupies decreases by a
power of two - for instance, if transistor size decreases by half, the transistor occupies
only one-quarter of the surface area.
This has led to Gordon Moore's prediction in
1965 that which states that the number of transistors on a chip approximately
doubles every 18 months allowing for the processing speed to double and the price to
fall by 50%.
Decreased circuit size also provides the benefit of reduced power
consumption, which is becoming increasing important with the growing popularity of
mobile computer devices.
As an example, Intel in 1971 released its first chip with
400 transistors, and in 2008, its Core 2 Duo microprocessor had 291 million transistors,
and in 2011, its chips each had approximately 1 billion transistors. 7
Exhibit 12
below shows the DRAM industry's historical and estimated future reduction in circuit
linewidth in 2009.
16
17
Ma, 2010; Shih, 2009; and Shih 2011.
Shih, 2011.
20
Exhibit 11:
DRAM Bits/Dollar
Exhibit 12:
DRAM Size (half pitch in nm)
100000
10000
1000
10
r,
r,
Do
M
oo
L~
O 0
00 00
0~C
0
rV
0
0)
0'
go
0
0
(o
0
0
--4
LO
-40W000M00000
0
0
Source: Willy Shih.
0 f,0
0
Source:
000 0
0
0 0c0
M
r"M
-- MCCna
00 0- 0
00
0
0
0
0
0
C
0
M 1-0
0
Willy Shih.
Currently, the DRAM industry is quite diverse in terms of the level of
linewidths that companies are producing.
To construct a new semiconductor fab
requires significant sums of capital and time, so industry participants cannot quickly
upgrade all of their facilities to match market demand.
Building a DRAM fab requires
at least one year, and 70nm DRAM fabs cost over $3 billion to construct, with smaller
linewidth facilities expected to cost significantly more.' 8
Currently, Samsung and
Elpida are leading the industry, producing DRAM at 27 nm and 32 nm linewidths,
respectively, as can be seen in Exhibit 13 below.
Exhibit 14 shows that the largest
DRAM manufacturers in the industry, Samsung, Hynix, Elpida, and Micron, lead the
industry in technology with smaller Taiwanese companies, such as Promos and
Powerchip, producing at 60 and 70 nm linewidths.
18
Shih, 2009.
21
Migration Status of DRAM Companies
Exhibit 13:
2010
10
Samsung
Hynix
40
30
35nmeva
20
2011
10
20
30
40
44nm
48nm
Micron
4
65nmXS
58nm
Epida
Nanya
5nfm3
Nomura.
Source:
Exhibit 14:
DRAM Manufacturer's Technology Composition (Linewidth)
100% T -r
80%
~-
40%
Hynix
1Oxnm+
0l5xnm
Source:
--
---
60%~
Samsung
Slpida
Mkron
k-9xnm
N 8xnm
RP4xnm
3xnrn
Promos Powerchip
Nanya
.7xnrn
M6xnm
02xnm
DRAMeXchange, Goldman Sachs.
One should note that the manufacturing technology differences in the industry are no
small matter, and can lead to significant cost differences for industry participants.
As can be seen
in Exhibits 15 and 16 below, packaging and test costs do not vary significantly for different
production technologies, but processing costs can drop dramatically with decreased linewidths.
For instance, as Exhibit 15 shows, 30 nm wafer processing costs can be approximately 40% below
that of 50 nm wafers.
Given that DRAM is oftentimes viewed as commodity, particularly for
personal computer applications which do not emphasize low power consumption technologies,
this significant cost difference could have a dramatic effect on a DRAM manufacturer's revenues.
Exhibit 18 shows a partial history of DRAM technologies and their related decreasing linewidths.
22
Exhibit 15:
Cash cost comparison
Exhibit 16:
fuss)
Variable cost comparison
(US$)
1A
18
1.4
L2~
0.8
0.6
0.
0.4--
02 1
012
4Xnm
SWaf:erpcesscosts Gesmtcusts.
Packagecots
Source:
4Xam
UWaferprocesscoss
DRAMeXchange, Goldman sachs.
Source:
Packagecosts
3Xntn
Testcosts
DRAMeXchange, Goldman Sachs.
DRAM Variable Cost Comparison
Exhibit 17:
USSI1Gb eq.
Ful cost
Cash cost
Mvbterial cost
Source:
5Xnm
3Xnm
5xnm
1.7
1.1
0.7
4xnm
1.1
0-7
3xnm
0.8
0-5
0.3
0.4
2xnm
0.5
0.4
0.2
Nomura.
Exhibit 18:
Historical DRAM Technologies and Linewidth Trends
DRAM Trends
Process type
Line width (pm)
Product
Year
lKbit
1970
PMOS
8.0
Transistors (K)
4
4Kbit
1974
NMOS
8.0
8
16Kbit
1976
NMOS
5.0
16
64Kbit
1979
NMOS
3.0
66
256Kbit
1982
NMOS/ CMOS
2.0/1.50
262
IMbit
1986
CMOS
1.20
1,049
4Mbit
1988/1991/199411996
CMOS
0.8/0.50f0.35/0.3
4.194
16Mbit
1991/1994/1996
CMOS
0.50/0.35/0.30
16,777
0.35/0.30/0.25/0.23/0.18/0.15
64Mbit
1994/1996/1997/199811999/2000
CMOS
128Mbit
1997/1998/1999/2000/2001
CMOS
256Mbit
1998/1999/2000/2001 /20022003
CMOS
Source:
0.25/0.23/0.18/0.
15 0.13
0.23/0.18/0.1510.13/0.11/0.09
67,109
131.072
262,144
ICKnowledge and Daw Ma.
Besides decreasing transistor linewidths to improve operating performance and product
performance, DRAM manufacturers also focus on wafer size.
In manufacturing DRAM chips, the
vast majority of costs are fixed costs related to equipment, therefore producing memory chips from
a larger wafer allows for the equipment cost to be amortized over more chips per batch, reducing
processing costs per chip.
Machinery and equipment expenses typically account for about 85% of
23
the set-up costs related to a $2-3 billion DRAM fab and equipment usually lasts for only two
product generations.1
Because equipment is so expensive, depreciation costs usually make up
approximately 70 percent of total wafer processing costs, as can be seen in Exhibit 18 below.
Currently, most DRAM producers are using equipment which handles 200 mm (approximately eight
inches) or 300 mm (approximately 12 inches) in diameter wafers.
Using 300 mm wafer allows for
125% more chips per wafer, and reduces costs by approximately 20%.20
200m Processed Wafer Cost Breakdown
Exhibit 19:
Probe
Yied Loss
Chmicah/Gaes
Mfasks
Maintenance
Wafer
(Total Pacsed Wafer Cost
$1,400)
$900
S1,000
Depreciation
$0
$100
$200
$300
$400
$500
$600
$700
$800
Future Horizons and Daw Ma.
Source:
A third factor that DRAM manufacturers focus upon is production yield, which
As new equipment is brought online, a
can dramatically affect production costs.
learning curve is sometimes required to increase production efficiency.
Production
defects can cause initial yields in DRAM production to be as low as one-third to
one-half of total produced chips, but yields can usually be raised to over 90% within
21
twelve to eighteen months.
19
20
21
Ma, 2010.
Ma, 2010.
Ma, 2010.
24
Section 1.4:
The DRAM Cycle
The competitive DRAM
industry has seen industry participants spend
significant sums to rapidly improve their technologies and remain competitive in the
industry.
Exhibit 20 below shows the large capital requirements, which have been
growing at an exponential rate, for new generations of DRAM.
so expensive and requires a year or longer to construct,
Because a wafer fab is
DRAM manufacturers have
rushed to expand capacity during times of strong DRAM pricing and profitability to
increase profits.
It should also be noted that producers have sought to rapidly build
scale, because unit profitability increases with increasing production quantities.
Industry studies have shown a "72 percent learning curve" from empirical data,
showing that unit costs will drop by 28% as output quantity doubles. 2 3
Thus,
producers will oftentimes run their fabrication facilities as much as possible to earn
back the facilities' large construction costs.
This has caused the industry to
experience significant cyclicality in its short history because when end market demand
slows or decreases, a glut of DRAM product is left on the market and DRAM prices
collapse.
This cycle has repeated numerous since the development of the first DRAM
memory chips.
Exhibit 21 shows the past cycles through overall semiconductor
market growth rates.
Exhibit 22 shows the past DRAM cycles of different DRAM
product generations through the mid-1990s.
Exhibit 23 shows historical monthly
DRAM sales, overlaid with NAND + DRAM revenue growth rates and significant industry
events.
22
2
Exhibit 23 also shows that in the mid-1990s, there were approximately 20
Shih, 2009.
van de Gevel, 2000.
