Qimonda's woes will zap gamers, PC and servers users

The bankruptcy filing by Germany's Qimonda AG last week marks a first for a major technology company

The bankruptcy filing by Germany's Qimonda AG last week marks a first for a major technology company amid the current global economic downturn, and it likely won't be the last.

Qimonda's problems are already rippling across the globe and could take down others, as well as cause a sharp rise in DRAM prices for users. Qimonda's problems could also zap computer gamers and businesses in the short term because the company supplies DRAM or specialty chips to around a quarter of each market.

Qimonda had hoped to use bankruptcy as a way to reorganize its business, but the prospects of such a comeback are quickly dimming. For one thing, a chip supplier Qimonda counted on, Inotera Memories, has said it won't provide DRAM to Qimonda anymore.

"This means that Qimonda will lose close to 35 percent of its capacity overnight, which will hamper the company's ability to support existing clients and to continue normal operations," said Andrew Norwood, DRAM industry analyst at Gartner, in a report released Monday.

"As for Qimonda, an insolvency administrator has been appointed, and the administrator will be looking to rescue as much money from the company as possible -- either though restructuring or, more likely, a fire sale of assets," he added.

The first place users will feel Qimonda's bankruptcy filing is in the price of DRAM and its possible reduced use in PCs, laptops and other hardware. The low price of DRAM over the past year has prompted many PC vendors to add more DRAM than normal to desktops and laptops, but a sharp rise in chip prices could halt that trend. PC sales are already waning and the last thing vendors want to do is raise prices. Reducing the amount of DRAM to the least needed per PC will keep system prices stable.

The price of 1Gb DDR2 (double data rate, second generation) that runs at 667MHz could rise to between US$1.20 to $1.50 in the near term as the DRAM market absorbs the Qimonda shock, according to DRAMeXchange Technology, a clearinghouse for the chips.

The price of the chips on Friday averaged US$0.85 on DRAMeXchange, indicating a rise of as much as 76 percent should they reach $1.50 each.

Some analysts say a price rise could be short lived because even if Qimonda shut down immediately the chip glut would still exist and several companies -- or even the German insolvency administrator handling Qimonda's case -- could dump inventories. But the bankruptcy filing and near term changes in business, such as Inotera Memories ceasing to supply Qimonda with 35 percent of its output, will disrupt the supply chain.

Qimonda's woes could far more significantly affect the graphics and computer server markets, according to Nam Hyung Kim, memory industry researcher at iSuppli.

Qimonda accounted for 26 percent of global shipments of graphics DRAM and as much as 20 percent of the DRAM for computer servers, he said. Companies that use Qimonda's chips will have to prepare for a possible shutdown by finding new suppliers for the chips.

Qimonda filed for bankruptcy protection in German last Friday after a EUR325 million (US$422.5 million) financing package from the German state of Saxony, a Portuguese financial institution and Qimonda's parent company, Infineon Technologies, could not be completed in time.

The company's troubles were partly caused by a DRAM glut that started over a year and a half ago, while the global economic downturn pushed the company over the edge.

Overly-optimistic projections of PC demand, partly based on hopes Microsoft Windows Vista would be a hit, and easy lending terms from financiers prompted companies to build massive new DRAM factories. In the end, Vista didn't stimulate PC demand as much as hoped and the new factories have become a problem to makers because of the oversupply they have created.

As DRAM prices sank, industry revenue dried up.

DRAM marked a second year of revenue declines last year due to the chip glut. Industry revenue fell 19.8 percent in 2008 to $25.2 billion, down from $31.5 billion in 2007, according to preliminary estimates by iSuppli. The market researcher predicts the sector will suffer a 4.3 percent decline this year.

Qimonda isn't alone in its financial troubles.

ProMOS Technologies of Taiwan faces a US$330 million bond repayment in mid-February and the company doesn't have cash on hand to cover the debt. ProMOS has petitioned the Taiwan government for a loan and sought new partnerships but so far has not found any takers.

It's hard to tell what might happen next, but a spike in DRAM demand is highly unlikely now that the holiday season and Lunar New Year celebrated in China and much of the rest of Asia is now past.

"If Qimonda exits the DRAM business, their competitors are likely to prosper while their partners will suffer," says Jim Handy, analyst at Objective Analysis. "Should the company remain intact, they are still more likely to be taken over than not. In any event, we anticipate that, by the end of 2009, there will exist at least one less DRAM maker."

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