DRAM Forecast Outlook, 3Q03: Price Rises Force Forecast Up

Forecast Analysis DRAM Forecast Outlook, 3Q03: Price Rises Force Forecast Up Abstract: Reduced supply of dynamic random-access memory has caused prices to rise sooner than expected. Now that the industry is starting to recover, we have increased our forecast for revenue in 2003 and 2004. By Andrew Norwood Recommendations Vendors of dynamic random-access memory (DRAM) should not increase production beyond planned levels to benefit from improving market conditions. If they do, this will destabilize the market. DRAM vendors should continue to support specialty and legacy devices, even in periods of undercapacity, to develop a non-pc customer base. DRAM users should prepare for periods of undersupply on some technologies and densities. Strategic Forecast Statements The most-likely forecast scenario for 2003 and 2004 is that: DRAM revenue will rise by 21.8 percent in 2003, to $18.9 billion. DRAM revenue will grow by a further 49.1 percent in 2004, to $28.1 billion. Bit growth will increase by 54.2 percent in 2003 and 50.0 percent in 2005. Link to Full DRAM Forecast Statistics For Gartner Dataquest's detailed DRAM forecast through 2007, broken out by DRAM density, unit shipments, average selling price, density, technology and regional revenue, see "DRAM Forecast Statistics: Worldwide, 1997-2007 (3Q03 Update)," SCSI-WW-MS-0201. Publication Date: 10 September 2003

2 DRAM Forecast Outlook, 3Q03: Price Rises Force Forecast Up Forecast Overview Conditions in the DRAM industry started improving in 2Q03. Since mid-may, spot pricing has started to increase, followed by contract pricing. This rise was sparked by the move to high-speed double data rate synchronous DRAM 400 (DDR SDRAM 400) after the introduction of Intel's 865 chipset (formerly known as Springdale). Problems with production leading to issues with product mix caused pricing for DDR SDRAM 400 to rise, followed by increases to pricing of other DDR parts and then the older SDRAM devices. Also during this period, major DRAM vendors reduced DRAM production in favor of other devices. This move has set the industry up for a possible shortage. We expected that a pricing recovery would begin in mid-august, on the back of a seasonal increase in demand. But, because it started earlier, we have revised our pricing assumptions upward for 2H03. If these increased prices hold, it will mean a return to profits and strong revenue growth for DRAM vendors. But if DRAM manufacturers become too greedy and increase production further than the current forecast, the industry will quickly swing back into oversupply and prices will crash. Gartner Dataquest has developed three forecast scenarios for the DRAM market, in the face of continuing economic and structural uncertainty. These are termed "best case," "most likely" and "worst case." The details of these forecasts are presented in this document. Changes Since Our May 2003 Forecast In May, we highlighted that only two events could pull the industry out of recession: reduction in capacity or increased demand. With the weak economy there waslittlehopeofastrongdemand-siderecovery.sotheonlyeventthatcould possibly help was a significant reduction in supply, and this looked unlikely too. However, Gartner Dataquest's latest analysis on DRAM supply and demand shows that some major vendors are reducing planned DRAM production in favor of other devices, like NAND flash. This reduction in planned capacity means that our outlook for the supply and demand situation has seen a marked improvement over our expectations in May. A detailed analysis of vendor shipment forecast and demand can be found in "DRAM Supply and Demand Outlook, 3Q03: Cuts Perk Up Market" SEMC-WW-DP-0328. Owing to change in supply and demand dynamics we have revised our DRAM pricing forecast upward for 2003 and 2004. This leads to a more optimistic outlook for the industry. However, if DRAM manufacturers become too greedy and increase production further than forecast, the industry will quickly swing back into oversupply and prices will crash. Table 1 compares the changes to the DRAM market forecast.