25
major DRAM producers, which has whittled down to four major production groups
today - demonstrating that the vicious DRAM cycle has claimed numerous causalities
in the past few decades.
Exhibit 20:
Wafer Fab Construction Cost Trend
BinimUD
Wafer Fab Cost Tmnd
4.0
3-50
3.5
3.0
15
140
2.5
2.0
1.5
1.00
1.0
0.40
0.5
0.05
0-10
75
80
0.0
70
Source:
05*
95
90
25
10"
IC Insights and Daw Ma.
Exhibit 21:
Worldwide Semiconductor Industry Growth Rates
60% -r
46%
38%
40%
37%
28%
20%
9%
|1
0%
-9%
-17%
-40% --
Source:
ICInsights and Daw Ma.
26
-8%
.10%
Exhibit 22:
1800
DRAM Cycle (1975-1995)
T
1600
1400
1200
£
k/
1000
1K
4K
=0 800
16K
64K
600
256K
400
4M
200
16M
0
64M
I'-
t%-
r-
CO
to
(o
CO
0m
CO
0
year
Source:
ICE and John A. Mathews.
Exhibit 23:
DRAM Market Trends and Consolidation
Pecounies
mideveloped coidmes & PC
fornotelbook
Demand
in BRIC-s
andset
demnwd
fromdeveloped
ecoismsdraclfmRMSSw~jr
(USSmn)
7000
r500
DSC.MP3,3G
TaiSetSD
t IPOD
Globalmonty RANDsales (LHS)
eM Globalmonty DRAMsales (LAS)
6,000.
-
NAND+DRAM
salesgrowth(yyRHS)
i
5,000
4,000
1l DRAM
20
p-
3,000 -
2,000-
IN Aj I
vimw
-.
11
V'
A
1,000-
~iel Orop-out
78 79 80
Major historicd
81 82
8 3 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
minestones
WIJapan
Senic-n.
Agreement
PIaa Ageement
Domnat OS
PCRAMRqrmt
Doninant IC
Tarmanese
ery
Kreenr
DO
256K
1bI
Aset
Koran maes
Asia CIsts Y2K
--
EalazuakeA
Japan (95.2)
Gi War
i
Iraq War (03)
Taiwan(99.9)
Win95
Win9 WinO WinXP
VISTA
Win7 64bit OS
64M 128M Sync
256M DDR512MDDR2 1G DDR32G
386(color)486 PenfiumP2 P3
DualChannel.AMso SantaRosa SandyBridge
GunWar
Wini.1
Win2.O
1M(US) 4M(Japan)16M(Jaan)
286
Source: WSTS, Nomura estimates
27
,a
(100)
(200)
Section 1.5:
Lessons from Japan's Success and Failure
in the history of the DRAM industry, two very important events include the
spectacular rise of Japanese manufacturers in the 1980s and the ascent of Korean
producers in the 1990s.
Given the tremendous capital requirements, significant
technology required, and the first-mover advantage of American producers, the
Figure 24 below shows
progression of these new market entrants is truly amazing.
the changing corporate leadership as defined by market share in the DRAM sector over
the last four decades or so at key inflection points demonstrating the rise of Japanese
producers, such as Toshiba, NEC, and Mitsubishi, in the 1980s, and then Korean
producers, namely Samsung, in the 1990s.
Exhibit 24:
Changing DRAM Market Leadership
4K DRAM
Market
share
1M DRAM
46
Texas Instruments
(US)
Mostek (US)
14
NEC (Japan)
4
National (US)
3
Source:
Market
share
4M DRAM
n
Toshiba (Japan)
-Market
share
(%)
(%.)
(%.)
Intel (US)
1992
1990
1975
13
sansung
(Korean)
14
NEC (Japan)
NEC (Japan)
10
Hitachi (Japan)
11
10
Toshiba (Japan)
11
S
Fujitsu (Japan)
9
(Japan)
Hitachi (Japan)
Daw Ma and J. Yu.
As mentioned earlier, Intel released the first commercial DRAM memory in the
early 1970s, and it, along with other American manufacturers, came to dominate the
market over the next few years.
By 1985, nine major American DRAM companies
emerged, including Intel, Zilog, National, Intersil, Motorola, Mostek, Micron, Inmos,
and Texas Instruments.
These companies dominated the global DRAM market
28
claiming approximately 95% of the first generation of DRAM chips (1K) in 1971 and
about 83% of the market for second generation 4K chips in the mid-1970s.14
Exhibit
20 below shows the leadership of American DRAM producers in the early years of the
industry (and the subsequent rise of Japanese competitors).
manufacturers
American DRAM
thrived at this time, not only because of an early grasp of
semiconductor and DRAM technology, but because of the DRAM industry's close links
to the US military during the 1970s Cold War, which provided for a well-funded
customer base and research and development support.
Exhibit 25:
DRAM Generation and Market Leadership
Device type
Volume
USA
Japan
production
1K
1971
95
5
4K
1974
83
17
16K
1977
59
41
64K
1979
29
71
256K
1982
8
92
1M
1985
4
96
4M
1990
2
98
16M
1997
n.a.
n.a.
64M
1999
n.a.
n.a.
256M
2000
na.
n.a.
Source:
A.J.W. van de Gevel.
However, the lead of American DRAM companies in the space decreased quite
quickly as Japanese memory producers enjoyed a tremendous rise in their market
share for the industry.
As Exhibit 25 shows above, Japanese producers claimed 41%
of the DRAM market for third generation 16K chips in 1977, and later came to
dominate the market, holding 92% of fifth generation 256K DRAM chips by 1982.
24
van de Gevel, 2000.
29
Furthermore, by the mid-1980s, many American DRAM manufacturers, which had
previously led the industry, even exited the market, including Intel, Zilog, National,
Intersil, Motorola, Mostek, and Inmos.
Significant research has been performed studying the impressive climb of
Japanese DRAM producers in the 1970s and 1980s and the corporate initiatives and
strategies that lead to their success.
Tilburg University professor, van de Gevel, lists
various government initiatives that supported the Japanese DRAM industry and aided
25
in its success:
-
Controlled Access.
Van de Gevel suggests that the Japanese government aided in
the success of Japanese companies by closing the Japanese domestic market to
foreigners, encouraging the purchase of domestic memory products; assisting
Japanese firms in acquiring memory technology, such as patents and licenses; and
implementing foreign direct investment barriers.
-
Government financial support.
Van de Gevel also mentions that the Japanese
government aided local companies in the DRAM space by providing research and
development subsidies, depreciation tax breaks, and subsidized loans from
government development banks.
-
R&D Support.
Van de Gevel also postulates that the Japanese government,
through its Ministry of Trade and Industry, also helped the Japanese memory
industry by helping to reduce the cost of risky research and development.
They
did this by providing subsidies and helping to form the Very Large Scale Integration
25
van de Gevel, 2000.
30
(VLSI) project, which saw the formation of joint research among the five major
Japanese semiconductor companies (Fujitsu, Hitachi, Mitsubishi, NEC and Toshiba),
and which
accounted for almost 40% of integrated
development in the late 1970s.2 6
circuit research and
The government provided long-term loans to
finance $200 million for the project.
This collaboration is credited with helping
the industry significantly, and produced over 1,000 patents.
Van de Gevel also mentions briefly that Japanese engineers were able realize
better technology breakthroughs because of Japan's unique corporate culture.
He
mentions that because Japanese had a closer attachment to their employers, Japanese
memory manufacturers saw decreased employee turnover, which improved learning
within their organizations.
Van de Gevel also details conditions related to American semiconductor
manufacturing which hurt the competitive position of DRAM producers in the United
States -
namely the separation of manufacturing from product development.
According to Van de Gevel, American DRAM manufacturers typically bifurcated their
organizations, with one group focused on innovation and product development and
another focused on production and manufacturing cost.
This structure led to new
product designs which lacked input from manufacturing professionals, and products
with low "manufacturability."
This, in turn, increased manufacturing errors and
reduced production yields, which as highlighted in an earlier section, can devastate a
semiconductor company, given that fixed costs related to manufacturing equipment
26 van de Gevel, 2000.
2
van de Gevel, 2000.
31
are so high.
To compound this problem, Van de Gevel also mentions that because
land and labour costs were rising so rapidly in the Silicon Valley area, DRAM producers
located their production and assembly groups in low-wage regions, and their research
and development teams in more expensive areas, that contained the required human
capital resources necessary to advance their semiconductor technologies.
Japanese firms on the other hand, according to Van de Gevel's research,
closely integrated product development with manufacturing, allowing for improved
production yields relative American competitors.
For instance, Japanese DRAM
companies pursued more conservative circuit designs, to increase product reliability
and decrease product failure.
In addition, Van de Gevel notes that Japanese DRAM companies more closely
integrated their businesses with semiconductor equipment manufacturers.
