Memory chip price swings keep PC owners guessing


August 16, 1993|By PETER H. LEWIS

Here we go again. Prices for computer memory chips have doubled in the past month, touching off a panic among computer makers and raising the possibility that computer prices will rise -- or at least stop falling for a while.

Sharp price swings are nothing new to the memory chip business, perhaps the most volatile of computer component industries. Prices more than quadrupled in the late 1980s and then reversed direction to become cheaper than ever in the early 1990s.

"We're back in those wild times," said Mike Frost, chief executive of Tech Works, one of the leading vendors of dynamic random access memory chips.

A few months ago, the cost of a 4-megabit memory chip was $10.50 or $11 on the spot market, Frost said. Last week, it was about $20 and heading north.

Ostensibly, the current gyrations are the result of an explosion and fire July 4 at a Japanese plant that is a leading supplier of a certain glue used in memory chips. But that may be merely a smoke screen, for the computer memory game is played in mysterious ways.

It takes eight or nine 4-megabit chips to produce 4 megabytes of system memory (there are eight bits in a byte, and on some systems an extra chip is needed to keep things orderly, like the coxswain on a racing shell).

So computer owners who had become accustomed to inexpensive upgrades, often as little as $150 for 4MB of additional memory, may soon see prices climb to $250 or $300. This increase may be gradual because many companies had already locked in lower chip prices under long-term contracts from chip makers. But for companies that must buy chips from distributors to meet short-term needs -- the so-called spot market -- prices are soaring.

The indirect effect on computer buyers is an effective truce in the vicious price-cutting war of the past year, which has seen most major PC makers slashing prices by one-third or more. The added cost of memory is offsetting many of the gains derived from more efficient manufacturing, and analysts say profit margins are thin enough already.

The relatively high chip prices have led to the return of high-tech bandits.

Law enforcement officials in the Silicon Valley area of California, the Silicon Gulch area of Texas and other high-tech centers are reporting an increase in semiconductor thefts from warehouses.

The episodes are reminiscent of the last chip panic, in the late 1980s, when a 4MB upgrade might cost $2,500 and it was not uncommon for companies to remove memory chips from inactive machines and lock them in a safe.

Analysts expect prices to continue climbing for the next few months -- but then, just as surely, to head back down again. That's the nature of the business. The big questions are when prices will settle down, and what to do in the meantime.

Should a person accelerate computer and memory chip purchases, anticipating that prices will rise well into the fourth quarter, traditionally the most active time for buying computers? Or is it best to postpone purchases until next spring, when the current panic is likely to have subsided? Or should you just shrug it off, buying computers and memory upgrades as needed, regardless of market fluctuations?

As usual, there are no absolute answers. But the background of the memory scare suggests that prices are unlikely to come down soon.

The catalyst for the recent panic was the July explosion at an obscure but important factory that is the world's leading supplier of a kind of epoxy used in the packaging of memory chips. Some 60 percent of the world supply of this esoteric goop was produced at the plant, which Japan has vowed to rebuild quickly.

But according to analysts' estimates, there was a three-month to six-month supply of epoxy already in distribution, so any direct effect of the factory mishap would not show up for some time. And smaller epoxy plants elsewhere will certainly step up production in an attempt to meet demand.

"There is a sufficient amount of inventory on hand," said Ronald Chwang, president of Acer America, a billion-dollar PC maker in San Jose, Calif.

"The problem will probably come later in the year. But it created a panic-buying situation, and all of a sudden the spot market went crazy."

The panic was easy to set off because demand for memory chips had been drifting upward before the explosion.

As computer prices plunged in the summer of 1992 through the first half of 1993, PC customers chose not to pocket the savings, but rather to set their sights higher: on powerful Intel i486-based systems that could run Microsoft Windows, IBM's OS/2 and other so-called graphical operating systems.

Those require at least 4MB of system memory. So the PC makers raised the base configuration to 4MB. Lately, some personal computers have been introduced with 8MB or even 16MB of base system memory.

Some business customers, especially those who work with video and color graphics, are loading their machines with 24, 48, 96 and in many cases 128 megabytes of D-RAM.

There was more memory in the box, and the companies were selling more boxes.

Double-digit increases in unit sales were common this year for the big PC makers. So, if a company has orders for 20 percent more computers than it sold a year earlier, each with four times the memory of a year ago, and if price competition has shaved profit margins as thin as a silicon wafer, any price increase in memory is cause for concern.

Chwang of Acer noted that buying on the spot market often gives smaller PC companies a price edge when there is an oversupply of memory chips. When demand outstrips supply, however, the advantage goes to the bigger companies with the long-term contracts. So the squeeze is on the little guys.

(Peter Lewis works out of the New York Times' Austin, Texas, bureau: [512] 328-8258.)

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