Times Are A-Changin' in the DRAM Market

http://www.ebnonline.com/author.asp?section_id=1162&doc_id=270894&

DRAM demand is on the upswing as sales are expected to continue growing in the double digits through next year. More importantly, there is nothing usual about this latest cyclic rise in DRAM revenues.

While the DRAM sector will experience tighter capacity and rising unit prices as it has during past growth cycles, the supplier base has consolidated to such an extent that only three dominate players account for more than 90% of the market share. This means that heavy hitters Samsung, Hynix, and Micron have more leverage to raise prices than they would have been able to do during the past few years, as they, for the time being, try to put their low-margin and unstable pricing days behind them.

Source: iSuppli

In the immediate future, DRAM suppliers, including the smaller players as well as the big three, are expected to benefit from double-digit growth and revenue gains thanks to higher pricing next year and in 2014. Following a 10.7% drop in DRAM revenues in 2012 to $26.4 billion, DRAM revenues are expected to surge 35.4% to $35.7 billion in 2013 and 10.8% to $39.6 billion in 2014, according to IHS iSuppli.

The rise in demand for DRAM as well as NAND flash memory, which is expected to see revenue growth of 27.7% in 2013, will lift the semiconductor market, IHS iSuppli says. Revenue growth driven by memory demand will increases by almost 5% to $317.9 billion. DRAM sales will account for 1.25% of the semiconductor industry's total growth worldwide, IHS iSuppli said.

Strong demand from the mobile sector from smartphones and tablets has helped the DRAM sector see growth. However, industry consolidation and what IHS iSuppli says is "more rational shipment growth" among DRAM makers are the main factors behind the up cycle.

Samsung, Hynix, and Micron also collectively benefit as the surviving large players in the market following a wave of consolidation. They have a share of over 92% of all DRAM revenues worldwide. Samsung alone in the third quarter had a 37% share of the DRAM market. Hynix and Micron commanded shares of 28% and 27%, respectively, in the third quarter, according to IHS iSuppli.

Micron has especially benefited from the industry consolidation. In the context of the total chip market, Micron's share of the total semiconductor market will more than double to 4.5% in 2013, up from 2.2% in 2012, IHS iSuppli says. Micron's acquisition of Elpida Memory in 2012 was also a main factor in Micron's sales gains this year.

Samsung, Hynix, and Micron are using new market domination to stoke prices in the immediate future. They are doing this in part by not adding manufacturing capacity to meet demand and thus limiting supply growth to 25% to 30%, Mike Howard, senior principal analyst for IHS' DRAM and compute platforms group.

"There are only three DRAM companies left... and there is little threat right now that anyone will jump into the industry," Howard wrote in an email message. "It is our belief that the current players in DRAM are more focused on profits and less focused on market share... a situation that is tenable when [the large players] have at least 25 percent market share and untenable when there are a handful of players with 5-10 percent share."

The bad news for electronics OEMs is, of course, that they will have to wait for at least a year or so before they might be able to seek lower pricing from their DRAM suppliers.

"DRAM suppliers are responding to shortages by raising prices," Howard wrote. "We expect shortages in much of 2014 -- a situation that will keep prices from declining at historical rates."

Xilinx Sues Flextronics Alleging Fraudulent Chip Resale

http://www.bloomberg.com/news/2013-12-11/xilinx-sues-flextronics-alleging-fraudulent-chip-resale.html?cmpid=yhoo

Xilinx Inc. sued Flextronics International Ltd. (FLEX) over claims the electronics manufacturer fraudulently resold its products at marked-up prices.

Xilinx said Flextronics buys its semiconductor chips at a discount based on misrepresentations about end users and sells the Xilinx chips to other customers at a profit, according to a complaint filed today in state court in San Jose, California. The complaint, provided by lawyers for Xilinx, couldn’t immediately be confirmed in court records.

Flextronics, a Singapore-based supplier of cameras and battery chargers to Apple Inc. (AAPL), has also dealt in “gray market and counterfeit” Xilinx devices, according to the complaint.

“Many of these devices are incorrectly remarked in order to appear to be more expensive, higher performing devices in order to sell for a higher price,” according to the complaint. “Because some of these devices are defective, Xilinx incurs additional damages upon the warranty-mandated replacement.”

In June, Flextronics, an authorized distributor of Xilinx products, placed a large discounted order on behalf of a preferred Xilinx customer, Airvana Network Solutions, and sold the devices to Checkpoint Systems Inc., which pays as much as $4.50 more for the same device, according to the complaint.

