Strategy Analysis - Micron Acquisition of Elpida

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Strategy Analysis - Micron Acquisition of Elpida

  1. 1. Team Assignment III: Capstone Paper Analysis of the Acquisition of Elpida Memory, Inc. by Micron Technology, Inc. MGMT 619 ▪ Fall 2012 ▪ Prof. Tammy L. Madsen Adi Aloni Gabriel Bowers Vijay Karakala Olena Marchenko Rafik Mikhael Carla Nunes Alex Reitor 1
  2. 2. TABLE OF CONTENTSI. WALL STREET JOURNAL ARTICLE AND EXECUTIVE SUMMARY ............................... 7 I. A. WALL STREET JOURNAL ............................................................................................................ 7 I. B. EXECUTIVE SUMMARY ............................................................................................................. 10 I. B1. Strategic Move...................................................................................................................... 10 I. B2. Major Issues .......................................................................................................................... 10 I. B3. Key Analysis ......................................................................................................................... 11 I. B4. Final Recommendation ......................................................................................................... 12II. EXTERNAL ANALYSIS ....................................................................................................13 II. A. INDUSTRY DEFINITION ............................................................................................................. 13 II. B. SIX FORCES ANALYSIS ............................................................................................................. 13 II. B1. Level One Analysis ............................................................................................................... 13 II. B2. Level Two Analysis............................................................................................................... 13 II. B3. Level Three Analysis ............................................................................................................. 16 II. C. MACRO ENVIRONMENTAL FORCES ANALYSIS, ECONOMIC TRENDS AND ETHICAL CONCERNS ............17 II. C1. Global ...................................................................................................................................17 II. C2. Social .................................................................................................................................. 18 II. C3. Technological ....................................................................................................................... 18 II. C4. Governmental/Political ........................................................................................................ 19 II. C5. Ethical ................................................................................................................................. 20 II. C6. Macroeconomic Trends ........................................................................................................ 21 II. C7. Demographic Trends ............................................................................................................ 21 II. D. COMPETITOR ANALYSIS ........................................................................................................... 21 II. D1. Firm’s Competitors ............................................................................................................... 21 II. D2. Primary Competitors ............................................................................................................ 22 II. D3. Primary Competitors’ Business Level and Corporate Level Strategies .................................... 24 II. D4. How Competitors Achieve their Strategic Position ................................................................ 26 II. D5. Value Minus Cost Analysis.................................................................................................... 28 II. D6. Comparative Financial Analysis............................................................................................ 31 II. D7. Implications of Competitor Analysis ...................................................................................... 32 II. E. INTRA-INDUSTRY ANALYSIS...................................................................................................... 33 2
  3. 3. II. E1. Industry Evolution and Formation of Strategic Groups ........................................................... 33 II. E2. Strategic Industry Groups ..................................................................................................... 34 II. E3. Mobility Barriers, Threats and Opportunities ......................................................................... 35 II. E4. Competitive Dynamics ......................................................................................................... 36 II. E5. Firm’s Competitive Position ...................................................................................................37 II. F. THREATS AND OPPORTUNITIES ANALYSIS .................................................................................. 38 II. G. SUMMARY OF EXTERNAL ANALYSIS ........................................................................................... 38III. INTERNAL ANALYSIS .....................................................................................................39PART 1 – MICRON ...................................................................................................................39 III. A. BUSINESS DEFINITION/MISSION ................................................................................................ 39 III. B. MANAGEMENT STYLE .............................................................................................................. 39 III. C. ORGANIZATION STRUCTURE, CONTROLS AND VALUES ................................................................ 40 III. C1. Organizational Structure ..................................................................................................... 40 III. C2. Organizational Controls ...................................................................................................... 41 III. C3. Organizational Values ......................................................................................................... 41 III. D. STRATEGIC POSITION DEFINITION ............................................................................................. 42 III. D1. Corporate Level .................................................................................................................. 42 III. D2. Business Level .................................................................................................................... 45 III. D3. Resources & Capability Level ............................................................................................... 45 III. E. FINANCIAL ANALYSIS ............................................................................................................... 45PART 2 – ELPIDA ....................................................................................................................47 III. A. BUSINESS DEFINITION/MISSION ................................................................................................ 47 III. B. MANAGEMENT STYLE .............................................................................................................. 47 III. C. ORGANIZATION STRUCTURE, CONTROLS AND VALUES ................................................................ 48 III. C1. Organizational Structure ..................................................................................................... 48 III. C2. Organizational Controls ...................................................................................................... 48 III. C3. Organizational Values ......................................................................................................... 49 III. D. STRATEGIC POSITION DEFINITION ............................................................................................. 50 III. D1. Corporate Level .................................................................................................................. 50 III. D2. Business Level .................................................................................................................... 52 III. D3. Resources & Capability Level ............................................................................................... 52 3
