And memory accounts for much less of the overall cost of a PC today than it did a few years ago. "It used to be couple hundred dollars," said Bear, Stearns analyst Andrew Neff. "Now it's a few dozen or tens of dollars. As a percent of the total cost, it's relatively small. But it gets all the press."
So long as computer makers can get the supplies they need, albeit at higher prices, the impact will be limited. Memory producers voluntarily taking some production offline is far different from the Taiwan earthquakes in late 1999 that crippled production and caused prices to spiral without warning, hurting Dell's earnings because the company couldn't increase prices quickly enough.
"Dell learned from its mistakes from the last time there were memory price spikes," Neff said. Now the company has clauses in supply contracts that allow it to automatically increase prices to allow for changes in component costs.
Analysts say that large manufacturers, such as Dell and Compaq, will continue to get the processors that they need. The losers will be small firms, so-called "white-box" vendors, who build non-brand-name computers. Even at today's higher prices, computer memory is still an incredible bargain. In the early 1990s, adding a single megabyte of memory cost at retail more than US$20. Today it costs a little more than US$0.20. Many dealers no longer sell memory modules that are smaller than 128 megabytes, an amount that would have seemed enormously large just five years ago.
The reason is competition and technical innovation. The 1990s brought a flood of new competitors into the memory chip business and improvements in manufacturing processes multiplied the productive output of each chip factory. Memory went from being in extreme shortage in 1995 to being in heavy oversupply in 1996 and the market hasn't fully recovered since.
The personal computer sales slump hit last year, the price of memory tumbled into a near-death spiral. Worldwide sales of memory chips dropped 62 percent to just under US$11 billion. In the face of weak demand, memory makers dropped prices again and again just to bring revenue in the door.
"It was the worst year ever for the DRAM business," said analyst Brian Matas with IC Insights.
At Samsung Austin Semiconductor's five-year-old memory factory in Northeast Austin, the price of a 128-megabit chip dropped from more than US$10 in the fall of 2000 to less than US$1 in early December, less than it cost to make the chip. The 950-employee chip factory is owned by South Korea's Samsung Electronics Corp, the largest maker of memory chips, with an estimated 30 percent share of the worldwide market.
Having to sell chips for less than cost "sucks the air right out of your lungs," said Samsung spokesman Bill Cryer.
Prices have risen enough in the past month to allow most memory makers to make a modest profit on the chips they sell, analysts say.
RSS