3 Table 1 DRAM Market Forecast: Changes Compared With May 2003 Forecast 2002 2003 2004 Growth 2001-2002 Growth 2002-2003 Growth 2003-2004 PC Shipments * Current 142.1 152.6 170.5 2.1% 7.3% 11.8% (Millions of Units) Previous NA 152.0 169.6 2.1% 6.9% 11.5% Change NA 0.4% 0.6% 0.0% 0.4% 0.2% Average PC DRAM Content Current 255.1 362.0 473.1 19.8% 41.9% 30.7% (Megabytes) Previous NA 362.5 483.6 19.8% 42.1% 33.4% Change NA -0.1% -2.2% 0.0% -0.2% -2.7% Total DRAM Demand Current 73,277 113,015 169,565 39.4% 54.2% 50.0% (Millions of Megabytes) Previous NA 112,967 170,741 39.4% 54.2% 51.1% Change NA 0.0% -0.7% 0.0% 0.1% -1.1% Total DRAM Supply Current 77,757 115,240 166,747 21.5% 48.2% 44.7% (Millions of Megabytes) Previous NA 117,163 172,631 21.5% 50.7% 47.3% Change NA -1.7% -3.5% 0.0% -2.5% -2.6% Supply and Demand Ratio Current 106.1% 102.0% 98.3% NA NA NA (Percent) Previous NA 103.7% 101.1% NA NA NA Change NA -1.7% -2.8% NA NA NA ASP for Mainstream Device Current $6.96 $4.72 $4.56-25.2% -32.1% -3.6% (256Mb DDR SDRAM) Previous NA $4.18 $3.69-25.2% -39.9% -11.8% (Dollars) Change NA 13.0% 23.6% 0.0% 7.8% 8.3% ASP per Megabyte Current $0.211 $0.167 $0.166-4.5% -21.0% -0.6% (Dollars) Previous NA $0.153 $0.145-4.5% -27.5% -5.2% Change NA 9.1% 14.4% 0.0% 6.5% 4.6% Total DRAM Revenue Current 15.5 18.9 28.1 33.2% 21.8% 49.1% (Millions of Dollars) Previous NA 17.2 24.7 33.2% 11.3% 43.5% Change NA 9.5% 13.7% 0.0% 10.5% 5.6% ASP = average selling price DDR SDRAM = double data rate synchronous DRAM NA = not applicable Trade Disputes Rumble On Countervailing duties against Hynix Semiconductor's South Korean origin product have now been confirmed in the United States and the European Union at 44.29 percent and 34.8 percent respectively. Results in Gartner Dataquest's "Quarterly DRAM Vendor Market Shares by Revenue, 2Q03" (MPDA-SE-DA-0001) show that the preliminary measures have yet to have an effect on Hynix's worldwide business. However, Hynix is being forced to redistribute its sales toward China, India and Eastern Europe. The South Korean government is likely to appeal to the World Trade Organization against both decisions. Worryingly for Hynix, Taiwanese DRAM vendors have been threatening to file a complaint with the government of Taiwan since April 2003. If Taiwan were to join the United States and European Union in imposing duties, it would be a major blow for Hynix. It should be noted that duties are only payable on DRAM of "South Korean origin" that is, on DRAM fabricated in South Korea. Hynix's U.S. plant in Eugene, Oregon, accounts for about 15 percent of the company's production, and that production is exempt from duties in both the United States and the European Union.

4 DRAM Forecast Outlook, 3Q03: Price Rises Force Forecast Up Forecast Scenarios Table 2 gives the main assumptions behind our worst-case, most-likely and bestcase forecasts for the worldwide DRAM market revenue. Some of the events described are not necessarily desirable for the industry, but their effect would lead to stronger bit or revenue growth. Table 2 Worst-Case, Most-Likely and Best-Case Forecast Scenarios for the Worldwide DRAM Market Economy/ Politics PC Shipments Density Transition New DRAM Technology Production/ Investment DRAM Pricing Underlying Market Conditions Worst-Case Scenario (Growth Inhibiting) The U.S. economy remains weak into 2004. Consumer spending slows and becomes more cautious. Global economic recovery delayed well into 2004. Users postpone replacing their PCs and the replacement cycle only becomes apparent in 2004, or later. PC unit shipment growth is below 6.0 percent in 2003 and 8.6 percent in 2004. "Technology pushers" accelerate the move to 512Mb density as a way of reducing the cost per bit and differentiating themselves from the "bit pushers." Most-Likely Scenario U.S. GDP growth rises, but economic fundamentals remain mixed. Global economy improves, but recovery is slower than in the past. Selective PC replacements are apparent in 2003, but a general cycle is not strongly evident until early 2004. Worldwide PC unit shipment growth for 2003 is 6.9 percent, followed by 11.5 percent in 2004. The move to 512Mb density will be modest; 256Mb will remain the largestshipping density though 2003 and 2004. The move to DDR SDRAM 400 devices will be fairly easy. Demand for DDR II SDRAM will be insignificant until the end of 2004. RDRAM will account for less than 3 percent of the market during 2003. Its price premium over DDR SDRAM will fall. DRAM vendors revert to earlier, higher production plans owing to improvements in pricing conditions. This pushes the industry back into oversupply. Pricing for all devices falls steeply becauseofintensepricecompetitionas vendors increase production. Industry consolidation falters and DRAM vendors return to the market share battle during 2003 and 2004. Pricing and revenue growth strengthen slightly toward the end of 3Q03, but pricing slips again at the beginning of 2004, after the Christmas holiday. DRAM vendors go with reduced production plans and take benefit from improving pricing conditions. Price rises in late 2Q03 are maintained through 2H03 due to seasonal demand. In 1Q04, pricing falls sharply before experiencing mild quarterly declines for the rest of the year. Reduced supply helps to increase pricing levels above production costs. Industry maintains reduced capacity forecast and benefits from strong market. Best-Case Scenario (Growth Accelerating) The United States experiences a strong economic recovery, leading to global economic recovery in 4Q03. PC replacement cycle strongly evident among consumers and professionals in 4Q03. PC unit shipment growth reaches 11 percent in 2003 and 13.3 percent in 2004. A slower move to higher-density devices slows production bit growth and helps stabilize the market. Yield problems on DDR SDRAM 400 devices affect the industry, keeping supply tight and pricing at a premium during 2003 and into 2004. Further industry consolidation occurs, through companies leaving the market or capacity being taken offline. Further production cutbacks, moves toward industry consolidation, or stronger demand for PCs means ASPs maintain 4Q03 levels though most of 2004. During 2H03, industry consolidation becomes a prospect again. Increasing demand from the PC market helps to increase pricing levels. DDR SDRAM = Double data rate SDRAM GDP = Gross domestic product RDRAM = Rambus DRAM SDRAM = Synchronous DRAM Most-Likely, Best-Case and Worst-Case Forecasts Based on these three scenarios, Tables 3 to 5 give Gartner Dataquest's forecast for quarterly and annual DRAM revenue, sequential revenue growth and year-overyear revenue growth from 2002 to 2004.

