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Figure 3 2 gives an overall idea about the dram

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Unformatted text preview: nomies of scale - Alliance and partnership among incumbents - Cross patents agreement Threat of New Entrants Industry Competitors Suppliers Bargaining power of suppliers Supplier Power: High - Equipment is a Key factor of quality and productivity 4Intensity of Rivalry: High - The severe drop in prices Bargaining Power of Buyers Buyers Buyers power: High - Easily change vendors due to the commodity characteristic of DRAM t Threat of substitute products or services | Substitutes | products: Low TNo potential substitute products until now - hreat of substitute Figure 3-2 Porter's Five Forces analysis, applied to the DRAM industry (Source: Author) 3-2-1 Threat of Entry The threat of entry in to the market can be measured by current barriers to entry. Barriers to entry into the DRAM industry are quite high with some industry characteristics. Barriers to entry into the DRAM industry are quite high due to extremely high fixed costs, economies of scale, cross patent and high switching cost. The design and fabrication stages are crucial to create value from cost leadership and differentiation. In other words, a huge capital is invested in two stages. In the table 2-4, Investment of equipment for iG DRAM is 2.5 billion dollars which is 7.1 times more than that of equipment for IM DRAM and it will increase continuously. In addition to the investment for design and fabrication, the investment for human resources is high because of highly skilled human resources for each stage of the value chain. It means that new entrants should take a capital risk premium and it makes barriers to entry high. Economies of scale in the DRAM industry are another burden to the new entrants. If new entrants enter on a small scale, they should take a cost disadvantage. Also, most of DRAM providers are vertically integrated firms, so they face a cost advantage in procurement and sales. In the DRAM industry, a significant number of patents are cross licensed because patents can be traded in this market. This cross licensing is another high barrier to a new entrant. As competition is getting tougher, the number of DRAM providers is decreasing from more than 20 in 1986 to around 10 in 2009. Also, partnership and alliance for technology and capacity makes the market power of incumbents bigger. Considering the above circumstances of the entire industry, the barriers to entry into the DRAM market is increasing. 3-2-2 Threat of Substitute Products For DRAM, the threat of a substitute is quite low because there are no substitutes which have the exact same function of DRAM until now. Flash memory chips may be potential substitutes for DRAM. Flash memory is a silicon-based memory, but non-volatile memory chip that is different from DRAM. In 1984 Toshiba invented this technology and Samsung is a leading company with 40% of total market share in the flash memory chip market. Flash memory chips can be electrically written and read and is non-volatile. In contrast to DRAM, flash memory chips can store data without electricity power, but they cannot be a substitute for DRAM. First of all, the times of read and write are the same for DRAM but the write time is longer than the read time. A fast write time requiring system cannot perform with flash memory. Also, flash memory has a write time limitation so it cannot be used for applications which need significant number of write times. At this point, although one of the substitutes for DRAM with the most potential is flash memory, it is difficult to see flash memory become a substitute for DRAM. 3-2-3 Bargaining Power of Suppliers The power of the supplier is quite high mainly since the quality of equipment and the timing of supply are critical factors to develop and produce massive new generations of DRAM. The equipment industry was controlled by the US and Japanese companies. As features of DRAM were mentioned in Chapter 2, equipment forms the key factors for cost leadership and differentiation. On account of a high level of process automation and a close correlation between quality of equipment and DRAM productivity, more delicate equipment is needed. Also, the timing of providing equipment can decide the revenue of the DRAM providers since the DRAM market is cyclical. In this sense, the power of a supplier is quite high. 3-2-4 Bargaining Power of Buyers The main customers of DRAM are computer manufacturing companies covering 70 -80 percent of the entire market. Also, about 80% of total customers are corporate customers except those that upgrade modules. Table 3-1 DRAM demand by application Applications 2006 201 1E Desktop 27% 18% Notebook 15% 29% Server 8% 8% Upgrade Module 25% 18% Graphics 5% 4% Computer 80% 77% DSC 2% 1% Game Console 3% 1% HDTV 2% 5% Handset 3% 6% Other 10% 10% Other Applications 20% 23% Source: UBS DRAM is a commodity-like product so change their vendors easily. Also, most of the demand comes from corporate so procurement power of these customers is very high. As a result of these facts, the power of the supplier is very high in the DRAM industry. 3-2-5 Ri...
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This note was uploaded on 01/22/2014 for the course BUAD 497 taught by Professor Degravel during the Fall '07 term at USC.

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