  4. 4. III. E. FINANCIAL ANALYSIS ............................................................................................................... 52IV. ANALYSIS OF THE EFFECTIVENESS OF THE STRATEGY ..........................................53 IV. A. IS ACQUISITION THE RIGHT MOVE? ............................................................................................ 53 IV. A1. Make vs. Buy ...................................................................................................................... 54 IV. A2. Ally or Acquire .................................................................................................................... 54 IV. A3. Porter’s Tests ...................................................................................................................... 54 IV. B. COMBINED RESOURCES AND CAPABILITIES, V-C, AND INDUSTRY CONDITIONS ............................... 55 IV. C. M&A VALUATION ................................................................................................................... 56 IV. C1. Most Likely Case Scenario ................................................................................................... 56 IV. C2. Best Case Scenario ............................................................................................................. 56 IV. C3. Worst Case Scenario ........................................................................................................... 57 IV. C4. Valuation Conclusion .......................................................................................................... 57 IV. D. OTHER CRITICAL ISSUES ........................................................................................................... 58V. RECOMMENDATIONS .....................................................................................................59 V. A. SHORT-TERM AND LONG-TERM RECOMMENDATIONS ................................................................. 59 V. A1. Short-Term Recommendations ............................................................................................ 59 V. A2. Long-Term Recommendations ............................................................................................. 61 V. B. STRATEGY IMPLEMENTATION ................................................................................................... 63 V. B1. Implementation of Short-Term Recommendation: Revise Product Mix .................................. 63 V. B2. Implementation of Long-Term Recommendation: Partner with Intel for DRAM Process Development ................................................................................................................................. 64 V. C. RECOMMENDATIONS FOR CORPORATE SOCIAL RESPONSIBILITY & ETHICS ..................................... 65 V. C1. Short-Term Recommendation .............................................................................................. 65 V. C2. Long-Term Recommendation ............................................................................................... 66VI. CONCLUSIONS ................................................................................................................67VII. BIBLIOGRAPHY ...............................................................................................................69VIII. MAIN APPENDIX ..............................................................................................................76IX. FINANCIAL BACKGROUND APPENDIX .......................................................................103 4
  5. 5. LIST OF EXHIBITSEXHIBIT 1: DRAM INDUSTRY DIAGRAM .............................................................................................. 76EXHIBIT 2: SIX FORCES ANALYSIS – LEVEL ONE ................................................................................ 76EXHIBIT 3: DRAM CAPACITY AS A KEY REVENUE DRIVER ................................................................. 84EXHIBIT 4: COST LEADERSHIP – SAMSUNG LEADING THE PACK ..................................................... 84EXHIBIT 5: “THE GREAT IT SHIFT” – SMARTPHONES AND TABLETS OVERTAKE DESKTOPS ANDNOTEBOOKS........................................................................................................................................ 85EXHIBIT 6: GROWTH AND DRIVERS FOR GLOBAL DATA TRAFFIC MEASURED IN EXABYTES ......... 85EXHIBIT 7: VRIO ANALYSIS ................................................................................................................. 86EXHIBIT 8: VALUE DRIVERS AND VALUE ESTIMATIONS.................................................................... 88EXHIBIT 9: VALUES, COSTS AND PRICES ........................................................................................... 89EXHIBIT 10: PRIMARY COMPETITORS FINANCIAL RATIOS ................................................................ 91EXHIBIT 11: ANALYSIS OF ACQUISITIONS .......................................................................................... 95EXHIBIT 12: ANALYSIS OF PARTNERSHIPS ........................................................................................ 95EXHIBIT 13: BCG MATRIX FOR MICRON .............................................................................................. 98EXHIBIT 14: MICRON’S VALUE CHAIN................................................................................................. 98EXHIBIT 15: ELPIDA’S ORGANIZATION CHART .................................................................................. 99EXHIBIT 16: ELPIDA’S CORPORATE GOVERNANCE BODIES AND COMMITTEES .............................. 99EXHIBIT 17: ELPIDA’S VALUE CHAIN ................................................................................................. 100EXHIBIT 18: ALLY OR ACQUIRE FRAMEWORK FOR ELPIDA’S ACQUISITION .................................. 100EXHIBIT 19: COMBINED COMPANY’S VALUE MINUS COST ............................................................. 101EXHIBIT 20: COMBINED COMPANY’S VRIO ANALYSIS .................................................................... 102EXHIBIT 21: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS MICRON .............................. 103EXHIBIT 22: CAPEX AND R&D EXPENDITURES – INDUSTRY AVERAGE VERSUS MICRON .............. 103EXHIBIT 23: MICRON’S STANDALONE VALUATION ......................................................................... 104 5
  6. 6. EXHIBIT 24: MICRON’S GROWTH FORECAST ................................................................................... 105EXHIBIT 25: MICRON’S GROWTH FORECAST FOR FCF COMPONENTS ........................................... 106EXHIBIT 26: MICRON’S WACC CALCULATION ...................................................................................107EXHIBIT 27: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS ELPIDA ................................ 109EXHIBIT 28: ELPIDA’S STANDALONE VALUATION .......................................................................... 110EXHIBIT 29: ELPIDA’S GROWTH FORECAST ...................................................................................... 111EXHIBIT 30: ELPIDA’S GROWTH FORECAST FOR FCF COMPONENTS ............................................. 112EXHIBIT 31: SENSITIVITY / REGRESSION ANALYSIS FOR ELPIDA’S STANDALONE VALUATION.... 112EXHIBIT 32: “MOST LIKELY” SYNERGIES FROM ELPIDA’S ACQUISITION ........................................ 114EXHIBIT 33: VALUATION OF SYNERGIES .......................................................................................... 114EXHIBIT 34: COMBINED VALUATION – MOST LIKELY CASE SCENARIO ...........................................115EXHIBIT 35: COMBINED VALUATION – BEST CASE SCENARIO ........................................................ 116EXHIBIT 36: COMBINED VALUATION – WORST CASE SCENARIO.................................................... 116EXHIBIT 37: SENSITIVITY/REGRESSION ANALYSIS OF THE COMBINED FIRM (MOST LIKELY CASESCENARIO) .......................................................................................................................................... 117EXHIBIT 38: FINANCIAL EFFECT OF SHORT-TERM REVISION IN PRODUCT MIX FOR YEAR 2013 ... 118EXHIBIT 39: FINANCIAL EFFECT OF NOT ACHIEVING THE 15NM TECHNOLOGY NODE BY 2016.... 119EXHIBIT 40: STACKELBERG GAME MODEL VS. COURNOT GAME MODEL...................................... 119 6
