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A Holiday Present From Taiwan


But come the new year, it might turn to coal.


Last month I highlighted the structural changes that have taken place in the DRAM industry and how that makes for a positive investment environment over the next year or so. Since then, there have been a couple of developments that will add to my thesis.

The first and most obvious has been pricing. Over the course of the last 30 days, contract prices have continued to increase with some parts up by one-third or more. Spot prices have increased even more as the major manufacturers direct the majority of their output to the large OEMs. Now that we're heading into the second half of November the seasonal pressures will abate and prices should weaken through the end of the year.

Better prices have had the expected positive impact on the P&Ls of all of the players. However, it also seems to have been a catalyst in the apparent demise of Taiwan Innovative Memory Company (TIMC) and that event spells problems for Elpida (Japan).

At the bottom of the memory cycle earlier this year, as the bleeding at Taiwan's DRAM suppliers was fast and furious, the Taiwan Ministry of Economic Affairs (MOEA) thought it had a solution.

The five Taiwanese DRAM suppliers were perpetually at a disadvantage in world markets because they lacked their own leading-edge process technology. As I noted last month in Micron Will Ride the Wave Into 2010, the Taiwanese were one to two nodes behind the competition in process technology, and that means their cost of goods sold is significantly higher in a world where they have no control over pricing.

MOEA's solution was to create TIMC with the expectation that the new entity would be funded by the government. TIMC would partner with the Taiwanese suppliers and, more importantly, with one of two foreign firms that would provide technology in exchange for capacity.

The two foreign companies being targeted were Elpida and Micron (MU). Micron saw nothing to be gained by participating with TIMC but that wasn't the case for Elpida.

Elpida's financial condition is as bad as the Taiwan's. However, the one asset that it does have is competitive process technology and it was willing to contribute that to TIMC in exchange for TIMC purchasing a stake in Elpida of "up to 10%."

This was the classic, you scratch my back, I'll scratch yours and it was desperately needed by both sides.

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Position in MU
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