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Why DRAM Chipmakers Need Their Own OPEC (bloomberg.com) 132

DRAM is just as much a commodity as oil. But manufacturers can only dream about the benefits of negotiating supply together. From a report: You've got to feel for the world's biggest suppliers of DRAM. Makers of these chips, which temporarily store information in PCs, smartphones and services, endured years of boom-bust profit swings and bruising competition long before the trade war began. The sector finally consolidated into just three companies holding 95% of global supply of DRAM. And yet earnings stability still eludes them. SK Hynix early Thursday posted an 88% drop in second-quarter net income, the lowest in three years and missing estimates. Investors cheered when the South Korean company concurrently announced that it will slow expansion.

SK Hynix supplies around 30% of DRAM. As much as manufacturers would like to tell you otherwise, these chips are all pretty similar, which is why they're considered a commodity. And with most commodities, like oil, prices shift with supply and demand. Profits, in turn, depend on balancing price and supply against the cost of the multi-billion dollar factories required to churn out these chips. It's no easy task. In fact, profitability is as much a function of game theory as capacity and cost management. If you cut supply while your competitor maintains output, prices may rise -- but most of that benefit goes to your rival and you miss out. If no one cuts supply even when demand is falling, then you're all likely to suffer lower prices, which could drag you into the red.

There's a collection of 14 nations well aware of how this works that came up with an ingenious solution: Sit down and negotiate supply together. Except they're peddling oil, not chips, and the Organization of the Petroleum Exporting Countries can't always see eye to eye.

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Why DRAM Chipmakers Need Their Own OPEC

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  • Sure (Score:5, Insightful)

    by nospam007 ( 722110 ) * on Thursday July 25, 2019 @09:01AM (#58984528)

    If they are not located in the US or EU, otherwise Antitrust laws might teach them something else.

    • Re:Sure (Score:5, Insightful)

      by Lab Rat Jason ( 2495638 ) on Thursday July 25, 2019 @09:07AM (#58984550)

      Came here to say the same... it's classic price fixing.

      • by Roger W Moore ( 538166 ) on Thursday July 25, 2019 @11:11AM (#58985248) Journal
        Unlike OPEC though it will not work long term because, unlike oil, you can make RAM anywhere. There may be a delay of several years to get new factories up and running but there is no geographical based restriction on production so you will be very limited in the profit you can make. Plus, if you violate anti-trust laws, the EU and US are likely to apply hefty fines and/or tariffs to encourage competition.

        So you might be able to make a short term profit but in the long term, you are going to go under and may even lose much of the short term profit to fines.
        • Plus, if you violate anti-trust laws, the EU and US are likely to apply hefty fines and/or tariffs to encourage competition.

          So you might be able to make a short term profit but in the long term, you are going to go under and may even lose much of the short term profit to fines.

          EU, maybe. US? Have you met the current administration? They've never met a cartel they didn't like. The Sherman Anti-Trust Act hasn't been effectively enforced in a century, and I include the abject failure that was the Ma Bell breakup.

          • by Jarwulf ( 530523 )
            They don't like the Silicon Valley tech cartel.
            • what is the silicon valley tech cartel that you mention exactly?
              • That would be all of the Silicon Valley tech companies whose CEOs don't kiss dear leader's ass, or the ones whose CEOs don't force their employees to kiss dear leader's ass, or the ones whose CEOs' or employees' campaign contributions don't go entirely to dear leader or his minions and supplicants.

        • by tlhIngan ( 30335 )

          Unlike OPEC though it will not work long term because, unlike oil, you can make RAM anywhere. There may be a delay of several years to get new factories up and running but there is no geographical based restriction on production so you will be very limited in the profit you can make. Plus, if you violate anti-trust laws, the EU and US are likely to apply hefty fines and/or tariffs to encourage competition.

          So you might be able to make a short term profit but in the long term, you are going to go under and ma

          • It will work long term, because the cost of building your own fab is in the hundreds of billions of dollars

            Well you are off by almost 2 orders of magnitude smaller. Frankly - NO company has 100 billion to sit around to make a fab. Intel spends in the 5B for a new fab a couple of times a decade.