  7. 7. I. WALL STREET JOURNAL ARTICLE AND EXECUTIVE SUMMARYI. A. Wall Street JournalTechMicrons Purchase of Elpida Seen as Positive for Chip IndustryBy Juro Osawa And Lorraine Luk735 words3 July 201207:17 AMThe Wall Street Journal OnlineWSJOEnglishCopyright 2012 Dow Jones & Company, Inc. All Rights Reserved.Micron Technology Inc.s acquisition of Elpida Memory Inc. is good news for other majorsuppliers of computer memory chips in Asia, as industry consolidation will likely help easethe oversupply problem that has been plaguing the market for years.When Micron takes over the failed Japanese rival and streamlines its operations, the wholeindustry could benefit from more subdued supply and higher prices of dynamic randomaccess memory, or DRAM, chips, analysts said."Longer term, as the industry consolidates, we predict more rational supply behavior andhence higher and more stable profits for survivors," Sanford Bernstein analyst MarkNewman wrote in a report after Micron announced the $2.5 billion deal Monday.With the Elpida acquisition, Micron will overtake South Koreas SK Hynix Inc. to becomethe worlds second-largest DRAM maker by revenue, behind another South Koreancompany, Samsung Electronics Co. DRAM chips are widely used in personal computers andmobile devices.While there are several smaller Taiwanese players, analysts expect the DRAM market tobecome increasingly dominated by Samsung, Micron and Hynix.Microns deal, expected to close in the first half of next year, comes at a time many DRAMmakers are trying to emerge from losses due to weak chip prices. After DRAM makers keptbuilding capacity to increase or maintain market share, the sector became a market withfew winners. As DRAM chips used in PCs have become highly commoditized and priceshave remained weak in recent years, many players are struggling to make money. 7
  8. 8. Elpida, Japans only DRAM maker, filed for bankruptcy protection in late February afterstruggling to repay hefty debts amid falling chip prices and as the yens strength eroded itsoverseas profits.Shortly after Elpidas collapse, DRAM prices rose on expectations for a tighter globalsupply."The consolidation of the DRAM market set off by Elpidas bankruptcy and the subsequentpurchase by Micron is bringing new stability to DRAM pricing," said Mike Howard, IHSiSuppli analyst, in a report.Thanks to more stable chip prices, the global DRAM industrys overall revenue is expectedto rise 3.3% this year to $30.5 billion, after it plunged 25% last year, according to IHSiSuppli.Micron, which was selected as Elpidas potential financial sponsor in May, said Monday thatit agreed to buy the Japanese company for $2.5 billion.Sanford Bernsteins Mr. Newman expects Micron to convert some of Elpidas DRAMfacilities to produce NAND flash memory chips instead, while the U.S. company may alsoshut down the Japanese firms least efficient facilities. This process, he said, would result inmore subdued DRAM chip supplies. DRAM and NAND chips are different types of memorychips, and mobile devices such as smartphones use both.On Monday, Micron Chief Executive Mark Durcan declined to provide any details aboutconverting Elpidas DRAM capacity to flash memory chips, but said it was something thatMicron could do to address market demand.While the expected increase in Microns global market presence could mean morechallenges for rivals Samsung and Hynix, analysts say the South Korean companies are alsowell positioned to benefit from industry consolidation and more stable chip prices.Samsung and Hynix declined to comment on whether or how Microns acquisition mightaffect them.By contrast, the environment remains tougher for Taiwanese players such as NanyaTechnology Corp., Inotera Memories Inc., a joint venture between Micron and Nanya, andWinbond Electronics Corp.As Taiwanese players have few advantages against larger South Korean players, there maybe more consolidation in Taiwans DRAM industry over the next few years, analysts say.While more stable DRAM prices would be positive for Taiwanese players, too, their abilityto take advantage of the improving environment is limited because they are already too farbehind the first-tier players like Samsung and Hynix in terms of technology and marketpresence, said William Wong, an analyst at Taiwans Fubon Securities. 8
  9. 9. Nanya and Inotera declined to comment on their competitive environment or possibility ofconsolidation. Winbond couldnt be reached immediately for comment.Jung-Ah Lee contributed to this article.Write to Juro Osawa at juro.osawa@dowjones.com [mailto:juro.osawa@dowjones.com]and Lorraine Luk at lorraine.luk@dowjones.com [mailto:lorraine.luk@dowjones.com] andLorraine Luk atDow Jones & Company, Inc.Document WSJO000020120703e873006el 9
  10. 10. I. B. Executive SummaryMicron Technology, Inc. (Micron) designs, manufactures, and sells semiconductor memoryproducts of three main types – DRAM, NAND flash, and NOR flash. These products are usedin multiple applications, such as PCs and notebooks, mobile devices, servers and consumerelectronics, as well as in automobiles and medical devices. This paper focuses on theDRAM business, in which Micron is the only American-based company left. The othermajor players in this space are South Korean companies Samsung Electronics (Samsung)and SK Hynix (Hynix), and Japanese Elpida Memory, Inc. (Elpida). This paper focuses onMicron’s DRAM business.I. B1. Strategic MoveIn July 2012, Micron has agreed to acquire Elpida for a total of about $2.5B, out of which$750 million is to be paid immediately, while the rest is to be paid in annual, interest-freeinstallments. Micron was already acting as Elpida’s financial sponsor since May 2012, a fewmonths after Elpida filed for bankruptcy, in February 2012. This move will position Micronas the second largest memory company after Samsung. With the acquisition, Micron alsogains significant presence in the mobile DRAM market where currently it is not ameaningful player.I. B2. Major IssuesIndustry: The DRAM industry is generally an unfavorable one, with intense rivalry and atrend of commoditization that makes it difficult for player to compete. The fact thatincumbents are relatively protected from new entrants (due to the high barriers to entry)is hardly helpful for survival. The costs to build a fab and to make it fully functional areabove $6B, excluding R&D. At the same time, the Total Addressable Market (TAM) forDRAM products is estimated at only $25B. The intense technology race is currently slowedsomewhat by difficulties in achieving the next technology node level. This, on one hand,represents an opportunity to close gaps between competitors. On the other hand, anyplayer that is not yet engaged in the efforts to go up to the next level will find itself in adisadvantage in 2-3 years. 10