American
firms switched equipment suppliers often, and cancelled equipment orders more
rapidly when demand decreased.
This behavior put financial pressure on equipment
suppliers, who would lack the adequate funding to develop new technologies for
memory production.
Lastly, Van de Gevel mentions the Keiretsu system in Japan, as another reason
for the success of Japanese DRAM producers.
Van de Gevel believes the Japanese
Keiretsu corporate structure allowed for a lower cost of capital for Japanese memory
companies, giving them better access to funding for technology and product
development.
Japanese companies also employed systems of Statistical Process
32
Control (SPC), Total Quality Management (TQM) and Total Preventive Maintenance
(TPM) which helped them increased their product yields and lower production costs.
However, while studying the success of Japanese DRAM manufacturers can
uncover some valuable lessons regarding technology management, studying the
industry's decline in the 1990s can also reveal some interesting lessons.
In the late
1970s and 1980s, Japanese DRAM companies did enjoy a spectacular rise in the
industry, but in the 1990s, their market decline was almost rapid.
Japanese DRAM
manufacturers captured approximately 80% of the global DRAM market in the
mid-1980s, but by the end of the following decade, Korean competitors surpassed their
production levels and soon held over 50% of the DRAM market by the mid-2000s.
8
Exhibit 26 below shows the decline of Japanese DRAM manufacturers.
Exhibit 26:
Exhibit 27:
DRAM Share by Country
Japanese Computer Shipments
25000
12
Japan
US
1975
1980
Mainframe
1965
Year
1990
19s
9.83
20I
1985
1
97 1989
1911
1913
1995
1997
Year
Source: Yunogami, 2005.
Many theories explaining the decline of Japanese DRAM producers have been
proposed but one of the most interesting explanations comes from Takashi Yunogami
from
Doshisha
University.
Through
numerous
interviews
with
Japanese
semiconductor engineers and managers from the 1980s, Yunogami hypothesizes that
28
Yunogami, 2005.
33
Japanese DRAM companies lost their dominance in the industry not because of
technical failings, but because managers did not see the transition of DRAM end
markets from mainframe computers to personal computers, as can be seen in Exhibit
27 above. 29
According to Yunogami, Japanese firms were accustomed to extremely
stringent quality and reliability standards for their DRAM products because major
customers such as Nippon Telegram and Telephone Corp. (NTT) often required 25 year
guarantees on operating performance for the DRAM in their phone operator systems.
However, by the 1990s, when personal computer demand began to rapidly increase
and surpass the mainframe market, managers at Japanese DRAM companies did not
change the cultural focus within their firms and continued to produce DRAM products
with excessively-high quality standards, making their products uncompetitive with that
of Korean competitors on a price basis.
For instance, Yunogami cites research by
Kanazawa (2000), which revealed that while Japanese DRAM producers focused on
designing DRAM technology and manufacturing processes that emphasized extended
periods of product use, competitors simplified their technology and processes to make
lower quality DRAM with fewer manufacturing steps at a faster pace.
Yunogami
mentions how Micron Technology designed processes which used only two-thirds of
the number of masks that Japanese competitors required in their process flow, greatly
reducing manufacturing costs.
In addition, Yunogami's research shows that as
non-Japanese DRAM companies accelerated their focus on manufacturing yield and
lower costs, Japanese producers stubbornly maintained their emphasis on excessive
29
Yunogami, 2005.
34
levels of high quality, with one Japanese semiconductor engineer proudly saying that,
"Only our factory can guarantee the quality of DRAM for over ten years,"30 despite the
lower quality requirements of personal computer DRAM.
Yunogami's research also
describes how Japanese DRAM manufacturers were not content using standard
manufacturing equipment like their competitors, but instead placed orders for higher
performance customized equipment.
This overemphasis on high technology by
Japanese
their
companies
likely
slowed
development
cycles
and
increased
manufacturing costs relative to peers.
However, it should be noted that politics also played a significant role in the
demise of Japanese DRAM companies.
In 1986, after complaints by American DRAM
competitors that Japanese firms were dumping DRAM product in the United States and
that American firms were deprived of fair access to the Japanese market, Japan and
the United States signed the Semiconductor Trade Agreement (STA).
Among the
major points of the agreement between the two countries was the promise of the
Japanese government to help American DRAM companies.
In a secret side-letter to
the agreement, the Japanese government agreed to help American companies increase
their DRAM market share in Japan to slightly above 20 percent.
In addition, the
Japanese government agreed to vague terms to prevent third market dumping, and
implemented this by instituting voluntary export restraints to Japanese DRAM
companies, which would attempt to raise export prices.
The signing of the 1986 STA
was extremely beneficial to upcoming Korean producers in the late 1980s, as Korean
30
Yunogami, 2005.
35
DRAM companies, such as Hyundai and Samsung, had incurred enormous losses
developing their DRAM products prior to the agreement between the United States
and Japan and were even debating staying in the industry, were given an entry into the
United States market.3
According to Jung (2005), due to new limitations of the 1986
STA, Japanese manufacturers focused their resources on developing next generation
DRAM products, allowing for Korean companies to capture market demand in lower
technology DRAM segments.
For instance, while Japanese manufacturers focused on
developing 1M DRAM, Samsung and Hyundai were able to become the dominant
suppliers of 64K and 256K DRAM.3
However, this market opening at the low end of
the DRAM market allowed Korean companies to develop their capabilities, and by 1991,
Samsung was also the world's largest producer of 1M DRAM chips.3 3
Section 1.6:
Lessons from the Korean Ascension
After Japanese manufacturers saw an incredible rise in the DRAM space during
the 1970s and 1980s, Korean memory companies achieved enviable success in the
1980s and 1990s.
Exhibit 28 shows how Korea producers, such as Samsung and Hynix
(formerly Hyundai Electronics; merged with LG Semiconductor), significantly increased
their DRAM market share in the 1990s.
In 1994, Samsung had about 14% market
share of the global DRAM market, but by 2005, it more than doubled its market share
to 32%.
Samsung and Hynix, together, increased their DRAM market share from 22%
in 1994 to 48% in 2005 (1994 figures exclude the market share of LG Semiconductor,
31
32
3
Jung, 2005.
Jung, 2005.
Jung, 2005.
36
Today, Samsung and Hynix
which was merged with Hyundai Electronics in 1999).
together have approximately 65% of global DRAM market share.3 4
On a larger scale,
including other types of semiconductors such as microprocessors, Samsung saw its
ranking in the overall global semiconductor market increase from about #7 in 1988 to
#1 in 1992 (please see Exhibit 29 below).
Exhibit 28:
DRAM Market Leadership - 1994-2005
1994 Market Share 0
Samsung (Korean)
1995 Market Share %o
1996 Market Share %o
14% Sansung (Korean) 16% Samsung (Korean) 25%
NEC (Japan)
11%
NEC (Japan)
11%
NEC (Japan)
12%
Hitachi (Japan)
10%
Hitachi (Japan)
10%
Hitachi (Japan)
10%
Toshiba (Japan)
10%
Toshiba (Japan)
9%
Hyundai (Korean)
S%
9%
Toshiba (Japan)
Hytundai (Korean)
S% Hvundai (Korean)
1998 Market Share %?/
Samsung (Korean)
1999 Market Share %
2000 Market Share
%
12%
Hyundai
(Koreau)
10%
10%
Hitachi (Japan)
2001 Market Share %
Samsung (Korean)
31%
21% Hyundai(Korean)
21%
Micron (US)
22%
18%
Hynix (Korean)
19%
Infaieon (Germany)
11%
Nanya (Taiwan)
5%
Hyundai (Korean)
Hyundai (Korean)
10%
Micron (US)
I1%
NEC (Japan)
10%
NEC (Japan)
10% Infieon (Germany) 9%
LG Semicon (Korean) 9% Infmeon (Gernany) 8%
2003 Market Share %
Micron (US)
NEC (Japan)
7%
2004 Market Share %
2005 Market Share %,
33% Samsung (Korean) 30% Sainsung (Korean) 31%
Saisung (Korean)
32%
19%
18%
Infmieon (Germany)
NEC (Japan)
22%
14%
Micron (US)
19%
8% LO Semicon (Korean) 9%
Micron (US)
Samisung (Korean)
Samsung (Korean)
Samsung (Korean)
16% Samsung (Korean) 22%
2002 Market Share q
1997 Market Share %
Micron (US)
13% Infimeon (Gennany) 17%
Micron (US
16%
Hynix (Korean)
16%
-lynix(Korean)
15%
Micron (US)
14%
Hynix (Korean)
13%
Hynix (Korean)
14% Infineon (Gerany) 14% Qimonda (Gennany)
Nanya (Taiwan)
6%
Nanya (Taiwan)
5%
Elpida (Japan)
6%
13%
8%
Elpida (Japan)
Source: IC Insights, iSuppli, Semico Research Corp., In-Stat, and D. Ma and J.Yu.