          • As the advance of semiconductor technology continues to slow, so does the need to upgrade fabs.
          • The fab cost is nowhere near as expensive as you claim. Billions, yes, but not hundreds of billions. Currently, the margins are thin but when a price-fixing cartel is formed countries are going to place large tariffs on their goods with the explicit intent of making their goods so expensive that it provides a large enough profit margin for local companies to be willing to spend the money to start up and get producing RAM. This is the whole point of tariffs.

            There would be absolutely no motivation to join
      • WHich has more power, the hammer or the anvil?

        Conan the Destroyer, the riddle of steel
        Neither anvil or hammer, but arm

      • Re:Sure (Score:4, Insightful)

        by UnknowingFool ( 672806 ) on Thursday July 25, 2019 @12:31PM (#58985600)
        Oh no, this time it will be legal price fixing as opposed to all the other times it was illegal. To me the whole premise is bullshit. DRAM manufacturers have been able to control prices [wikipedia.org] without a cartel, and they have done it in the past. It’s just all those time it was illegal. They just want to make colluding to screw over customers legal so they don’t have to face regulations.
    • by Anonymous Coward

      Remember around the time of that whole Rambus investigation? There was a price fixing scandal among the big memory producers as well. All of them. From Korea to China to Minnesota. Right after that memory prices dipped again as well, but not as far as they had dipped before the collusion started...

    • by Anonymous Coward

      They should do the same with FLASH and HDDs and with all the new profit they can buy up printer toner and ink suppliers and raise the price on that, and then maybe pencils.Thisn is brilliant; I don't see a downside for anybody.

    • Re:Sure (Score:5, Insightful)

      by Zontar The Mindless ( 9002 ) <plasticfish@info.gmail@com> on Thursday July 25, 2019 @10:42AM (#58985098) Homepage

      I saw the headline and said to myself, "Hey kids! Can you say, 'Cartel'?"

      • by Mashiki ( 184564 )

        Did you know multiple DRAM companies have been hit by price fixing and cartel like behaviors over the last 20 years, not only in the US, but Canada, European countries, Japan, Singapore and S.Korea. They got the literal shit kicked out of them for doing it. So it shouldn't be a surprise that astroturfing articles like this are starting to pop up again.

    • why and "OPEC"? (Score:4, Informative)

      by mschaffer ( 97223 ) on Thursday July 25, 2019 @11:27AM (#58985326)

      Call a duck a duck. It's a "cartel" not an "OPEC". (I see that Msmash's vocabulary is lacking.) While allowed under international law, many countries (e.g. Korea, Japan, and the USA) where DRAM manufacturers call home prohibit these types of trade-restricting organizations.

  • by Anonymous Coward on Thursday July 25, 2019 @09:10AM (#58984568)

    This is a dumb post. Cartels and market collusion is generally regarded as illegal for a good reason. How well did it work out for consumers when Apple, Amazon, et al came together to discuss pricing and supply of e-books?

  • Multinational crime (Score:5, Interesting)

    by rickb928 ( 945187 ) on Thursday July 25, 2019 @09:10AM (#58984570) Homepage Journal

    To expand, in one country this is considered price fixing, an anti-trust violation, etc...

    When you expand it to several countries, somehow it's supposed to be legal?

    OPEC only works because 0) most of the members ignore international law and 1) no one wants to piss off the oil producers.

    DRAM (or substitute your favorite 'commodity' chip here) makers might not have the same leverage. Can't move the oil deposits, but you can make chips wherever. Of course if this actually happens, they won't be making them in the US.

    • Correct. OPEC basically tweaks the supply to maximize prices and profit margins for all its members at the expense of the consumer. This is a path to $6,000 low-end desktop PCs.

    • by EvilSS ( 557649 ) on Thursday July 25, 2019 @09:48AM (#58984810)
      OPEC "works" because it's nation-states and not individual companies that are the members, thus you get issues like sovereign immunity coming into play that protects the cartel from anti-trust laws. Governments can get away with shit corps can't. Whether it's right or not, that's the way it is.