  11. 11. Competition: The industry is highly concentrated, with the above mentioned fourcompanies representing 91% of the market. Samsung is the strongest competitor with twomain factors that play to its advantage – forward integration into mobile devices andconsumer electronics, and a positive feedback loop of investments in future technology thatenable lower costs, higher margins, and better profits, which are, in turn, invested back intechnology. Those factors help Samsung remain profitable even in the downturns of thesemiconductor cycle. Hynix is the second largest competitor. Hynix experienced sharpswings in profitability in recent years, yet it currently holds a strong position with mobiledevices manufacturers in China. Elpida is a DRAM-only company with the third largestmarket share in DRAM. It is known for its low-power, high-quality mobile DRAM products,and it is Apple’s main supplier of DRAM. It holds a strong technological position, but theexpenditures that were required to achieve that position burdened its debt level to thepoint of bankruptcy. Micron held the fourth largest market share in DRAM. It is positionedwell in server and specialty DRAM, but lacks presence in mobile DRAM, which is the fastestgrowing and most profitable segment. In the current market dynamics, Samsung is theonly competitor that holds sustainable advantages and is relatively secure in its position.The other competitors are playing a technology catch-up game with Samsung and trying tocreate value by appealing to market niches.I. B3. Key AnalysisOur analysis shows that acquiring Elpida is a good move for Micron. The acquisitionsuccessfully withstands various tests, such as “Ally or Acquire” and Porter’s three tests. Inaddition, our DCF model shows that in the “Most Likely Case” and in the “Best Case”scenarios, the value of the combined entity is greater than the value of each companystandalone. The synergies are derived mainly from three areas: 1) Revenue – with Elpida’smobile DRAM capabilities, we assume that Micron will ramp up production of mobileDRAM, thus increasing revenue of the combined company, 2) Cost of Goods – Elpidaachieved a more advanced technology node than Micron. We assume that Micron will usethe knowledge from Elpida to migrate its fabs to a higher node, thus improving its COGS (ahigher node means more chips on each wafer, so the cost of each chip is lower) andprofitability, and 3) Capital Expenditures – with the acquisition of Elpida, Micron is 11
  12. 12. essentially buying two operational fabs at about a third of the cost of building one fab in thesame technology node.From a Value Minus Cost perspective, the combined company offers higher value andimproved costs over each company standalone. Micron was a negligible force in the mobileDRAM space, but, with the acquisition of Elpida, it strengthens its offering and inheritscoveted customers. Micron can leverage its mobile offering further by bundling its NANDflash products with Elpida’s DRAM, an offering that is quite valuable to mobile customers.Server and Specialty DRAM will also benefit from the technological expertise that Elpidaoffers.I. B4. Final RecommendationIn order to reap the most benefit from the acquisition, Micron has to act fast. In the short-term, its efforts need to concentrate on three main areas: 1) Integrate Elpida quickly intoMicron, to allow Micron the most control over Elpida’s operations, 2) Improve its productmix, preferably towards the more profitable mobile DRAM, and 3) Migrate Elpida’sadvanced technology into Micron’s fabs to achieve better COGS.In the long term, we believe that the key to remain competitive in this market is to breakSamsung’s positive feedback loop, or find a way to imitate it to compete on the same level.Micron is not capable of doing it by itself, so we suggest three non-mutually-exclusivealternatives: 1) A merger with Hynix, 2) Getting acquired by Apple, which has a strongincentive to limit Samsung’s growth, and 3) Develop the next generation of DRAM productstogether with Intel, in a similar fashion that was implemented for their NAND joint venture– IMFT. Intel has equity stake in the sole manufacturer of the equipment that is requiredfor the next technology node, and it can help Micron get better access to that criticalresource. Intel will benefit from the partnership by limiting Samsung’s growth, and bymaking sure that it has the complementary DRAM needed for its Atom mobile processor. 12
  13. 13. II. EXTERNAL ANALYSISII. A. Industry DefinitionMicron competes directly in the Memory Chip & Module Manufacturing (“Memory”)industry (Hoovers, 2012). This industry is part of the broader Semiconductor and RelatedDevice Manufacturing (NAICS: 334413) industry, where players engage in themanufacturing of semiconductor and related devices parts (IBISWorld, 2012). TheMemory industry (see Exhibit 1) focuses primarily on the design and manufacturing ofmemory components with diverse applications in personal computers, networking,storage, mobile telecommunications and consumer electronics products. Given the natureof Elpida’s position in the specific DRAM market, this analysis will focus on the DRAMsegment of the Memory industry.II. B. Six Forces AnalysisII. B1. Level One AnalysisExhibit 2 contains a Level One Analysis for the DRAM industry.II. B2. Level Two AnalysisThreat of Entry/Barriers to EntryThe high fixed costs (time and money) are a large deterrent to market entry. A firmwould require two years to build a facility and another one or two years to rampmemory production. This increasing cost is exceptionally prohibitive given theaverage DRAM TAM that has remained at about $25B since 2000 (Credit AgricoleSecurities, 2012). The combination of unpredictable long-term market developmentsand a tendency for the incumbent firms to oversupply the DRAM market is also adeterrent to market entry. The incumbent advantages owned by the largest fourplayers span broad product portfolios covering various markets. These firms sharetheir large patent portfolio over cross-licensing agreements, as well as form a linkageof intellectual property and know-how that a new firm would need to overcome ifentering the market.Threat of Rivalry 13
  14. 14. The DRAM industry is mature and highly concentrated (CR4 = 91%), and it is growing at adecreasing rate. In addition, firms employ similar technological processes to manufacturetheir products, as there is a strong dependence of DRAM capacity as a driver for revenue(see Exhibit 3), as opposed to firms gaining share through differentiated offerings. Thosethat are unable to maintain steady R&D and process investments are eventually pushed outby lower cost and more technologically advanced competition. Exhibit 4 identifies theconstant race for firms to achieve cutting-edge cost process nodes in order to maintain acompetitive variable cost structure. While each technology node reduces the variable costsper product the increasingly higher levels of investments raises the overall break-evenpoint requiring the firm to sell even more DRAM memory. Despite the strong requirementto commoditize in the PC space, DRAM firms are seeking ways to differentiate withincustomer segments in order to raise Average Selling Prices (ASPs) and attract higherrevenues.Threat of Suppliers/Supplier PowerDRAM buyers are a small percentage (11.6%) of the total semiconductor buyer group. TheCR1 of the key supplier categories is greater than 75%, each nearly forming a monopoly.These equipment categories face high fixed costs and long-term support, requiring them toserve a large majority of the market in order to stay profitable, and creating high (and nearimpossible) switching costs for equipment buyers due to suppliers’ high concentration.DRAM firms typically require 3-4 years from developing their semiconductor process untilproduction ramp up, further increasing their dependence on equipment availability andsupport from suppliers. Other forms of supply (labor, utilities, shipping, and financing) areconsidered easily attainable in most geographic locations; however, their impact is notconsidered to counter-weight the unfavorable forces of equipment suppliers.Threat of Buyers/Buyer PowerPCs and Notebooks [40% Market Share]: PC and notebook manufacturers place the highestcost pressure on DRAM firms and face low switching costs due to standardized interfacesand low requirements for differentiation. A main driver for these firms is cost of goodsgiven the low gross margins and low differentiation among computers and laptops. 14
