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Unformatted text preview: n Winbond $33 $19 1.0% 0.6% Others $42 1.3% Total $3,322 100.0% Source: iSuppli As seen from the history of the DRAM industry, the competitive advantages for firms are fleeting and DRAM providers are always facing the challenges of industry evolution. 2-2 The main Industry Features There are three crucial industry features for the DRAM industry analysis: short product life cycle, technology driven and equipment based industry 2-2-1 Short Product Life Cycle The product life cycle of DRAM is very short due to the speed of technology innovation. As the DRAM industry is getting mature and competition for the next generation process is getting tougher, the product life cycle becomes shorter. In this sense, DRAM providers need a specified and speedy strategy from product design to sales. The average DRAM product life cycle was about two to three years from 4K DRAM in 1974 to 256M DRAM in 2000 and it is accelerating. This short product life cycle implies that DRAM providers who have the leadership in launching a new product can recover their initial investment and enjoy further profits. The typical semiconductor life cycle shown in figure 2-1 explains how DRAM prices, cost and demand work through the whole DRAM product life cycle. Typical Semiconductor Life Cycle Figure 2-1 Typical Semiconductor Life Cycle (Source: Golding,1972 : Freeman & Soete,1997) 2-2-2 Technology Driven Industry The DRAM industry is technology driven through its whole process: Product Design, Production, Assembly and Test. Especially, product design and process aspects need a high level of technology and a significant investment is needed at the product and process development stage. As mentioned before, a company with technology leadership can earn a high premium at the initial stages of a new product and it can maintain a good position to recover its initial investment and enjoy additional profit due to a short product life cycle. Meanwhile, technology followers have difficulty in recovering their initial investment since these companies launch new products at a mature stage where prices decrease dramatically. For example, 4M DRAM sells at $40 per unit at the initial stage of a product life cycle while prices decrease by $38 after 4 years from launch. At this point, technology leadership for product design and process are critical factors for a company's competitiveness in the DRAM industry. 2-2-3 Equipment Industry The last important feature of the DRAM industry is that the dependence on equipment for designing and producing the product is very high. As the density of DRAM and the needs for shrinkage of chip increases, huge capital expenditure for the equipment is needed. As DRAM productivity has a high level of process automation and a close correlation exists between quality of equipment and productivity, the equipment needed for production is more delicate. Table 2-5 Investment for Equipment by DRAM product generation IM 350 4M 600 16M 1,300 64M 1,500 256M 2,000 IG 2,500 (US$ Millions) Source: Korea Semiconductor Industry Association Following the DRAM product generation changes, there was huge increase in investment for equipment as shown in table 2-5. Investment of equipment for 1G DRAM is 2.5 billion dollars that is 7.1 times more than that of equipment for IM DRAM. This high tech equipment requires a long lead time and the strategy for procurement is highly related to a company's business strategy because the new product development and mass production cannot be conducted without equipment at each process. Chapter 3 Analysis of the DRAM Industry Chapter 3 will first discuss semiconductor value chain and provide an analysis of the DRAM industry and its competitive position within the semiconductor industry using Porter's five forces model 3-1 Semiconductor Value Chain A Semiconductor product is developed and produced following 4 important steps: design, fabrication, assembly and test. Figure 3-1 shows the semiconductor value chain. Through the entire value chain, compared to all stages, design and fabrication are the more important stages of value creation. The design stage needs a high level of skilled human resources and expensive EDA software. The fabrication stage requires huge capital investment for equipment set up and a clean environment for production. At these points, technology differentiation can be created from the design stage and cost leadership can be achieved from the fabrication stage. Although the assembly and test stages require expensive equipment and skilled workers as well, the cost and skill levels needed are much lower than those of the design and fabrication stages. When the semiconductor industry is analyzed, the focus is more on the design and fabrication stages. Figure 3-1 Semiconductor Value Chain4 4 Clair Brown and Greg Linden, Chips and Change, The MIT Press, 2009 3-2 DRAM Industry Analysis Porter's 5 forces model is used to analyze the DRAM industry. Figure 3-2 gives an overall idea about the DRAM industry. Barriers to Entry: High - High initial investment Potential Entrants - Eco...
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