      The idiot that wrote this article is advocating for price fixing between companies, which is illegal almost everyone on earth. Even China won't put up with it (https://www.reuters.com/article/us-samsung-elec-china/china-launches-dram-chip-price-probe-into-samsung-elec-sk-hynix-and-micron-idUSKCN1J02DI [reuters.com])
    • by lgw ( 121541 ) on Thursday July 25, 2019 @10:38AM (#58985078) Journal

      OPEC only works because 0) most of the members ignore international law and 1) no one wants to piss off the oil producers.

      The members of OPEC are sovereign nations, who can do as they wish with their oil. "International law" is only a set of treaties. It's fundamentally opt-in.

      Of course, strong nations can leverage their strength to force treaties onto weaker nations, as the US does with IP law, but as you suggest: OPEC is not weak when it comes to trade.

    • by vakuona ( 788200 )

      Granted, this will not be legal in many countries, and particularly in the USA and EU countries. However, what are the realistic alternatives?

      In fact, the risk is that DRAM will consolidate to one manufacturer at some point, and this monopoly will be able to set prices at a level they consider is economically feasible for long-term survival. Government already intervene in many markets e.g. agriculture, to prevent excessive boom and bust.

      I think maybe an open cartel might not be a bad idea, provided governm

      • DRAM is not so specialized as to prohibit anyone with a state-of-the-art semiconductor fab from also producing DRAM. If DRAM prices suddenly tripled, companies like Intel and TSMC would give serious consideration to entering the market. No new fabs required, just make the masks and start pumping out product within a year of making the decision.
    • OPEC only works because they hold a vast amount of the world's oil reserves and since our economy needs it to function politicians have to tread very carefully. Unlike RAM, you can't just start producing oil if you do not have the natural resource available so blocking imports and/or raising tariffs is not much of an option either.

      This is easy to see because the power of OPEC has tremendously diminished in recent years with the development of oil sands and more recently fracking which make oil production
    • OPEC only works because 0) most of the members ignore international law

      No, OPEC works (when it does) because the members are governments. They ARE the law.

      Governments are 195 individuals acting in an anarchy. Sometimes they posture about "international law". But all it is is posturing.

      Law is what country governments impose on people and groups of people other thans peer governments.

  • I think they should go ahead with their own OPEC because it not just a matter of a few months. It is going to be their future.
  • by DeathToBill ( 601486 ) on Thursday July 25, 2019 @09:12AM (#58984592) Journal

    Yes! Let's form a cartel! That'll solve all our problems!

    What an idiot.

    • by Matheus ( 586080 )

      The title was funny and misguided enough but the first sentence of the summary was the best:
      "You've got to feel for the world's biggest suppliers of DRAM"

      No. No I dont.

  • Slashdot suggests a chip cartel.

    cartel /kartel/

    noun

    an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition.


    Rather than compete, they should band together and fix prices. Brilliant!

    m
  • DRAM is subject to innovation. Granted there may not be a lot appearing on the market at the moment, but over the years there have been attempts at innovation (rambus, ddr, ddr2, etc.). Oil is a raw material.

    These items are different and price fixing is a really bad idea. The same could be said for SSD's, Harddrives, monitors, televisions, etc.

    Let the free market drive things.
  • Rare-earth and other raw materials suppliers might be able to pull this off, but not those who make finished products.

    Well, the DRAM makers MIGHT be able to pull this off if they got in cahoots with the countries that have a collective monopoly on the raw materials. For a long time DeBeers had a de facto monopoly on gem-grade diamonds because they either owned the mining companies or had enough control over enoug of them to shut out other companies. Now, let's see, which dozen-or-so countries have a monop

  • by kilodelta ( 843627 ) on Thursday July 25, 2019 @09:45AM (#58984798) Homepage
    I explained that storage be it hard drive, ssd, or even RAM is getting less expensive over time. What is happening is the same thing that happened to Ma Bell - she innovated to the point where it cost here virtually fractions of a cent per minute to carry a long distance call. Yet she charged $0.10 to $0.25 per minute. When regulators and courts finally figure out Ma Bell was subsidizing local service with revenue from long distance all hell broke loose.

