NEW YORK -(Dow Jones)- In the high-stakes global staring contest of the DRAM memory market, manufacturers are starting to blink. But for some particularly battered competitors, it might be too little, too late.

The market for dynamic random access memory, used mainly in computers, is in the midst of a prolonged period of oversupply that is cutting into cash reserves. As a result, some DRAM makers have begun to cut their capital expenditures, which will eventually lower supply. However, continued investments from larger market players as well as the weak economic environment could push a recovery well into 2009.

Prolonging the market's recovery enables the larger players - like industry leaders Samsung Electronics Co. (005930.SE) and Hynix Semiconductor Inc. ( 000660.SE) - to gain market share at the expense of troubled smaller companies, such as Qimonda AG (QI).

Samsung and Hynix are "certainly contributing to and prolonging the DRAM industry downturn. It was in a recovery mode, but it looks like its going to stall and we're going to go back into an oversupply situation," Caris & Co. analyst Betsy Van Hees said, adding that her most bearish outlook has the downturn lasting into the third quarter of next year.

Not everyone agrees that a recovery will take that long to occur.

"Other than Samsung, most suppliers cut their capital spend dramatically, so the industry supply growth will slow down for sure, triggering recovery next year," said iSuppli corp. analyst Nam Hyung Kim, who believes the DRAM market bottomed in the second-quarter and expects "a few top tier suppliers" to turn a profit this year.

Some prominent DRAM makers recently announced spending cutbacks. For example, last week Taiwan's largest DRAM maker by revenue, Powerchip Semiconductor Corp. (5346.OT), lowered its capital spending this year by 28%, while Nanya Technology Corp. (2408.TW), the second-largest, reduced its capital spending expectations by 33%. The two companies have posted five consecutive quarterly losses.

"On the supply side, the DRAM market seems to be consolidating, so we don't have the excesses of last year" where companies were continuing to increase capacity, said Think Panmure analyst Vijay Rakesh.

However, while those making the cuts help the industry rebound, it leaves them vulnerable to market share losses whenever a recovery does happen - especially with Korean rivals keeping up the pressure.

In April, Samsung said it plans to raise its DRAM shipment growth forecast to 100% this year from 70%, while Hynix said Thursday that it plans to maintain its DRAM shipment growth of 60% this year in a sign it has no plans to cut back on production.

Samsung and Hynix are at least maintaining production in anticipation of the next upturn in DRAM prices, but doing so could add to the length of the current downturn, which could be weighed down further by the expected weak demand for PCs and notebooks in the coming quarters.

Qimonda's Woes

Still, in the DRAM market, as oversupply hits the market, chipmakers push themselves to the brink and are doing so again.

Qimonda AG (QI) currently remains closest to the edge, in transition from a nearly abandoned technology and burning through cash reserves. The positions of competitors Micron Technology Inc. (MU) and Taiwan's Nanya Technology and Powerchip don't seem quite so dire, but mounting financial losses have clobbered stock prices and losses continue to mount.

Since last July, Qimonda has lost more than 85% of its market value, and Micron is down more than 61% during the same period. Taiwanese manufacturers have fallen as well, with Powerchip and Nanya both down 59%.

Market analysts, however, aren't as worried as shareholders. Staying competitive in the DRAM business historically requires huge capital expenditures for upgraded technology during periods of high demand, with big profits followed by steep losses as oversupply sets in and competitors put off cutting spending until the very last to avoid missing out on the next upswing.

The current oversupply began in 2007.

A drawn-out market downturn hits smaller, pure-play DRAM makers hardest, and the position of Qimonda is particularly concerning.

Qimonda, the subsidiary of Infineon Technologies AG (IFX), is running through cash amid mounting losses and recently said it plans to dissolve a joint manufacturing venture with Nanya. In the past quarter, Qimonda burned through EUR138 million in cash, dropping its cash position to EUR630 million, and further reduced its 2008 capital expenditure spending plan to between EUR370 million and EUR420 million.

Dan Berenbaum, an analyst from Cowen & Co., said Qimonda's cash burn is "at an alarming rate," and Citi's Glen Yeung wrote that Qimonda's cash balances through the first half of 2009 could fall "precariously low," making "the likelihood of a dilutive liquidity event high."

Meanwhile, Qimonda has cut capital spending and is ahead of schedule on its conversion to "stack" technology. Qimonda spokesman Ralph Heinrich says the company has the best debt position, after Samsung, of anyone in the industry and the company sees further potential for asset-based financing and debt transactions should it be necessary.

In the past, no company has every gone belly-up directly because of a downturn, said Andrew Norwood, an analyst with Gartner Research, and iSuppli's Kim believes all the current industry players will live to fight another day.

"I don't think any of the DRAM suppliers shut down their businesses in the near future," Kim said.

                Table Of Average Weekly Spot Prices
                 July 31  Jul 14   June 24  May 29
32 Gb NAND        $8.61    $9.46    $9.72   $10.59
16 Gb NAND        $3.58    $3.96    $4.19    $4.55
 8 Gb NAND        $2.08    $2.27    $2.35    $2.83
 4 Gb NAND        $1.39    $1.46    $1.76    $1.85
 1 Gb DDR2-800    $2.03    $2.16    $2.25    $2.25
 1 Gb DDR2-667    $1.90    $2.00    $2.10    $2.14
512 Mb DDR2-667   $0.91    $0.96    $1.03    $0.99

   Source - DRAMeXchange

-By Jerry A. DiColo, Dow Jones Newswires; 201-938-2007; jerry.dicolo@ dowjones.com

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  07-31-08 1515ET
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