The complaint includes allegations of fraud, misrepresentation and breach of contract.

Xilinx, based in San Jose, manufactures chips that can be reprogrammed after they’ve been installed in electronic devices.

Renee Brotherton, a spokeswoman for Flextronics, declined to immediately comment on the the complaint.

The case is Xilinx Inc. (XLNX) v. Flextronics International Ltd., 113CV257431, California Superior Court, Santa Clara County (San Jose).

Companies See Bright Spots in Bleak Market

http://www.nationaldefensemagazine.org/archive/2013/November/Pages/CompaniesSeeBrightSpotsinBleakMarket.aspx

Military contractors were recently warned by a senior official that they are about to be “punched in the face” as the defense market takes a beating over the next several years.

That statement comes as no surprise. Sequestration and gridlock will be taking a huge toll on Pentagon spending. Budgets for new weapons will be plummeting by at least 20 percent. And Pentagon buyers will be hesitant to spend what they have, as they are still scarred by a decade of procurement flops.

Remarkably, there are still companies that have the stomach to invest in defense. Some actually view these tough times as an opportunity to win new business.

Textron just unveiled a new light-attack surveillance aircraft that can carry spy sensors and is based on a commercial Cessna business jet. The aircraft, named Scorpion, is a private investment by Textron and a partnership of 22 vendors.

But in today’s bleak market, how long can a company wait for a Pentagon order before investors lose their patience?

Textron executive Edward Hackett says the company is not expecting to “drive decisions” within the Defense Department. But he hopes that products such as Scorpion will help open the debate on the “value” that industry can bring to the Defense Department.

The company decided to take the plunge in response to what it has been hearing from Deputy Defense Secretary Ashton Carter and Undersecretary for Acquisition, Technology and Logistics Frank Kendall: Industry, keep investing, please. Bring us solutions.

The business model is rather simple: Build an aircraft at a fraction of the cost of a government-developed system, mostly by using commercial components from the Cessna line.

It remains to be seen whether industry-funded hardware such as Scorpion sparks interest within the Defense Department. Some industry insiders appear impressed by the idea. Maybe the Pentagon is not ready to buy a commercial jet to replace F-16 fighters, but other countries that have less money might consider it. All Textron needs is one customer that is willing to be the first to buy one of these airplanes. Then, others probably will follow, or so some business leaders believe.

Another company that sees the downturn in a positive light is Saab North America, which spends 8 to 9 percent of its approximately $4 billion in revenues on research and development.

That’s at least two to three times what top prime contractors spend, on average, on corporate R&D.

Saab executives will admit that investors do not always like to see so much money poured into research ventures. “It takes a lot of leadership to do it,” says Vice President Brian Lawrence.

But that is the only way the company believes it can compete with the bigger primes. Saab’s story is a cautionary tale for defense companies that primarily rely on government funding to develop new products. In the 1980s, 90 percent of Saab’s revenues were from sales to the Swedish government. After the end of the Cold War, it faced a sink-or-swim moment. It decided to start funding its own product development and branched into the global market. Now 50 percent of Saab’s business is outside Sweden.

Non-U.S. defense firms understand the politics of jobs and the industrial base and have no problem pouring funds into domestic production, licensing or codevelopment, if they are reasonably sure that the U.S. government intends to buy the product.

That philosophy is guiding new investments by MBDA Inc., the U.S. subsidiary of Europe’s largest missile manufacturer. It is actively marketing its Brimstone air-to-ground missile — whose development was funded by the United Kingdom — to the U.S. Air Force, Navy and Army. This might seem overly ambitious, as the market is owned by Lockheed Martin’s Hellfire. But the company believes it can beat incumbent suppliers if given a chance to compete.

Some industry CEOs remain skeptical that the Defense Department can be trusted to commit to buy products that it did not design or develop in house. This is often known as the “not invented here” syndrome.

The government is asking industry to invest in new technology, but for some corporations, that is too big a gamble. David Melcher, CEO of Exelis Inc., a supplier of high-tech military equipment, says he expects most industry investments will be based on “requirements” set by the Defense Department.

As the downturn loomed, Defense Department leaders assumed that they would have to slash R&D spending and industry would pick up the slack. Melcher cautions about overblown expectations that industry will deliver products at high technology readiness levels not knowing whether the Pentagon will buy them. “At the end of the day, our board and our shareholders will not want us to keep investing in something that doesn’t have a return on the invested capital,” he says.

Melcher might have a point. A new study by the Center for a New American Security contends that the U.S. military “strongly resists serious investments in technologies that may threaten perceived ‘core’ weapons platforms and traditional concepts for their employment.”