Exhibit 29:
Samsung Semiconductor's Ranks in World Market Share From 1998 to 1992
1988
Toshiba
1989
Toshiba
1990
Toshiba
1991
Toshiba
1992
Samnsung
2
NEC
NEC
Samsung
Sainsung
Toshiba
3
Fujitsu
TI
NEC
Hitachi
Hitachi
Samsung (7th)
Samlsung (5th)
Rank
I
I
1
Source: Kim, Shi, and Gregory.
3
Kim, 2011.
37
f_
The impressive rise of Korean DRAM companies, such as Samsung and Hynix,
highlight numerous lessons for technology management.
Much research has been
done exploring the corporate initiatives that led up to the success of Korean DRAM
companies, and this section will highlight many of them.
One factor often mentioned
in the research explaining the achievements of Korean DRAM companies is the
increasingly improved manufacturing of each successive DRAM generation, which has
been labeled as the firm "learning how to learn," 35 or "double loop learning."3 6
As
Exhibit 30 illustrates, Mathews and Cho suggest that with each new generation of
DRAM, Korean companies more rapidly improved manufacturing yields.
This can be
seen in the chart below with the slope of each DRAM generation's production yield
becoming steeper, showing production yields increasing faster.
Furthermore, Exhibit
30 shows that when production was switched from pilot production to mass
production (the line below which intersects the four production yield lines), the
manufacturing yield was higher in each DRAM generation.
This trend suggests that
Korean DRAM organizations were improving operations with each new DRAM
technology.
35 Mathews 1999.
3
Argyris, C., 1995.
38
Exhibit 30:
DRAM Yield Improvements over Successive Product Generations
Yidd
(%)0
100
nis podn
704M
256K
omMmm
Ii
pikat podin to mzs
podn
50
pikt R&D podn
1985
Source:
1985
1991
1993
"
Yrofmass podn
Mathews and Cho.
Another important initiative that Korean companies pursued to help them
achieve commercial success in the DRAM industry was to closely couple manufacturing
with product design, which, coincidentally, was one of the key factors leading to the
success of Japanese companies.
Kim, Shi and Gregory and illustrated how Samsung
improved their process technologies and product technologies concurrently to allowing
them to achieve strong sales and profitability.
This process also allowed Samsung
Semiconductor to produce memory chipsets 6-12 months faster than its nearest
competitors.
The procedure is outlined in Exhibit 31 below where new product
development (NPD) is pursued alongside manufacturing improvements.
Exhibit 32
below shows some of the specific organizational structures and procedures put in place
to encourage
parallel improvements of both manufacturing and new product
technology, including co-location of manufacturing and design, job rotation, and
overlapping matrix structures.
37
Kim, 2002.
39
Exhibit 31:
Source:
Developing Product-based and Process-based Technologies in Parallel
c[::'
Strategy
IF-*
Strategy
Kim, 2002.
Exhibit 32:
Initiatives to Parallel Process and Technology Improvements
Efforts
0
R&D Activity
Results
PrAWlpeooect proceA vnh mziani
-
prc
*
Organsational
Structure
110Miklyof
.
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-
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Kim, Shi, and Gregory.
Finally, many other reasons, some related to government initiatives and
country demographics, have been listed as contributing to the business achievements
of Korean DRAM manufacturers.
38
Some of these include: 3 3
Byun, 1989.
40
u
mm-wa
f..<e
y
-
Aggressive management style of founders.
It has been mentioned that many
domestic Korean semiconductor firms were managed by the companies' founders,
who had significant shareholdings and business experience.
These managers
employed an effective, aggressive management style.
-
High-quality, inexpensive labor.
Korean DRAM manufacturers were able to benefit
from a well-educated workforce, many educated abroad, that accepted relatively
low wages.
At the time, the labor cost per hour in Korea was only 11% and 22% of
that in the United States and Japan, respectively.3 9
-
Support from conglomerates.
Many Korean DRAM companies were part of a
larger conglomerate, which allowed them to benefit from strong financial backing
as well as in-house consumption of their memory products.
-
Focus on specific products.
Korean semiconductor firms as a whole targeted
select chip products, such as DRAM, SRAM, and ROM, allowing for them to develop
a competitive edge in these segments.
-
Functional
level support.
Korean
DRAM
companies implemented
various
initiatives to support their memory businesses, such as creating offices in Silicon
Valley, collaborative research with other domestic firms, producing OEM products,
and utilizing automation to realize better quality control.
-
Government support.
The Korean DRAM industry benefited from government
subsidies that allowed for improved research and development and employee
training, which companies alone would not be able to afford.
3
Byun, 1989.
41
PART 2:
CASE STUDY:
Section 2.1:
ELPIDA MEMORY INC.
Company Overview
Elpida Memory Inc. is one the world's largest manufacturers of DRAM in the world,
making
DRAM
memory
products for
device/consumer electronics industries.
the
personal
computer and
mobile
The Company is based in Tokyo and has its
main manufacturing facilities in Hiroshima, Japan and Taiwan, through its 63%-owned
joint-venture subsidiary, Rexchip Electronics Corp.
The Company was formed in 1999,
through the combination of the DRAM units of Hitachi and N.E.C, and in 2003, further
expanded its scale by acquiring Mitsubishi Electric's DRAM unit.
In 2004, Elpida
became a public company when it listed on the Tokyo Stock Exchange.
As of
September 2011, the Company had 5,957 employees on a consolidated base (3,206 on
a non-consolidated basis).
In fiscal year ending March 31, 2011, the Company had
revenue and EBITDA of JPY 514.3 billion and JPY 161.6 billion, respectively, but industry
analysts expected a significant drop in profitability for the Company in fiscal year 2012
as Revenue contracted significantly (Exhibit 33 below).
In addition, given its high debt
load of approximately JPY 300 billion (Exhibit 34 below), the Company ultimately filed
for bankruptcy in February 2012.
Please see Appendix A for more detail on Elpida.
42
Exhibit 33:
Income Statement of Elpida
Exhibit 34:
JPY in bilions
Balance Sheet of Elpida
JPY in bilions
2011
2012E
Revenue
% Growth
V514.3
V280.5
-45.5%
Gross Profit
% Margin
101.5
19.7%
-59.4
-21.2%
EBITDA
% Margin
161.6
31.4%
4.2
1.5%
EBIT
% Margin
35.8
7.0%
-125.4
-44.7%
Net Income
% Margin
15.2
3.0%
-138.5
-49.4%
Source. Companydata, Macquarie Research.
CBs (unsecured)
Bonds (unsecured)
LT debt
Rexchip
Elpida in Japan
Capital leases
Total debt
Less Rexchip
93.3
45
147.3
-60
-87
72.5
358
Receivables
Inventories
PPE
PPE less Rexchip
Cash
-35
-70
-490
~310
>50
Book value of investments/other
Equity ex minority interest
25-30
-190
298
Source: Cortpanydata, Macquarie Research.
In regards to Elpida's product focus, the Company manufactures DRAM for
both personal computers and non-mobile electronic devices.
The Company does not
give specific public disclosure in regards to its production output composition, but
analysts estimate that its revenue is split approximately 50-50 between PC and non-PC
Premier DRAM.40
Its Premier DRAM output includes lucrative sales of mobile DRAM
which is used for mobile devices including mobile phones and tablet PCs.
Elpida is
actually one of the DRAM suppliers to Apple for its iPad and iPhone devices.
While
commodity PC DRAM prices have dropped precipitously recently, as shown in Exhibit
35 below, with many producers expected to be selling near their marginal cost of
production, mobile DRAM is the main driver for DRAM companies including Elpida,
providing gross margins of approximately 30%.
40
Thong,2012.
43
Analysts estimate that Elpida's mobile
DRAM sales account for about 15% of bit sales, yet make up as high as 40% of total
revenue.41
Exhibit 35:
Historical DRAM Prices
a70
PC 2Gb DDR3 DRAM
Spot & Contract Price
Current spot: 50,50/Gb
Currem contract 0 52/Gb
0,60
Z 0.45
Souce
DRA5 echane, Bensten Resarch
In addition to Elpida's product mix, it should also be highlighted that the
Company has strong process technology relative to its peers as the majority of its
DRAM output utilizes 30nm technology, allowing for smaller chip sizes and lower
power consumption (please see Exhibit 36 below).
Its 30 nm technology also allows
for the Company to enjoy a significant cost advantage over smaller peers, as
manufacturing costs for 30 nm products are almost 30% below that of 40 nmn DRAM
(Exhibit 17, full cost).