5 Table 3 DRAM Forecast Revenue: Worldwide, 1Q02-4Q04 (Million of Dollars) 1Q02 2Q02 3Q02 4Q02 2002 Most-Likely Case 3,928 3,688 3,637 4,228 15,481 1Q03 2Q03 3Q03 4Q03 2003 Best Case NA NA 6,040 7,227 20,733 Most-Likely Case 3,743 3,723 5,132 6,261 18,859 Worst Case NA NA 4,336 4,837 16,639 1Q04 2Q04 3Q04 4Q04 2004 Best Case 7,565 8,128 8,652 9,628 33,973 Most-Likely Case 6,274 6,766 7,254 7,828 28,121 Worst Case 4,823 4,954 5,652 6,888 22,316 NA = Not applicable Table 4 DRAM Forecast Revenue: Worldwide, 1Q02-4Q04 (Sequential Growth) 1Q02 2Q02 3Q02 4Q02 2002 Most-Likely Case 101.6% -6.1% -1.4% 16.3% 33.2% 1Q03 2Q03 3Q03 4Q03 2003 Best Case NA NA 62.2% 19.6% 33.9% Most-Likely Case -11.5% -0.5% 37.8% 22.0% 21.8% Worst Case NA NA 16.5% 11.6% 7.5% 1Q04 2Q04 3Q04 4Q04 2004 Best Case 4.7% 7.4% 6.4% 11.3% 63.9% Most-Likely Case 0.2% 7.8% 7.2% 7.9% 49.1% Worst Case -0.3% 2.7% 14.1% 21.9% 34.1% NA = Not applicable Table 5 DRAM Forecast Revenue: Worldwide, 1Q02-4Q04 (Year-Over-Year Growth) 1Q02 2Q02 3Q02 4Q02 2002 Most-Likely Case -14.3% 16.8% 87.7% 117.0% 33.2% 1Q03 2Q03 3Q03 4Q03 2003 Best Case NA NA 66.1% 70.9% 33.9% Most-Likely Case -4.7% 1.0% 41.1% 48.1% 21.8% Worst Case NA NA 19.2% 14.4% 7.5% 1Q04 2Q04 3Q04 4Q04 2004 Best Case 102.1% 118.3% 43.2% 33.2% 63.9% Most-Likely Case 67.6% 81.7% 41.3% 25.0% 49.1% Worst Case 28.8% 33.1% 30.3% 42.4% 34.1% NA = Not applicable

6 DRAM Forecast Outlook, 3Q03: Price Rises Force Forecast Up Gartner Dataquest Perspective Changes in DRAM vendors' planned production for 2003 and 2004 have radically changed the industry outlook for the next six quarters. If companies hold true to these plans and demand materializes as forecast, the industry should be heading for an extended period of undersupply. Gartner Dataquest is concerned that as pricing improves, owing to balance between supply and demand, and companies return to profitability, they will be tempted to increase capacity to maximize profits. If production is increased too soon, the industry could quickly move into oversupply again and pricing will drop. Key Issue How will supply and demand for memories like DRAM and flash affect industry growth? This document has been published to the following Marketplace codes: SEMC-WW-DP-0335 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-267770 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 117097