Risk aversion is a “deeply rooted facet of Pentagon culture,” the CNAS study says.
Government buyers eventually will have to decide whether their desire for innovation will trump entrenched thinking. They will need to keep in mind that the modernization of the military largely will be made possible by advances in commercial technology. “The commercial sector now catalyzes far more technological innovation than the military industrial base,” says the study.

This is good news, CNAS analysts note, because a healthy commercial industry will generate innovative technologies that can be applied across the entire U.S. economy while also allowing the military to benefit from private investments.

The Pentagon, however, will always need technologies that are not available in the civilian world, and will have to make sure it invests in those areas. And if it wants defense contractors to put more skin in the game, it will also need to do a better job informing companies about its needs. The Pentagon is asking industry to invest in technology not only because it is cash strapped but also because it is in danger of losing its technological edge.

Lawrence notes that one of the biggest hurdles his company encounters in its defense business is the way the Pentagon articulates its requirements.

“The defining of requirements for new weapon systems in the U.S. needs a complete overhaul,” he says. “I think a lot of people would agree with this.” Military buyers often write requirements that are too restrictive or too difficult to achieve, he said. “That is why we have so many programs that are over budget and behind schedule.”

Compromised By Design? Securing the Defense Electronics Supply Chain

http://www.brookings.edu/research/papers/2013/11/4-securing-electronics-supply-chain-against-intentionally-compromised-hardware-villasenor

Executive Summary:

Electronic “chips” are found everywhere—not just in critical defense systems, but also in the broader infrastructure for power, finance, communications, and transportation. All of these systems function effectively only when the electronic circuits at their heart can be trusted to operate as intended.
Unfortunately, ensuring trust has become much more difficult in recent years. Concern over the growth of counterfeit electronics (parts that have been harvested from discarded systems, relabeled, and sold as new to unsuspecting buyers) has grown in recent years. These parts can fail prematurely, with potentially disastrous consequences. Thanks to recent congressional attention, improved detection methods, and heightened screening requirements for parts destined for defense systems, however, the threat of counterfeits is being actively addressed.
Yet the supply chain is almost completely unprotected against a threat that may turn out to be more significant in the long term: Chips could be intentionally compromised during the design process, before they are even manufactured. If placed into the design with sufficient skill, these built-in vulnerabilities would be extremely difficult to detect during testing. And, they could be exploited months or years later to disrupt—or exfiltrate data from—a system containing the compromised chip.
As chips have gotten more complex and design teams have grown larger and more globalized, the opportunities to insert hidden malicious functionality have increased. If the history of cybersecurity has taught us anything, it is that these opportunities will be exploited. The prudent question, therefore, is not “will intentionally compromised hardware will end up in the defense electronics supply chain?” but “how do we maintain security when it inevitably does?” This paper aims to help frame the discussion regarding how best to respond to this important and underappreciated aspect of cybersecurity.

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U.S. Manufacturing Expands At Best Pace In 2½ Years

http://www.manufacturing.net/news/2013/11/us-manufacturing-expands-at-best-pace-in-2%C2%BD-years-0?et_cid=3574502&et_rid=490548696&linkid=http%3a%2f%2fwww.manufacturing.net%2fnews%2f2013%2f11%2fus-manufacturing-expands-at-best-pace-in-2%25C2%25BD-years-0