Elpida, while smaller than competitors Hynix and Samsung, also
has significant economies of scale in the sector, having approximately 14% market
share and being the third largest DRAM producer, as was shown in Exhibit 4.
41
Thong, 2012.
44
Exhibit 36:
Elpida Manufacturing Plant Product Mix by Production Technology
Mar-10
Hiroshima 300mm tab
3Xnm
4xnm
5X/6Xnm
66nm XS (63nrn)
65nm S (68nm). 70nm etc.
Rexchip (Taiwan) 300mm fab
3Xnm
Jun-10
Sep-10
Source:
Mar-11
Jun-11
sep-11
Dec-11
Mar-12
130K/mo 130KImo 130K/mo 115K/mo 120K/mo 120K/mo 120K/mo 95K/mo
Slight
-20%
-30% -3040%
-20%
-30%
-50%
-60%
-60% -50-60%
-60% -50-60%
-30-35%
-20%
-10%
-5-10%
95K/mo
>50%
<50%
~0%
-30%
~50%
85K/mo
-40% -20-30%
-30% -20-30%
85K/mo
85K/mo
4Xnm
SX/6Xnm
65nm XS (63rnm)
65nm S (68nm), 70nrn etc.
Dec-10
~5%
-75%
-25%
~90%
-5%
-80%
-20%
-30%
-10%
85K/mo
80%
S
-20%
85K/mo
v slght
-100%
85K/mo 85K/mo 70K/mo
-None -35% -70-80%
~5%
-96%
~66% -20-30%
or
65K/mo
-100%
~0%
NN
Thong, 2012.
Overall, Elpida has tried to be a technology leader in the industry, spending
significant sums on research and development and capital expenditures, which has
helped it develop very strong technology capabilities, but has also burdened the
Company with significant levels of debt.
In regards to its leading technology, Elpida, in
2011, was the first company to complete the 25 nm manufacturing process, which it
began shipping in July 2011.
In 2010, the Company developed the industry's smallest,
most current-efficient 30 nm SDRAM and in 2009, the Company led the industry with
the industry's smallest 40 nm SDRAM.
However, in racing to develop the latest technology, Elpida imprudently
funded its expenditures with debt instruments, as opposed to cash from its operations
or equity.
This trend was particularly pronounced in recent years, when the Company
began to rely too heavily on new debt issuances for its funding needs. Its main
competitors, Samsung, Hynix and Micron, on the other hand, were able to fund
themselves with cash flow from non-DRAM segments or with more moderate debt
levels.
Exhibit 37 below shows historical DRAM capital expenditures.
As can be
seen, Elpida in every year spent heavily on capital expenditures, investing in its
45
business even when cash flows were negative.
Its competitors also spent heavily, but
were able to fund their DRAM businesses with cash from other operating segments.
Exhibit 37:
DRAM Industry Capital Expenditures and Cash Flow
(USDin llions)
Estimated DRAM Capex
Samsung
Hynix
Micron
Elpida
Total DRAM Industry Capex (1)
2003
$3,045
1,181
1,188
$2,000
250
1,811
240
$7,123
$1,800
350
900
345
$4,787
$2,100 $3,000 $3,210 $3,500 $4,200 $3,900
1,606
4,129
1,000
1,800
3,400
500
2,500
1,000
1,000
1,497
1,500
1,400
1,754
1,333
1,395
877
912
1,153
$6,781 $11,065 $13,873 $17,072 $22,834 $11,374
$2,200
733
380
625
$5,128
31.0%
27.1%
7.4%
14.7%
134%
100.0%
9.0%
13.5%
10.4%
100.0%
42.9%
14.3%
7.4%
12.2%
100.0%
% of Total Industry Capex
Samsung
Hynix
Micron
Elpida
Total DRAM Industry Capex
28.1%
32.9%
37.6%
7.3%
12.8%
3.5%
12.8%
25.4%
18.8%
54%
3.4%
7.2%
100.0% 100.0% 100.0%
Free Cash Flow (2)
Samsung
Hynix
Micron
Elpida
$4,560
3,457
2,002
NA
Capex as % of Free Cash Flow
Samsung
Hynix
Micron
Elpida
66.8%
55.6%
23.5% 17.8%
20.9%
38.2%
34.2% -75.2% 191.4%
46.6%
59.3% 229.5% 155.7% 351.9% 129.2%
NA
NA
NA -504.5% -399.1%
$3,595
-333
789
NA
2006
2009
2002
500
2005
2008
2001
$9,251
2004
2007
2000
23.1%
20.5%
13.0%
19.9%
10.8%
8.2%
12.6%K'
7.8%
8
100.0% 100.0%
18.4%
18.1%
10.9%
6.1%
100.0%
34.3%
14.1%
8.8%
7.7%j
100.0%
$7,669 $11,766 $14,339 $13,016 $15,808 $15,921 $12,146 $14,527
1,051
2,786
3,450
3,694
-342
183
1,072
2,618
1,206
2,019
937
1,018
1,237
1,159
578
284
848
804
-517
-181
-289
191
291
NA
24.7%
22.1%
64.6%
98.6%
69.3%
121.3%
920.5% 458.0%
32.1%
15.1%
26.4%
69.7%
111.8% -470.0%
266.8%
98.2% 31.5%
164.5% 109.1%7-121.0%
Source: Capitalexpenditures fromYoshikawa, 2009. Freecash flowfromoperations fromCapitalIQ.
Note: Usesaverage exchanges rates fromforecast-chart.corn
notpresented.
(1) Includescompanies
as Cash FlowfromOperations.
(2) Estimated
Exhibit 37 above, however, does not offer a full perspective on the funding of
operations for each company listed above.
This is because Elpida's main competitors
listed above also had non-DRAM capital expenditures, which would have absorbed
cash flow as well.
Exhibit 38 below shows total capital expenditures and total cash
flow for Elpida's main competitors, including cash flows from non-DRAM segments.
As can be seen from Exhibit 38, even after accounting for the cash flows of non-DRAM
segments, Elpida's competitors more prudently managed their funding needs and did
not overly-extend themselves and burden themselves with excessive debt.
46
Micron
and Hynix, however, have been quite aggressive in their capital spending, as Exhibit 38
shows them spending large sums of capital to expand their business even in years with
relatively little to no positive cash flow from their businesses.
Exhibit 38:
Elpida Competitors Total Capital Expenditures and Cash Flow
(USD in miions)
2000
2001
2002
2003
2004
Total Capex
Samsung
Hynix
Micron
$4,877
2,018
1,127
$4,004
393
1,489
$4,051
395
760
$6,460
687
822
$9,160 $11,270 $12,304 $13,188 $12,807
1,658
2,692
4,845
5,554
2,563
1,081
1,065
1,365
3,603
2,529
Free Cash Flow (1)
Samsung
Hynix
Micron
$4,560
3,457
2,002
$3,595
-333
789
$7,669 $11,766 $14,339 $13,016 $15,808 $15,921 $12,146 $14,527
183
1,072
2,618
2,786
3,450
3,694
-342
1,051
578
284
1,159
1,237
2,019
937
1,018
1,206
Capex as % of Free Cash Flow
Samsung
Hynix
Micron
107.0% 111.4% 52.8%
54.9%
58.4% -118.3% 216.1%
64.1%
56.3% 188.6% 131.4% 289.1%
63.9%
63.3%
93.3%
2005
86.6%
96.6%
86.1%
2006
77.8%
140.5%
67.6%
2007
2008
82.8% 105.4%
150.4% -750.2%
384.5% 248.4%
2009
$6,319
794
488
43.5%
75.5%
40.5%
Note: Micron statistics include distortions (relative to DRAM capital expenditures due to acquisitions and divestitures.
(1)Estirated as Cash Flow from Operations.
Overall, while Elpida has been able to develop very strong technical abilities in
the DRAM space, the Company was too aggressive with its financial leverage, and
funded itself with exorbitant levels of debt.
Exhibit 39 below shows Elpida's capital
raising activities, and the Company's excessive use of debt, particularly in 2008 and
2009, when the Company issued over USD 2 billion in debt obligations.
A strategic
mistake by the Company's management may have been for it to rely too heavily on
DRAM products for its survival.
While its peers were able to support themselves with
cash flows from non-DRAM segments, Elpida stayed focused on only the DRAM
product group, making it very susceptible to the price swings and profitability cycles in
the DRAM industry (as highlighted in section one of this thesis).
47
Exhibit 39:
Elpida Competitors Total Capital Expenditures and Cash Flow
(USD in millions)
2003
Net Debt (1)
$80
Equity
Total New Capital
2004
$1,143
2005
2006
2007
2008
2009
507
602
$1,029
956
$597
0
-$378
1,147
$1,059
12
$1,009
1
$588
$1,745
$1,985
$597
$769
$1,070
$1,010
14%
65%
52%
100%
-49%
99%
100%
35%
48%
0%
149%
1%
0%
100%
100%
100%
100%
100%
100%
% of New Capital
Net Debt (1)
86%
100%
Equity
Total New Capital
Source: Capital IQ.