  15. 15. Mobile Devices (Tablets & Smart Phones) [20% Market Share]: Mobile tablets andsmartphones are a growing segment with a medium level of concentration (CR4 = 58%).Mobile DRAM products are more differentiated, with mobile buyers valuing small size, lowpower, reliability, and ample manufacturing capacity. DRAM firms may reduce switchingcosts by providing ample manufacturing capacity and leading edge technologies.Servers [15% Market Share]: Servers represent the highest concentration ratio (CR4 =78%) of the buyers segment. These customers differentiate DRAM based on speed, lowlatency, and high reliability. Switching costs are slightly higher than in Mobile DRAM giventhe efforts that server vendors spend in quality DRAM products for long-term reliability.Despite their higher consumptions of DRAM (24-48GB/server), DRAM total share ofproduct costs is close to10%.Specialty Memory [5% Market Share]: The specialty memory market is believed to be themost attractive group given its high differentiation and relaxed focus on powerconsumption or size. These firms enable high switching costs by favoring DRAM productsthat are promised to be in production for long periods of time and are qualified for highreliability across increased temperature ranges. This market is thought to have high grossmargins, leading to overall favorable buyer power conditions for this segment.Summary: Despite high concentration and general pressure placed on DRAM ASPs, theDRAM firms have found opportunities to raise switching costs based on differentiation thatrepresents value to the various buyer groups.Threat of SubstitutesNew, non-volatile high speed memory technologies are in development, yet they have notreached a level of performance that can disrupt the DRAM industry. Micron has launched aversion of RRAM (Resistive Random Access Memory) called PCM (Phase Change Memory)on their 45nm process. The memory is in low-volume production and still lags inperformance (speed and bandwidth) compared to DRAM.Role of ComplementsDRAM is required in all consumer electronics; nonetheless, the value-added and pull-through are determined by the NAND and CPU components. The high switching costs for 15
  16. 16. CPUs in the form of both hardware and software redesign is beneficial to the DRAMindustry. Also, while NAND itself has a low switching cost, memory firms that sell bothtypes of memory (e.g. Samsung, Hynix, Micron) have developed low-profile high-performance multichip packaging (MCP) solutions that increase overall value in the mobilemarket. An unfavorable factor comes from the capabilities of NAND and CPU firms to haveequipment and technology know-how to enter the DRAM market if industry conditions areto improve.II. B3. Level Three Analysis Force Affecting Profitability Strength RankThreat of Rivalry Moderately Unfavorable 4.5 1Barriers to Entry Favorable 1 2Buyer Power Neutral 2.5 4Supplier Power Unfavorable 5 3Threat of Substitutes Moderately Favorable 2 6Role of Complements Moderately Unfavorable 4 5Overall Industry MODERATELY 4 N/AAttractiveness UNFAVORABLEDRAM firms face unfavorable forces through intense rivalry and threats from both supplierand complement groups. The incumbents continuously battle for high volume sales neededto generate the cash flow to fund an intense technology race. Further exacerbating thisrivalry, from the equipment supplier side, is the low percentage (11.6%) of semiconductorequipment purchased by the DRAM industry as compared to other semiconductorindustries, leading to longer equipment lead times and higher capital costs.Fixed costs and lead times required for most firms to enter the DRAM industry are high andcontain significant long-term market risk. In addition, many firms that createcomplementary products (e.g. CPUs) arguably possess know-how and semiconductorequipment required to move into the DRAM space. Given the higher profits obtained fromthese other products, it is clear that these firms are choosing to stay out of DRAM unlessmarket conditions are to improve. DRAM firms have been able to improve traditionally low 16
  17. 17. switching costs in three (mobile, server, specialty memory) of the four buyer groupsthrough differentiating features or product strategies.II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical ConcernsII. C1. GlobalThe Great IT Demand ShiftYear 2011 was noted as the first year where mobile device shipments (552M) exceededthat of notebooks and PCs (365M), as identified in Exhibit 5. This cross-over point hasbeen labeled “The Great IT Shift” noting a paradigm shift as consumer values change fromhigh computing performance to long battery life and constant high-speed connectivity(Nomura Equity Research, 2012). Mobile devices are expected to continue their highgrowth to 1,800 million units in 2014 as compared to 600 million units for notebooks andPCs. DRAM production for 2012 has also accounted for this shift with computer DRAMproduction dropping below 50%.Explosion of Data ContentThe advent of social networking along with tablets and smart phones is leading a sharpincrease in data traffic – from 200 EB (billion gigabytes) in 2001 to a projected 55,000 EBin 2013. This increase has driven demand for servers and server DRAM. Exhibit 6identifies both the growth in traffic and notable events driving increased demand, includingthe advent of YouTube (2004), Facebook (2005), Android 2.0 mobile operating system(2009), iPad (2010), and Netflix Streaming over mobile devices (2011). Overall mobiletraffic usage is growing as forecasted to a CAGR of 78% from 2011 to 2016 (CISCO, 2012).Shift Away from PC DevelopmentMicrosoft’s Windows 8 release has disappointed the PC DRAM industry. Now centeredtowards a tablet platform, the new operating system will not require an increase above thecurrent 2GB DRAM typically used in computers. This is a sharp contrast to the mid-1990sand early 2000s, when each new release of Windows required increased DRAM needs inPCs. 17
  18. 18. II. C2. SocialSocial MediaSocial networks such as Facebook, Twitter and LinkedIn are training the youngergenerations to be permanently online and are driving the fast growth ofgaming/video/texting-capable mobile terminals, i.e., smartphones and tablets. Thesedevices require increasing amounts of DRAM to support their increasingly powerfulprocessors, networking, and audio-visual chips. If social networking ever proves to be afad, the growth rate of the memory industry will be affected.II. C3. TechnologicalDRAM-to-NAND FlexibilityThough it is cheaper to build a new higher-technology foundry than to refit an older one,foundries are somewhat flexible in converting production from one product to another.For example, responding to the NAND over-supply problems of 2012, Samsung isconverting its “Line 14” plant in Korea from 28 nm NAND to 28 nm Logic circuitmanufacturing (Lapedus, 2012). Micron’s purchase of Elpida’s DRAM fabs in Japan andSingapore is not a pure DRAM play, since the fabs can always be converted to NAND or NORproduction, albeit with some costs and down-time.Move Towards 450 mm (18”) WafersThe 300 mm (12”) wafer has ramped up now in newer foundries across the globe. Themove to 450 mm wafers will be the core of planned or under-construction plants, expectedto start production in 2017, at the earliest. Intel leads the investments, followed byGlobalFoundries and TSMC. 37% of wafers produced in 2012 are still 200 mm. This moveis expected to lower the variable costs of memory production by 30-40%. (Pajjuri, Heller, &Goodman, 2012).Long Lead TimeManufacturers and designers typically plan their multi-billion dollar investments to targeteconomic sweet spots 2-4 years in advance. Intel, GlobalFoundries, Samsung, and TSMChave made public 2015 plans for 14 nm process manufacturing. These plans depend ontools and technologies still under development, with no guarantee of their fruition or final 18