WASHINGTON (AP) -- U.S. factory activity expanded in October at the fastest pace in 2½ years, suggesting that the 16-day partial shutdown of the government had little effect on manufacturers.
Instead, overseas demand and healthy U.S. auto sales appear to be supporting factory output. The housing recovery is also lifting the furniture and wood products industry despite a recent slowing in home sales.
"We've become accustomed to the way Washington operates in the past couple of years and assume that it will get resolved eventually, however painfully," said Bradley Holcomb, head of the survey committee of the Institute for Supply Management, a trade group of purchasing managers that on Friday reported a solid manufacturing figure for October.
The ISM's manufacturing index rose to 56.4 from 56.2 in September. A reading above 50 indicates growth.
Factories also expanded in Europe this month, though at a slightly slower pace, according to surveys in that region. Manufacturing indexes have all picked up in China, Japan, and South Korea.
The overseas strength is boosting demand for U.S. factories. A measure of export orders jumped to its highest level in nearly a year and a half in October, the ISM report said.
"The outlook for manufacturing looks far more constructive now than it did over the past several months, in light of the improving global backdrop," said Michael Dolega, an economist at TD Economics.
U.S. factory activity has now risen at an increasingly fast pace for five straight months, according to the ISM's index. In October, a measure of new orders rose slightly. And a gauge of production fell but remained at a high level. Factories added jobs, though more slowly than in September.
The shutdown did depress activity at some companies that make metal products and electrical equipment. And while the survey's findings suggest stronger output in coming months, the most recent measures of factory production remain tepid.
"The strength of this hasn't yet been reflected in actual manufacturing output," said Amna Asaf, an economist at Capital Economics.
On Monday, the Federal Reserve said factories barely increased their output in September. Automakers produced more. But that gain was offset by declines at companies that make computers, furniture and appliances.
Companies reduced demand for long-lasting factory goods in September, the government said last week. Orders for industrial machinery, electrical equipment and other core capital goods fell. And August's figures were revised down.
Economists pay particular attention to core capital goods, which exclude aircraft and defense-related goods, because they reflect business confidence.
Analysts were also encouraged by a survey of companies in the Chicago region, released Thursday. It found that the companies expanded at their fastest pace in more than two years in October. New orders jumped, and hiring also rose.
Still, economists don't expect manufacturing to boost economic growth in the coming months. Growth likely fell to a weak annual rate between 1.5 percent and 2 percent in the July-September quarter from a 2.5 percent pace in the April-June period.
Most economists expect similarly slow growth in the final three months of the year.

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Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), offered the following analysis:
“The October report on U.S. manufacturing activity from the Institute for Supply Management (ISM) contributes to growing evidence that modest improvements in global financial stability and growth are benefiting U.S. factories. The Purchasing Managers’ Index rose slightly from 56.2 in September to 56.4 in October, the highest level for this closely watched leading indicator of factory sector performance since April 2011.
“The demand components of the index were notably positive, with the new orders component remaining above the strong 60 percent level and the backlog of orders, a measure of the pressure on the factory production schedule, increasing nicely from contraction territory in September to growth territory in October,” Waldman continued. “Neither the data nor the respondent comments in October suggest any measurable impact from the government shutdown, although reports for coming months need to be interpreted carefully for any distorting influence of Washington difficulties.

“In recent months, the survey-based data from the ISM have painted a more optimistic picture of manufacturing performance than the industrial production reports from the Federal Reserve,” Waldman concluded. “Federal Reserve data show that the third quarter rebound from the modest contraction of manufacturing output in the spring was a disappointing 1.3 percent. Fed data also show that the slowdown in the U.S. housing recovery is impacting overall manufacturing performance. Taken together, the ISM data and the industrial production data suggest positive but muted near-term performance for U.S. factories, as the beneficial impacts of an improved global growth picture are at least somewhat neutralized by uncertainties about the sustainability of the rebound in key parts of the world and the potentially harmful effects of historic policy uncertainty in Washington.”

Airbus Promotes Its U.S. Links On Boeing's Turf

http://www.manufacturing.net/news/2013/10/airbus-promotes-its-us-links-on-boeings-turf?et_cid=3559583&et_rid=490548696&linkid=http%3a%2f%2fwww.manufacturing.net%2fnews%2f2013%2f10%2fairbus-promotes-its-us-links-on-boeings-turf