Note: Uses average exchanges rates from forecast-chartcom
(1) Debt issued, net of debt repaid.
Unfortunately, Elpida's funding mismanagement came to a calamitous end
early this year in 2012, when the Company filed for bankruptcy.
On February 29,
Elpida filed a petition for restructuring with the Tokyo District Court.
A supervisor was
appointed that will temporary control the Company until a Trustee is appointed by the
Tokyo District Court.
The court could appoint an independent Trustee, or name the
Company's current CEO, Yukio Sakamoto, as the Trustee.
Some analysts expect
Sakamoto may be appointed to lead the Company, so that a faster reorganization
process can be implemented, while others have mentioned that creditors may prefer
new Company management given the surprise bankruptcy filing of the Company.
It
should be noted that two provincial governors, which house Elpida's fabrication
facilities, have asked the National Government to provide financial support to Elpida.
It should be noted that the Government rescued Elpida in 2009 with a JPY 30 billion
funding package from the Development Bank of Japan.
In addition, the future
restructuring process and direction of the Company is further muddied by the fact that
48
no leading creditor, oftentimes a bank, has offered to take control of the reorganization
process.
Section 2.2:
Strategy Recommendations
Elpida now sits in a precarious situation, and faces being another victim of the
vicious DRAM cycle which has claimed so many causalities in the past.
In 2009, a
competitor, Qimonda, a spin-off of Infineon Technologies which itself was spun-off
from Siemens AG, filed for insolvency.
The Company at one point was one of the top
five DRAM manufacturers in the world, with close to 64 billion in revenue.
However,
oversupply in the market and the 2008 financial crisis lead the Company to bankruptcy
and eventually complete liquidation.
Today, the Company exists purely as an entity to
market its intellectual property portfolio.
Elpida faces this same potential outcome,
as Qimonda's equipment was eventually sold to Texas Instruments for 18 cents on the
dollar.42
However, as dire as Elpida's situation seems, this section will discuss several
strategic options that it could pursue to benefit Company stakeholders.
Section 2.2.1:
Horizontal Integration
One strategy that Elpida can pursue (or at least use as a bargaining tool while
exploring other options) is to consider horizontal integration by merging with a
competitor.
This additional industry consolidation would continue the trends
discussed in earlier sections of this thesis.
42
Thong, 2012.
49
Micron Technology would be a very likely candidate as a merger partner or
acquirer of Elpida and could reap significant benefits from such a corporate event.
While Micron has seen some success as the only major American DRAM supplier today,
its position in the industry is by no means absolutely secure, given it has approximately
10% market share, and competes against Samsung (about 42% market share) and
Hynix (about 23% market share).
Given the tremendous advantages of scale in this
industry, as highlighted in Section 1 of this thesis, Micron could benefit tremendously
from a combination with Elpida.
Firstly, with fewer competitors in the sector, more
controlled capital spending can be implemented by companies, allowing for less
capacity surpluses and less volatile pricing during times when demand slows.
In 2009,
after Qimonda went bankrupt, DRAM prices rapidly increased, as market supply
corrected and better met market demand.
Exhibit 40 below shows DRAM pricing
after Qimonda's bankruptcy in 2009.
Exhibit 40:
DRAM Prices After Qimonda Bankruptcy
2.50
Elovatod price sustahnd tuni 30
~2,0
Omndbanrup"c
.0
Low:$0 580 b
0:00 D
N
Source: DRAMeXchange, Newman, 2012.
50
Secondly, a combination of Micron and Elpida could allow Micron to expand its
product offerings.
Currently, Micron has a small presence in the mobile DRAM market,
of only approximately 7.3%, while this segment offers higher-margins (gross margins of
-30%) relative to commodity PC DRAM and is growing rapidly (some analysts expect it
to grow sevenfold by 2015, from 2011 levels).4 3 Elpida has a relatively strong mobile
DRAM product, with landmark clients such as Apple, and a presence in the iPad and
iPhone.
In addition, significant cost synergies can also likely be squeezed from a
combination of Elpida and Micron allowing for improved profitability from the
combined entity.
Currently, Micron as a standalone entity has approximately -3.7%
Net Margins, but assuming a combination with Elpida and an elimination of Elpida's
SG&A costs, the combined company could see Net Margins increased by approximately
100 bps to -2.8% (please see Exhibit 36 below).
In addition, if the merged entity could
further decrease Elpida's R&D expenses by 50%, this would allow for a pro forma Net
Margins of approximately 0.4% (as displayed in the sensitivity tables of Exhibit 36).
If
Micron and Elpida were to merge, there could also be some revenue synergies, from
Elpida selling some of Micron's NAND Flash memory products (which Elpida currently
does not produce) allowing for increased sales.
Exhibit 41 below shows small
revenue synergies of 5% of Micron sales layered on top of R&D expense reductions,
which would give the combined company 3.3% Net Margins - a 600 bps increase from
In addition, one should highlight that the
Micron's standalone Net Income margin.
4
The Times of India, 2012.
51
illustrative analysis below does not account for potential savings in capital expenditures
and the benefits of shared knowledge involving technology and manufacturing
processes, which helped Japanese and Korean manufacturers in the past to achieve
significant commercial success.
Exhibit 41:
Illustrative Micron-Elpida Merger Synergies
($ inn.imns)
Micron
Elpida
Adjusted
Elpida
Pro FormaNet income Sensitivity
M+E
Revenue
$8,601
$5,774
$5,774
COGS
Gross Profit
% Margin
7,113
$1,489
17.3%
4,851
$923
16.0%
4,851
$923
16.0%
11,964,
$2,411
16.8%
922
$14,375
R&D
SG&A
Extraordinary Exp.
Operating Profit
% Margin
920
594
6
-$31
-0.4%
$0
0.0%
$0
0.0%
1,842
594
61
-$31
-0.2%
Interest& Other Inc.
Pre-tax income
% Margin
-140
-$171
-2.0%
-142
-$142
-2.5%
-142
-$142
-2.5%
-282
-$313
-2.2%
Tax
Minority Int. (Profit)
Equityin Affil.(Loss)
Net income
% Margin
39
15
94
-320
-3.7%
-52
0
0
-$90
-1.6%
-52
0
0
-13
15
94
-$409
-2.8%
922
%/$
Revenue
Synergy (1)
0.0%
2.5%
5.0%
7.5%
10.0%
$0
215
430
645
860
% R&D exp. Reduction / $ R&D exp
70.0% 60.0%
50.0%
30.0%
0.0%
$277
$369
$461
$645
$922
$236
$144[
$52 -$1321 49
451
359
267
83
-194
666
574
298
21
881
789
697
513
236
912
1,004
728
1,097
451
5a
Pro FormaNet MarginSensitivity
%/$
Revenue
Synergy (1)
0.0%
2.5%
5.0%
7.5%
10.0%
% R&D exp. Reduction I $ R&D exp
70.0%
60.0%
50.0% 30.0%
$277
$369
$461
$645
$0
1.6%
1.0%1 0.4%j -0.9%E
215
3.1%
2.5%
1.8%
0.6%
430
4.5%
3.9%
3.
2.0%
645
5.9%
5.3%
4.6%
3.4%
860W
7.2%
6.6%
6.0%
4.8%
I
0.0%
$922
-28%l
-1.3%
0.1%
1.6%
3.0%
based on iron reveme.
(1) Percentage
Nole: iclkdes assurM ns *om 0j.2012
It should be noted that because the DRAM industry has consolidated so much
over recent years, other viable suitors among competitors may be limited.
Samsung
already has approximately 42% market share (as shown earlier in Exhibit 4), and
anti-trust issues could be major obstacle if Samsung were to merge with Elpida.
Customers would likely protest strongly, fearing such concentration among their
suppliers.
Hynix, too, with about 23% market share may also catch the attention of
anti-trust regulatory bodies, but more importantly, Hynix is more focused on its NAND
Flash business, and appears to want to want to limit further expansion of its DRAM
segment, and use it as a cash cow to create cash flow to re-invest into its NAND
52
business.44
The limited interested buyers of Elpida within its industry may decrease
its negotiating power as it restructures, but other options are also available as
highlighted below.
Section 2.2.2:
Complimentary Asset Combination
Companies outside the DRAM space could also be appropriate suitors for
Elpida and another strategic option for it to consider.
Toshiba is a possible candidate.
Toshiba is a diversified electronics company, selling products including computers,
televisions, imaging and storage systems, but does not have a presence in the DRAM
industry.