  19. 19. wafers/hour or yield/wafer results. This high-risk nature of the field has been the case fordecades and all players have got comfortable planning that far ahead.Intel’s DominanceIntel’s x86 CPUs are threatened by the emergence of ARM processors in mobile and tabletdevices. Tablets are cannibalizing laptops/netbooks, and increased power of the cheaperlow-power ARM processors will eventually threaten the x86 in PCs and servers. (CreditAgricole Securities, 2012)II. C4. Governmental/PoliticalLocal GenerositySemiconductor manufacturing is considered a matter of national security by manygovernments across the globe. It is also a creator of mass high-paying jobs where foundriesare located. Generous tax and credit support is furnished by governments to luremanufacturers to build their foundries locally. For example, NY State has committed morethan $1.2B in cash and tax breaks to GlobalFoundries (spin-off of AMD) to build a researchand manufacturing facility at Luther Forest Technology Campus (Kerr, 2011). Companiestypically auction their future plans to squeeze the most generous support from competingstates/regions. Hynix was bailed out by the Korean government in 2001, without seriouslegal challenges from its competitors.Need for LobbyingAnti-trust lawsuits, anti-dumping policies, and penalties for collusion vary from onecountry and government to another. The solar industry just witnessed a big win forAmerican manufacturers against their Chinese counterparts that were long known to beflooding the market – aided with different forms of Chinese government subsidies – leadingto huge tariffs and shifts in the market. Similar incidents has happened in the memoryindustry – Chinese dumping of DRAM in the 1980s – forcing current players to be involvedin lobbying and political campaigns, and to diversify their plant locations and suppliers.Chinese PoliticsConcentration of manufacturing in China is exposing the whole supply-chain to anypolitical instability in China. Foxconn, a contract manufacturer of electronics that employs 19
  20. 20. 1.2 million in China, was heavily criticized by labor groups in 2010 after several workersjumped to their death (Lorraine, 2012). Deceleration of Chinese GDP growth to 7.8% isadding more risk to the industry, and might potentially cost the survival of less diversifiedmanufacturers.II. C5. EthicalEnvironmental PollutionSemiconductor industry is a major contributor to environmental pollution in a number ofways. Fabrication can lead to river and soil contamination, as proved by numerous studies(Angela Yu-Chen Lin, 2009). Old integrated circuits (ICs) are very toxic if disposed of inlandfills. The rise of solar power has accelerated the growth of silicon recyclingtechnologies that recover gold and other expensive and toxic elements from obsolete chips,while using re-processed silicon for use in solar panels.Inhumane RecyclingThe silicon scrapping and recycling industry, while beneficial to the environment, is nowbeing scrutinized for its own dependence on “e-waste” export to poor countries like Indiaand Nigeria, where labor is heavily supplied by children in dangerous facilities. The West isturning more towards local e-waste management. For instance, the “Electronic WasteRecycling Act”, in effect in California since 2003, requires consumers to pay a recycling feefor certain types of electronics. This added fee is redirected to qualified companies thatrecycle silicon products and is becoming part of the total cost of ownership of electronics,whether paid by the producer as cost, or by the consumer as added price (Government ofCalifornia, 2012).Water ConsumptionA foundry consumes pure water (for rinsing chemicals) corresponding to a small city of40,000 to 50,000 inhabitants. New technologies are emerging to minimize the need forpure water (Yan, Dhane, Vermeire, & Shadman, 2009), thus having less impact on theenvironment. Technology is allowing less environmental impact for semiconductormanufacturing, in return for slightly higher COGS. Micron and most of its competitors 20
  21. 21. acknowledge the increasing costs to meet the environmental regulations and laws relatedto health and safety.II. C6. Macroeconomic TrendsShaky Economic RecoveryBy Q2 2012, the U.S. economy is growing at a 1.3% rate, barely recovering from the 2008Great Recession. Europe is still unable to convince its members to forfeit their fiscalsovereignty – a needed step before bailing out its weaker economies. Growth in China hasslowed down to 7.8% and the world is worried about another credit bubble busting inChinese construction loans. The world’s central bankers are running out of ammunitionafter 4 years of credit easing, while governments will be forced to tighten their budgets toavoid credit downgrading. The world economy is unstable, directly affecting the overalldemand for consumer electronics, and, consequently, the demand for DRAM products.Made in AsiaWith Asia fast becoming the world’s factory, semiconductor and electronics manufacturingecosystems are creating barriers to entry in other regions of the world. Supply chain Asiandominance is exposing the market to shocks. For example, the supply of NAND Solid-StateDrives was directly affected by the flood that hit Thailand (where half of the HDD parts aremanufactured) in 2011 (Deloitte, 2012). Similarly, the Tsunami in Japan offered anotherexample of supply disruptions caused by concentration of suppliers in that region.II. C7. Demographic TrendsWith the fast aging of the Asian Tigers, the demographic dividend enjoyed by the currentcenters of semiconductor manufacturing will run out. China’s median age is expected togrow from 35 to 45 years by 2035. Manufacturers will find skilled labor in shorter supply,will need to pay more taxes, and will face a less welcoming environment for import labor,affecting the overall production cost advantage seen within this region.II. D. Competitor AnalysisII. D1. Firm’s Competitors 21
  22. 22. The DRAM industry has consolidated from around twenty players in the first half of the1990s to eight players (four major and four minor) in 2012 (Nomura Equity Research,2012). The four major companies – namely, Samsung, Hynix, Elpida, and Micron – supplied85% of DRAM products globally in 2011, and this number expected to grow to 91% in2012. Consequently, the market share of smaller firms keeps declining.In 2011, Samsung’s market share was 37%, Hynix’s was 22%, Elpida’s was 18%, andMicron’s was 9%. In 2012, Hynix and Micron are expected to increase their market shareto 27% and 11% respectively, taking market share away from the smaller players – NanyaTechnology Corp. (Nanya), Powerchip Technology Corp. (Powerchip), Winbond ElectronicsCorp. (Winbond), and ProMOS Technologies (ProMOS). ProMOS is expected to exit theDRAM market completely, Powerchip and Winbond are expected to supply less than 0.5%of total DRAM shipments, and Nanya will keep a steady market share of 5-5.5% (NomuraEquity Research, 2012).II. D2. Primary CompetitorsAs indicated above, Samsung, Hynix, and Elpida represent the three primary competitors ofMicron in the DRAM market. All three companies and Micron itself will be included in theanalysis of competitors below.SamsungSamsung is a major player in two main business areas: 1) Consumer Electronics (referredto as “Set Business”), where it develops, manufactures and sells a wide range of products,such as smartphones, tablets, cameras, and home appliances, and 2) Semiconductors(referred to as “Component Business”), where it develops, manufactures and sells a varietyof memory chips, logic components, and image sensors, as well as LCD products.Samsung developed its first DRAM product in 1983, making South Korea the third countryin the world after the U.S. and Japan to produce DRAM chips. In the ten years that followed,Samsung climbed its way up to become the leading supplier of DRAM, reaching a 14%market share in 1994. Research shows that Samsung mastered product design and processdesign at the same time, helping the company achieve shorter product life cycles andshorter time to market. As a result, it gained higher profits by being first to market and 22