WASHINGTON (AP) -- Airbus, headquartered in France, is pitching its value to the U.S. economy as it takes its battle for dominance in the global airplane market onto rival Boeing's home turf.
This week for the first time Airbus is holding its annual meeting with its suppliers from around the world in Washington instead of at home in Toulouse. It's the company's way of underscoring that 42 percent of its procurement spending — about $13 billion in 2012 — goes to U.S. companies.
Earlier this year, Airbus broke ground on a $600 million assembly plant for its popular A320 airliner in Mobile, Ala., the company's first such facility in the U.S. A poster at the company's offices only a few blocks from the White House promotes the A320 as made in America.
Airbus currently claims less than 20 percent of the U.S. commercial airplane market, but is aiming for 50 percent — roughly the same as its market share worldwide, Airbus CEO Fabrice Bregier said in an interview Thursday.
"There is room to maneuver to do better in the United States," he said. "We care about this country, we have extremely good partners here, we are competitive and we want to grow with them."
Airbus is having some success with its campaign for the U.S. market, Bregier said, noting that Delta Air Lines and JetBlue have ordered A320s.
"This is first of all because of the quality of the product, but also because we are seen as a U.S. citizen and assembling our aircraft here in the United States," he said.
Boeing officials, however, scoff at Airbus' attempts to emphasize their value to the U.S. economy, noting that Boeing employees 160,000 workers across the country, about half of them involved in commercial airplanes and the rest mostly in the company's defense business.
"Their starting up of one very small plant in Mobile versus our 160,000 employees in the United States, it's a significant difference," said John Wojick, senior vice president, global sales & marketing, for Boeing Commercial Airplanes.
Both companies draw on many of the same suppliers scattered all over the world. A significant portion of Boeing's 787 parts, for example, are made in Japan. The company also has suppliers in Europe.
The U.S. is the world's largest airplane market, but it is a "mature" market and not growing nearly as fast as Asia, Wojick said.
Boeing reclaimed the title of world's largest airplane maker from Airbus last year, delivering 601 planes in 2012 to Airbus' 588 deliveries. But earlier this month, Airbus secured its first ever order from Japan Airlines, a deal that undermines Boeing's long-held dominance of the Japanese aviation market.
So far this year, Airbus has sold slightly more planes than Boeing, but both companies "are having a very good year," Wojick said. Boeing will again deliver more planes this year than Airbus, he predicted.
Bregier said he anticipates Airbus will regain the lead on deliveries around 2017 or 2018, when the company ramps up production of the A350, a family of long-range, two-engine, wide-body jet airliners due to come into service next year.
The contest between the two aircraft makers is about a lot more than bragging rights. Boeing forecasts that over the next 20 years the global demand for new airplanes will exceed 35,000 aircraft valued at $4.8 trillion.
The two companies are also challenging each other in legal arenas. They are locked in an international trade dispute at the World Trade Organization in Geneva, each claiming that the other receives illegal state subsidies.

Samsung to cut chip investment

http://www.koreatimes.co.kr/www/news/tech/2013/10/133_144910.html

By Kim Yoo-chul

Samsung Electronics, the world’s top supplier of memory chips, plans to cut its investment in components by as much as 30 percent next year.

The company doesn’t plan to build any more plants to make memory chips because the industry is undergoing rapid structural change.

Industry officials at Samsung's local primary parts suppliers say that aggressive investment does not guarantee high returns anymore due to industry consolidation as well as rising uncertainty surrounding technology and sluggish demand.

“Investment in chips will be cut by 30 percent next year, at least, because we believe Samsung doesn’t have plans to build new fabrication facilities. Total investment in components will remain under 10 trillion won throughout 2014,” said a senior executive at one of the company’s suppliers by telephone.

“It is unlikely that the industry will see cash-burning business projects in chips next year as complexity is increasing because the market is approaching scaling limits.”

Samsung planned to invest 13 trillion won this year. So far it has spent 4 trillion won to transition its Texas plant toward processors, 3 trillion won to build the first line of its NAND flash chip plant in Xian, China, and 2.3 trillion won to build its 17th processor assembly line in Hwaseong.

The remainder will be used for maintenance, technology migration and equipment, said industry sources.

“Samsung’s primary target for its semiconductor business is to churn out advanced flash memory chips including V-NANDs in a strategy to actively meet the industry’s demand for NAND-intensive digital devices such as smartphones, tablets and solid state drives. It may invest more in flash chips. However, the factory expansion, if it materializes, will cost less than 1 trillion won from next year’s tentative investment budget,” said an official from another partner of Samsung.

“Next year’s key issues are how to operate new factories and expanded lines, effectively.”

Strategy change

Samsung’s “golden pricing strategy” encouraged heavy investment in chips in an attempt to gain a larger market share, regardless of the market’s volatility.

“As a new order prevails, you don’t have to invest heavily in chips. Samsung is sourcing conventional DRAM chips from its strategic partners such as SK hynix and Micron Technologies. Rather than building new factories, Samsung can secure enough chips via cross-licensing deals with them,” said a fund manager at a U.S.-based investment bank in Seoul.

Its earlier investments in the 17th processor assembly line and the U.S. plant were aimed at supplying processors to major clients such as Apple.

“Samsung’s factory in Xian will be tasked to sell NAND chips to be used in corporate servers and to leading technology solution majors such as IBM and Apple,” said a Samsung source asking not to be identified.

The company’s in-house solid-state drives with flash chips are used in Apple’s MacBook Air, said the suppliers.

“Samsung will continue to improve semiconductor earnings as it gains more share in non-memory areas including foundries and processors. The company will enhance earnings from NAND as the market continues to grow rapidly, powered by smartphones and solid state drives. In addition, the company plans to improve DRAM margins and share as the DRAM industry moves towards a profitable oligopoly,” said Sanford C. Bernstein in a recent note to clients.