The Company actually exited the DRAM industry in 2001, when it sold its
DRAM segment to Micron.
The Company, however, could have an interest in Elpida
because the market appears to moving towards a combined DRAM + NAND flash
chipset as Samsung announced a combined embedded multi-chip package with both
DRAM and NAND Flash in January 2012 for mobile devices.45
Samsung's technology is
expected to allow for a simpler design process for users, as well as enhanced
performance and longer battery lives.
To be competitive and have a full product mix,
Toshiba may have to re-enter the DRAM industry or at least form a partnership with a
DRAM
manufacturer.
Acquiring Elpida could be one strategy for it to use in
competing with Samsung in the NAND Flash space.
In addition, a purchase of Elpida by Toshiba could help it develop its own
storage
business,
which
may
involve
44 Newman, 2012.
4s Shilov, 2012.
53
the
integration
of
next
generation
Magnetoresistive random-access memory, or MRAM.4
MRAM is a non-volatile
memory technology which stores O's and 1's with magnets, as opposed to DRAM
technology which relies on a transistor and a capacitor.
MRAMs, however, do still
utilize transistors in their design, and Toshiba, having sold its DRAM unit in 2001, has
lost its internal transistor product knowledge. Therefore, an acquisition of Elpida would
help Toshiba regain expertise in transistor technology.
Combining with Elpida and integrating Elpida's transistor technology with its
MRAM development could ultimately help Toshiba with its storage business. 47
Currently, computer architectures rely on memory feeding hard disk drive systems, but
there exists a 1,000 times speed gap in the transmission between RAM and permanent
storage HDDs.4
If Toshiba can fully develop its MRAM product, it could then insert its
MRAM and NAND product offerings, in between the DRAM and HDD storage layers of
corporate storage networks, allowing for improved speed/performance (which is
gaining in importance with the emergence of Big Data trends) and lower power
consumption.
Exhibit 42 below illustrates the potential future architecture of
corporate server/storage networks.
It should also be noted that a combination of Elpida and Toshiba would imitate
one of the aforementioned strategies of Korean manufacturers, which helped them
dominate the DRAM industry.
By combining with Toshiba, Elpida could become part
of a larger corporate entity, which could potentially help it get access to lower costs of
capital (particularly important as wafer fab construction costs exponentially increase)
Yasui, 2012.
47 Yasui, 2012.
46
48 Yasui, 2012.
54
and provide the Company with some financial support during down cycles of the
DRAM sector.
Exhibit 42:
Future Server-Storage Architecture with MRAM/NAND
Speed Gap
I
Cache
Memocy
~10
X
Devkx-
lwtmacion
Core iS-670x
0.005 ns
$35.5
3.46GI-z
X1.0
x 383,094
DDR3 1066MWz
0.0 12 ns
Wo020
3GB
X3
x 216
3.5" 7200RPM
1.5TB
Sequence Read
3 ns
x 687
$0.00009
x1.0
1MBewt
I
DR AM
00~o
MRAM
HDD
Source:
Yasui, 2012.
Section 2.2.3:
Utilize Private/Public Funds
Another important strategic option Elpida could consider is a going-private
transaction with a financial sponsor (i.e. private equity investment firm).
While this
option has had mixed results in Japan, at the minimal, it could provide another
bargaining chip to Elpida as it negotiates with other partners/buyers.
One should
note, however, in general, Japan has been a relatively barren market in terms of private
equity deals. 4 9 Despite being one of the largest economies in the world, the Japanese
market for private equity transactions has been very limited with only about $3.8
billion of private equity deals announced in 2009.:5
49 The Economist, 2010.
so The Economist, 2010.
55
Some of the largest private equity
investment firms in the world, despite opening offices in Japan, have done very few
deals - Permira opened an office in Tokyo in 2005, but completed only one deal in the
subsequent five years.
Kohlberg Kravis Roberts also opened an office in Japan in 2005,
and also only completed one transaction in the following five years.
But it should be noted that some private equity transactions in Japan have led
to remarkable windfalls to their investors.
In 2000, J.C. Flowers & Co. rescued
Long-Term Credit Bank in Japan in a $1.1 billion transaction, which led to a fivefold
return.s1
The transaction was later labeled by competitor, David Rubenstein of The
Carlyle Group, as the "most profitable private equity deal of all time."5 2
While competing against semiconductor industry companies in a competitive
auction may be challenging for a financial sponsor, in terms of acquiring or investing in
Elpida (given the likely operational synergies that a strategic buyer would have), a
private equity firm could potentially invest in the Company and improve its profitability
through a corporate restructuring that a more traditional, Japanese public company
would not be able to implement due to potential cultural factors that could limit large
employees layoffs.
Exhibit 43 shows the returns of a hypothetical private equity
transaction assuming a $1.5 billion purchase price of the Company (based on some
media expectations of a merger with Micron at that valuation for Elpida).
While the
financial model below utilizes numerous projected financial assumptions, most notably,
forward operating estimates from Macquarie Research, the general conclusion of the
analysis is that a private equity investment firm could potentially pay up to $3.5 billion
si The Deal, 2010.
52
Mackintosh, 2010.
56
for Elpida, and still earn a 20.4% annual return on their investment.
While this
analysis includes some aggressive forward assumptions, including EBITDA margins
expanding to approximately 38% in 2014, it should be noted that the analysis also
includes some very conservative estimates such as 2.Ox Enterprise Value to EBITDA exit
multiple valuation for Elpida.
Overall, despite some significant industry headwinds
that Elpida faces now, a private equity firm could potentially earn a very rich rate of
return (if it could negotiate with current debt holders of the Company, which
effectively control Elpida today) to provide for a more appropriate capital structure for
the Company, and if the industry sees a rebound in DRAM prices and profitability in the
near term.
A private equity firm may also consider following initiatives that successful
Japanese DRAM manufacturers used in the past, such as seeking government funding
to support jobs and technology development within Japan. Exhibit 44 below shows
additional detail for an illustrative financial model which calculates investment returns
related to a private equity investment in Elpida.
Exhibit 43:
Illustrative Private Equity Returns
Investment Entry Statistics
Assumed Purchase Price
$1.5
Assumed Exchange Rate
80
Purchase Price in JPY
V120
2012E EBITDA
V4
Enterprise Val/EBITDA
Estimated New Debt
28.8x
60
Implied Required Equity
V60
Implied Required Equity
$0.8
Annual Return - Sensitivity Analysis
Gain on Invested Equity - Sensitivity Analysis
Assumed Exit EV/EBITDA Multiple
Assumed Exit EV/EBITDA Multiple
3.5x
4.Ox
V381
V460
V538
273
351
430
508
243
321
400
478
134
213
291
370
448
104
183
261
340
418
2.Ox
2.5x
$1.50
V224
V303
Assumed
2.00
194
Purchase
2.50
164
Price
3.00
3.50
3.Ox
3.5x
4.0x
$1.50
67.9%
82.2%
94.5%
105.4%
115.2%
Assumed
2.00
50.8%
64.0%
75.3%
85.4%
94.5%
Purchase
2.50
38.2%
50.8%
61.5%
71.0%
79.5%
Price
3.00
28.4%
40.5%
50.8%
59.8%
67.9%
3.50
20.4%
32.1%
42.0%
50.8%
58.6%
2.Ox
57
2.5x
3.Ox
Exhibit 44:
Illustrative Private Equity Financial Model
(JPY and USD in billions)
2011A
Revenue
2012E
4514
% Growth
Gross Profit
% Margin
EBITDA
2013E
2014E
V280
V374
V415
-45.5%
33.2%
11.0%
Viol
-V59
V78
V123
19.7%
-21.2%
20.8%
29.6%
V162
V4
V123
V157
31.4%
1.5%
32.8%
37.9%
-97.4%
2846.8%
28.0%
Y130
V112
V103
4
4
4
Taxable Income
-4130
V6
V50
Depreciation and amortization
V1 30
V112
V103
0
0
0
-70
-25
-67
% Margin
% Growth
Depreciation and amortization
Estimated Interest (1)
Taxes (2)
Capital Expenditures
Change in Working Capital
Free Cash Flow
% of Revenue
-40
0
5
-V110
V94
V90
25.2%
21.8%
-39.2%
Investment Entry Statistics
Investment Exit Statistics
Assumed Purchase Price
$1.5
Assumed Exchange Rate
80
Implied Purchase Price in JPY
2012E EBITDA
V120
Assumed Exit Multiple
4.Ox
2014E EBITDA
V157
Implied Enterprise Value
V628
V4
Enterprise VaIue/EBTDA
Estimated New Debt
28.8x
60
Estimated Debt Balance
30
Implied Required Equity
V60
Est. Equity Value (3)
Implied Required Equity (USD)
$0.8
JPYGain
-7i538
% Gain from Entry
897.1%
V598
d2%
ArmuaReturn()
Note: Includes forward projects from Macquarie Research, 2/29/12.