  23. 23. improved costs faster than competitors (Woojai Kim, 2004). This capability plays toSamsung’s benefit to this day. In 2011, Samsung’s market share in DRAM was 37%. Thecompany is forward integrated, which means that its semiconductors products arecomponents in its consumer electronics products. In that same year, 48% of thesemiconductors that were manufactured by Samsung were used in-house (Samsung,2011).HynixHynix was founded in 1983 as “Hyundai Electronics Industries”, the electronics arm of theHyundai conglomerate. In 1999, it acquired LG Semicon (the semiconductor unit of LGGroup) and created a meaningful force in the memory market. In 2001, the companydisaffiliated itself from Hyundai and changed its name to Hynix Semiconductor (Hoovers,2012). In February 2012, SK Telecom acquired a majority stake in Hynix, making it a partof SK group and giving it a much needed injection of capital, after more than a decade offinancial woos and swings from profits to losses. Hynix develops, manufactures, and sellsmemory products in the DRAM and NAND markets. It is the second largest manufacturer ofDRAM products with 22% market share in 2011, a share that is expected to grow to 27% in2012 (Nomura Equity Research, 2012).ElpidaElpida was founded in 1999 by combining the DRAM units of electronics giants NEC andHitachi. In 2003, Elpida acquired the DRAM operations from Mitsubishi Electric Corp. Thefirm specializes in the manufacturing of DRAM products and, as of 2011, holds 18% marketshare, only behind Samsung and Hynix (Nomura Equity Research, 2012). Elpida is knownfor its advanced process engineering capabilities, which has allowed the company to skiptechnology generations from 60nm DRAM to 40nm and to spearhead the move to 30nmDRAM. However, the combination of volatile DRAM prices, lack of product diversity, andhuge R&D and capital investments brought the company to declare bankruptcy in February2012.MicronMicron was established in 1978 in Boise, Idaho. It started as a semiconductor design firm,later adding a manufacturing capability with funding from local potato farmers and 23
  24. 24. McDonald’s. In the 1980s, when Japanese manufacturers were dumping chips on the U.S. togain market share, Micron filed an antidumping petition, which resulted in theSemiconductor Trade Agreement between the U.S. and Japan.Micron expanded its operations by acquiring the DRAM business from Texas Instruments,in 1998, and Toshiba, in 2002. Still in 2002, Micron tried to acquire then ailing Hynix, butthe deal was not approved by Hynix’s directors. Over the years, Micron has made a fewattempts to diversify its portfolio – it had a PC business from 1995 to 2001, it had a flatpanel display division for a few years, and it developed and manufactured CMOS imagesensors with the acquisition of Photobit. Micron spun-off the imaging business in 2008. Allthose years, however, memory products remained as a core business (Hoovers, 2012). In2006, Micron diversified its memory offerings by entering into a joint venture with Intel todevelop NAND flash memory. Numonyx’s acquisition in 2010 added NOR to the portfolio.Micron is the fourth largest DRAM supplier, with a market share of 9% in 2011. This shareis expected to grow to 11% in 2012 (Nomura Equity Research, 2012). DRAM was Micron’sbest selling product for many years. In 2012, for the first time, NAND sales outpaced DRAMsales (Micron, 2012).II. D3. Primary Competitors’ Business Level and Corporate LevelStrategiesCorporate Level StrategyThe corporate level strategy of each firm was determined based on an analysis of the levelof granularity observed in the memory market. It was concluded that, although DRAMproducts can belong to different segments, they are often grouped under a single businessunit.Samsung: Samsung breaks down its revenue by product-based operating segments whichinclude Digital Media, Telecommunication, Semiconductor, and LCD. In 2011, Digital Mediaaccounted for 35% of the revenue, Telecommunications for 30%, Semiconductor for 19%and LCD for 16%. No further breakdown within the semiconductor segment was available.In Samung’s 2011 annual report, the CEO stated that the company has “maintained strongsynergy between our set and component business areas” (Samsung, 2011). Samsung, 24
  25. 25. therefore, can be classified as a related constrained corporation under Rumelt’sclassification.Hynix: In Q2 and Q3-2012, DRAM sales represented 75% and 70% of Hynix’s revenue,respectively. The other 25% and 20% came mostly from NAND sales (SK Hynix, 2012).This makes Hynix a dominant DRAM business according to Rumelt’s classification.However, growing demand for NAND may change the mix and make it a relatedconstrained corporation.Elpida: Elpida is a DRAM-only company; hence, it is classified as a dominant business.Micron: Micron supplies all types of memory, namely DRAM, NAND, and NOR. With DRAMrepresenting 39% of sales in 2012, NAND with 44% and NOR with 12%, Micron qualifies tothe definition of a related constrained corporation.Business Level StrategyThe business level strategy of the DRAM business of each competitor was determinedbased on the characteristics of the different DRAM products, which were combined underfour segments:1) PC/Notebook DRAM: DRAM chips used in PCs and notebooks are consideredcommoditized. Any PC manufacturer can buy PC DRAM from any DRAM supplier and therewill be no apparent difference in quality, operational and technical specifications.2) Mobile DRAM: Smartphone and tablet companies (such as Apple and Motorola) requirethat the DRAM used in their devices will be smaller in size and will consume less powerthan PC DRAM. A DRAM firm that wishes to supply mobile DRAM must be able to complywith different power requirements from different customers.3) Server DRAM: Server companies (such as HP and IBM) require higher quality standardsand have strict technical requirements regarding operating temperature range and speed.However, there is no differentiation among server DRAM products.4) Specialty DRAM: A bucket category that describes multiple uses of DRAM such as inconsumer electronics and appliances, automotive applications, and medical applications. 25
  26. 26. Another important factor in the analysis is that DRAM prices are determined by marketforces, and a single supplier has no power of price differentiation. On top of that, acompany that achieves economies of scale will not typically transfer the cost reduction tothe DRAM buyer, as this will erode its margins very quickly given that prices are inconstant decline.In light of the above segmentation and pricing scheme, it was concluded that all DRAMcompanies are employing a differentiation strategy (as opposed to low cost) according toPorter’s generic business level strategies. In addition, all firms have characteristics ofbroad differentiation in the PC DRAM business, and of focused differentiation in the otherDRAM segments. Because no single company supplies only one type of DRAM, allcompetitors employ a hybrid business level strategy.II. D4. How Competitors Achieve their Strategic PositionExhibit 7 presents a complete VRIO analysis of the four players. Following are the mainfindings from the analysis.SamsungSince 1994, Samsung has been the global leading supplier of DRAM products. Samsung’ssustainable leadership stems from two primary factors: 1) a positive feedback loop, fromearnings to R&D to sales and back to earnings, and 2) vertical integration.Positive Feedback Loop: Samsung entered the semiconductor business in the early 1980swhen it injected $100 million into developing its first DRAM product. It then acquiredtechnology from outside the company, and embarked on a rapid learning process thatresulted in outstanding product design and process design capabilities, and, ultimately,leading to advanced, high-quality DRAM products (Woojai Kim, 2004). This learningcapability, driven by injections of capital, is what keeps the company’s leadership positionto this day. In the last twenty years, Samsung has consistently been the first DRAMcompany to invest in the next technology node. This fact enables Samsung not only to bethe first to market with the new technology, but also to achieve production efficiencies andimproved yields before its competitors. As a result, Samsung has enjoyed higher margins 26