    Now of course don't pay anything for long distance. International yes, but domestic long distance charges are a thing of the past.
    • by hawk ( 1151 )

      At a keynote speech for the Society for Computational Economics in the mid-90s, the speaker explained that at that time, the tracking and billing was *two thirds* of the costs of a long distance call . . . the writing was on the wall . . .

      hawk

  • by sjbe ( 173966 ) on Thursday July 25, 2019 @09:49AM (#58984826)

    DRAM is just as much a commodity as oil. But manufacturers can only dream about the benefits of negotiating supply together./quote.

    Right because that is called a cartel and it's generally frowned upon for some very good reasons under anti-trust law. The only reason OPEC can exist is because it's collusion between nation-states and not privately held companies. See Standard Oil if you want to see what happens to private companies that engage in anti-trust violations for an important commodity. I'm sure such a cartel would be hugely beneficial for DRAM makers but they are illegal because they tend to have a negative impact on the end consumer via higher prices are restricted supply.

  • How about some supply and demand?
    People want new low cost products?
    The private sector floods the market with innovative and low price products.
    People buy from a trusted brand. Invest the profit back into getting ready for the next generations of products.
    Your company cant keep up?
    Thats not the worlds problem.
    Hire much smarter workers and try again.
  • Oil is a commodity. It is a fundamental thing existing in only specific geographic locations with a finite reserve that is extracted at a rate based on market conditions and demand. Further, it is controlled primarily at the nation-state level because of the consolidated geographic distribution of the resource. DRAM is just another of a million products that can be manufactured within any country that one chooses to invest in. The fact that the DRAM market is cut-throat and involves production in plants

    • Agreed. This sort of fierce competition is nothing new to the vast majority of businesses, especially small businesses. Why are DRAM makers so special as to be exempt from the laws of supply and demand, or can fix prices / supply to whatever they want? What a bizarro-land article.

  • by pak9rabid ( 1011935 ) on Thursday July 25, 2019 @10:22AM (#58984998)
    Just what the world needs, more cartels...
  • Why do we care if DRAM makers can't manage pricing in their product? This results in lower prices for consumers and it benefits everyone except the manufacturers. Are you suggesting a price fixing scheme that flips that around? The darwinian economic principal in play here is that suppliers will either adapt or go out of business to be replaced by someone who can manage their capacity. Price fixing syndicates are "unnatural" selection and are bad for consumers and the industry at large.
  • You don't need a cartel, you need a credit line.

  • by WaffleMonster ( 969671 ) on Thursday July 25, 2019 @11:05AM (#58985218)

    Or is Bloomberg naturally this out of touch with reality?

    • Pro business Bloomberg will always advocate for pro-business ideas regardless of practicality or reality.
      • >"Pro business Bloomberg will always advocate for pro-business ideas regardless of practicality or reality."

        That is true, while at the same time (to some, paradoxically, but it really isn't), he and his media giant is solidly "left". This story is very much in-line with such thinking.

        Bloomberg is also pumping tons of money in to anti-gun-rights campaigns which disseminate highly inaccurate and inflammatory information.

        • Do you have examples of highly inaccurate information?
          • >"Do you have examples of highly inaccurate information?"

            Yes, lots. Especially if "very misleading" fits the category (which I think it does, perhaps others don't).

            • I don’t see any evidence. Did you post it in invisible ink?
              • >"I donâ(TM)t see any evidence. Did you post it in invisible ink?"

                Sorry, busy prepping for upgrading my computer (Ryzen 7 zen2!!) Don't have time right now to go fetch it all and post, especially for an off-topic sub-thread. I doubt it would have any impact here, anyway.

                • So you have evidence but you won’t post any bit of it because you’re “busy”. To me that is essentially no evidence.
  • Reminder the 9/11 attackers were Saudi Arabians.

    Fuck the cartel countries, and fuck a DRAMM cartel. Price tumbling is good for consumer. So oil barons and corporate 1 percenters don't make as much, wah wah wah

  • Does the author not understand that cartel profits come at the expense of the consumers who use the product? It would be bad enough if they just restricted supply so we all paid more but dividing up the market means limiting their ability and incentives to bring new tech to market. What would possibly motivate one to worry about these giant multinational companies because they have to deal with fluctuations in profits rather than the consumers who would be hurt by a cartel? Ohh, and DRAM is very much not

  • When price fixing fails hire shills to promote other schemes.

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