(1) Assumes 7% interest on all new debt.
(2) Assumes minimal taxes due to depreciation tax shields and potential net operating losses carry forwards.
(3) Excludes accumulated cash.
(4) Assumes three year investment
Section 2.2.4:
Leverage Relationships with Vertical Stakeholders
Another strategic option for Elpida would be for the Company to explore
potential financial support from companies that exist in vertically-related industries,
and which have a vested interest in Elpida's survival.
may want to assist Elpida is its suppliers.
One group of companies that
Taiwanese Powertech Technology Inc.
focuses on memory packaging and testing, and Elpida reportedly accounts for 40-50
58
percent of its revenues.
53
Powertech, however, has strong profitability, with some
analysts forecasting 34% EBITDA margins for the Company in 2012, and the Company
ended its fiscal year in December 31, 2011 with over $400 million in cash and cash
equivalents, with continued cash balance increases in future years.54
exposure to Elpida,
Given its large
Elpida may be able to extract funding from
Powertech.
Formfactor Inc., another manufacturer of semiconductor capital equipment, had
approximately 18.2% of revenue from Elpida or Elpida-rated companies in 2011,ss and
could also be able to financially-assist Elpida.
Even though the Company is projected
to have slightly negative margins and relatively small negative free cash flow in the
coming years, the Company is still forecasted to have cash balances of approximately
$250 million over the next few years56, and could possibly contribute some funds to a
rescue fund for Elpida.
In addition, larger semiconductor capital equipment such as ASML and
Applied Materials could potentially make more sizable investments into Elpida.
These
companies have not publicly detailed their exposure to Elpida, but given their strong
leadership in the semiconductor capital equipment segment, it is likely Elpida is a
significant customer to them.
For instance, in 2011, ASML held approximately 57
percent market share of lithography tools. 57
in addition, ASML is in an extremely solid
financial condition with approximately E2.7 billion in cash and cash equivalents as of
December 2011, and very strong profitability with operating profits of approximately
s3 wu, 2012.
5 Shu, 2012.
ss LaPedus, 2012.
56 Muse, 2012.
s7 McGrath, 2012.
59
27%.58
It should be noted that suppliers' financial support of Elpida may be
controversial given they likely supply capital equipment to Elpida's peers as well.
However, the industry for semiconductor capital equipment is relatively specialized
with relatively few participants, therefore disgruntled competitors of Elpida may not
have many other alternatives in terms of capital equipment sources.
In addition, this
option could be used in conjunction with the aforementioned injection of capital from
a private equity firm, which may make the illustrative private equity deal modeled
above more viable.
Lastly, another group of vertical stakeholders which may be able to offer some
financial support to Elpida is the Company's customers.
This is a particularly
interesting option given that some of the Elpida's customers source their components
from their own competitors, which may give these customers increased incentives to
support Elpida in order to increase their own competitiveness.
For instance, Apple's
purchases of mobile DRAM from Elpida currently make up approximately 40 percent of
the output of Elpida's Hiroshima plant.59
However, Apple also purchases significant
amounts of DRAM and NAND memory from its competitor, Samsung, with Samsung
having over $7.8 billion of contracts with Apple in early 2011.60
But the relationship
between Apple and Samsung is becoming increasingly contentious with Apple suing
Samsung for various patent infringements including Samsung's use of its "slide to
58
Meunier, 2012.
59 Times of India, 2012.
60
Saeed, F.
60
unlock" feature, search features, and spell check functionality.6 1
Samsung in March
2012 counter-sued Apple, claiming Apple infringed on three of its patents involving
methods of displaying data, the user interface, and short text messages.62
Media
reports also point to Apple moving DRAM and NAND orders away from Samsung due to
patent disagreements between the two companies.
If Apple wanted to decrease its
component dependency on Samsung, offering support to Elpida could help it
accomplish this given that the DRAM market is largely dominated by four companies:
Samsung, Hynix, Elpida, and Micron (Exhibit 4).
By supporting Elpida, Apple would be
able to keep its DRAM costs under control, with three non-Samsung major DRAM
producers competing in the market, while also insuring continued innovation with that
component.
It should be noted however that DRAM unfortunately does not make up
a significant percentage of the total costs related to manufacturing an iPad.
Based on
industry estimates, the DRAM component costs of an iPad only make up about 5% or
less of the latest iPad model. 64
in addition, DRAM costs as a percentage of total
component costs for other electronic devices is approximately 4% to 6% (please see
Exhibits 6 and 7).
Exhibit 45 below shows detailed estimates for component costs of
Apple's latest iPad.
61
62
63
6
Sherr and Vascellaro, 2012.
Reuters, 2012.
Lien, 2011.
Rassweiler, 2012.
61
Exhibit 45:
Apple iPad Bill of Materials
Correonentse
RtaPrmg As ofMarch 20s12
TotalSOM Cost
Manfacturing Cost
B5M - Manufacturg
Wadrdar
(3rdnt
GeneE
s33900
S236.95
St1S
$245.10
64G
5529.00 $49S,00 ssn9.00
3262.55 S306.5
$8,45 51.09
0
5271.00 5316,05
5*99,00 W629.00
72n00 5829.00
5322.5 $535645 '47E55: $364.35 539795
10 $10.0
0 510175
510.75 110.75
32,8 S36645 S358.30 5375.1
5403 70
Memory
UAllash
DRAM
516.80 5$160 53160
$7,60 $11319
0
567.20
1190
5160
$13,90
$33,60
$67.20
£1190
$1190
557200
557.00
587.00
$-o
587.00
$87.00
587-00
S40.00
$1420
$40.00
i40.,
$2100
516.80
57,0
Display &Touchscreen
Display
Touchscren
Processor
Comera(s}
$4.10
Wireiness Section - BRFWPA (Modte)
Uter Intsrce &Sensr
Combo
Module (WLAWBTRTM)
13
Power Management
5285
-
MQChcWC547-80
Othier
Box Contents
Sour e ? Supp2 Reserch March 20 2
$12.35
$2550
522.75
Battey
$14,20
34.10
$5250
00$40 S4400.
4
$4S.01 549.0
S23.00 52300
523.00
$23.00 52100
S12-35
512 35 :$Z$$2, 512.35
12,35
'5450
54I.50
54150
$15.00
15
t~
87.00
$50
100
501500515 .X0
$15.00
S5955 510-C0
$22.75 S32.09
547.10 550-50
318.00
$3200
Stal:0
532.00
$18.00
$32,00
$32.00
$55050
$5050
$50.0
550-50
50.50
55355.50
$5.50
$5.5
$50
$550
$5.0
$10100
S32.100
However, in Apple's case, supporting Elpida may still be advantageous to limit
the strength of its competitor Samsung.
Samsung provides the display ($87) and the
processor ($23) of the new iPad, which has a total component and manufacturing cost
of approximately $375 (for the 32 GB WiFi + 4G model) (please see Exhibit 43 above).
If Elpida were to fail and Micron were to exit or become uncompetitive in DRAM
manufacturing (it currently has approximately 10% market share, Exhibit 4) then Apple
would have to rely upon Hynix and Samsung for its DRAM needs.
However, Apple
may choose to support Micron in its DRAM business because Micron has a strong
presence in the NAND flash market (please see Exhibit 46 below) and supporting
Micron's DRAM endeavors could help Micron increase its DRAM + NAND operating
scale and provide a financially-sound manufacturer of DRAM and NAND, which is not
Samsung.
Nonetheless, Apple currently has close to $30 billion in cash and an
infusion of $500 million (approximately 2% of its available cash) or even $100 million (if
62
done in concert with a private equity buyer for the Company) may provide a viable
strategic outcome for Elpida.
Exhibit 46:
Estimated 2011 market share within PC SSDs
OCZ,
5-10%
Others,
5-10%
Kingston
,
3-5%
3ar,
Micron,
10-15%
Samsung,
20-25%
SanDisk,
10-15%
Intel,
15-20%
Toshiba,
15-20%
Source: Companydaa Gartnr,Goldman SachsRasrch
e3sumatrs.
Strategic Recommendations Summary
Overall, even though Elpida faces substantial financial stresses at the present
time, the Company does still have significant operating scale in the industry (which is
imperative for survival in the DRAM space as demonstrated in Section 1 of this thesis),
strong technology capabilities, and a strategic position in an essential component for
many electronics devices which are rapidly growing in popularity, which give it various
options for its future.
63
Appendices
Detailed Financial Estimates
Appendix A:
Elpoa Memory (06 JP. Undeperorm Target Price:
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