  27. 27. than competitors and greater profitability. Those profits are then invested back in R&D andcapital expenditures, and the positive feedback loop continues.Vertical Integration: Overall, semiconductor companies (including DRAM companies) face amultidimensional capacity planning problem. In the short term, they have to decide theirDRAM product mix, i.e., how many wafers to manufacture for each DRAM type. In themedium term, they have to assume how much will be produced from their young,immature, and low yields emerging DRAM lines. In the long term, they have to decidewhether or not to start investing in the next technology node and which node it will be,knowing that the cost to construct a new fab is more than $6B dollars and that it takes twoyears for the fab to be fully functional. All these decisions have to be made in a highlyuncertain and volatile environment. Vertical integration gives Samsung an edge over othercompetitors by making known some of the unknown – information about demand, futuremarket requirements, and product mix is readily available from in-house customers.Because those internal customers are leaders in their respective markets, Samsung is onthe right track to keep its technological leadership.HynixHynix is the second largest manufacturer of DRAM products, but in recent years it was notprofitable. The company experienced profitability and liquidity problems in the past andwas bailed out by the Korean government in 2001. Recently, in a strategic move that seemsto bear fruit, Hynix focused its marketing and sales efforts on Chinese smartphone makers,which Hynix predicts will account for 33% of global smartphone shipments in Q4-2013 (SKHynix, 2012). However, our VRIO analysis shows that Hynix does not currently hold asustainable competitive advantage.ElpidaElpida continues a long standing Japanese tradition of delivering high quality products tocustomers. The company has a strong presence in the mobile DRAM space, with areputation for its low power chips and innovative packaging solutions (GlobalData, 2012).Elpida’s contract to supply Apple with DRAM for the iPhone and iPad is considered highlyvaluable. However, none of its resources and capabilities provides the company with asustainable competitive advantage. 27
  28. 28. MicronMicron was able to survive in the DRAM market through acquisitions and strategicalliances that allowed it to diversify within the memory market and enhance itstechnological capabilities. Currently, however, Micron is at a disadvantage compared to itscompetitors in the mobile DRAM space, mainly because it did not upgrade its technology tobe on par with new mobile requirements. Ironically, Micron’s sustainable competitiveadvantage comes from its older technology fabs. Having kept the facilities and the know-how to support older products, Micron is now offering a “Product Longevity Program”, inwhich it guarantees to make products available for at least ten years. This valueproposition is appealing to many customers in the automotive, industrial, medical, andaerospace industries. The Product Longevity Program is part of Micron’s focus on specialtyDRAM, which carries higher margins.II. D5. Value Minus Cost AnalysisValueExhibit 8 shows a list of value drivers by segment and assigns scores to the primary playersacross all the drivers for each segment. A summary of this analysis is provided below.PC DRAM: As noted before, PC DRAM is commoditized and, as a result, all firms receivedsimilar value scores.Mobile DRAM: In mobile DRAM, important value drivers include power, size, as well asguaranteed supply, given the high growth rate this industry is experiencing. In thissegment, Elpida provides the highest value among competitors due to its strong reputationfor supplying low power, high quality DRAM products. One of Elpida’s most coveted assetsis its relationship with Apple, while its lacking capability is in bundling. Many mobilemanufacturers are starting to use packages that bundle DRAM and NAND. Elpida does nothave a NAND operation, hence is not able to bundle. Micron scored low on mobile becauseit is on an older technological node than its competitors, and is not able to meet the powerand speed requirements of mobile customers. Samsung and Hynix received similar valuescores. The fact that Samsung is forward integrated is affecting its score on guaranteed 28
  29. 29. capacity, under the assumption that its in-house needs will get higher priority over othercustomers in times of shortage.Server DRAM: Micron has only two competitors in the server DRAM space, since Elpidadoes not have an offering of this product. Samsung and Hynix both scored about 20%lower than Micron on their server DRAM capabilities, a segment which puts emphasis onDRAM’s speed and latency, but is less concerned about the size and power consumption.Micron has gained reputation in the server space by providing a special low-latency DRAMchip, and so far has developed good relationships with important customers, such as HPand IBM (Employee1, 2012) (Employee1, 2012).Specialty: All of Micron’s competitors scored 50% lower on specialty DRAM. A few yearsago, Micron made a strategic decision to go after the smaller, but higher margin segment ofspecialty DRAM. This segment is comprised of customers with a unique requirement: tokeep product life cycles longer than those typical of PC or mobile applications. Forexample, a DRAM used in a car computer can last ten years before the car company changesthe design of its computer. Micron has developed the capability to answer this specificneed, focusing primarily on automotive and industrial applications, as well as consumerelectronics.PriceDRAM ASPs are in constant decline. Specifically, between 2007 and 2008 prices took a divebecause of oversupply in the market, and then continued to decrease because of theeconomic crisis. From about $10/GB in the beginning of 2007 (Nomura Equity Research,2011), ASPs of PC/Notebook DRAM reached $0.9/GB in 2012 (Nomura Equity Research,2012).DRAM prices in all segments are determined by the market, which implies that all DRAMfirms sell their products for the same prices, whether it is by contract or by occasionalsales. The differentiation in prices comes from the segmentation according to the DRAMusage. PC/Notebook DRAM carry the lowest price. Mobile DRAM enjoys a 2.5x multiplierabove PC DRAM, Server DRAM enjoys a premium of 2x, and specialty DRAM carries apremium of 1.5x. 29
  30. 30. CostThe prohibitively high fixed costs that are required to build a fab were discussed in SectionII B – Six Forces Analysis. For the Value Minus Cost analysis, only variable costs wereconsidered. These costs are largely dependent on the technological node the company hasachieved. Historically, each new technology node, named after the line width that thelithography process was able to achieve, such as 60nm or 40nm, enabled doubling thenumber of transistors on a wafer. This resulted in reduced cost per transistor. The costreduction was not reduced to half because of low initial yields. As the manufacturerincreased its yields, margins improved.To determine the cost for each competitor, the node each one achieved for each of theDRAM segments was taken into account. The findings are summarized in Exhibit 9.Samsung enjoys a cost advantage in almost all segments due to its ability to jump to thenext node before its competitors. Micron and Hynix, both on older technology nodes, suffercurrently from a cost disadvantage. Elpida has already achieved the 2x nm technology, butits production mix in 2011 was mostly PC DRAM, for which margins are close to zero.Summary of Value Minus Cost AnalysisBecause prices are the same for all competitors in all DRAM segments, advantages ordisadvantages originate from the value that the company is capable of delivering tocustomers, as well as from costs. Following is a summary of each competitor’s position inthe V-C framework.Samsung: Samsung enjoys cost advantages across the board and is the only company thatturns a profit even in the low periods of the DRAM cycle. Samsung delivers comparablevalue to Hynix in the mobile and server DRAM. Overall, Samsung’s power comes from itsability to 1) be the first to market with new nodes, 2) ramp up production quickly, 3)improve quality faster than competitors, and 4) enjoy the higher margins that follow.Hynix: Hynix is at a cost disadvantage in the mobile and server DRAM. To stay competitive,it will have to catch up with the other competitors. However, Hynix delivers comparablevalues in PC/Notebook, mobile, and server DRAM. 30
  31. 31. Elpida: Elpida enjoys a cost advantage over Micron and Hynix in the PC/Notebook, mobile,and specialty DRAM segments. It has a slight value advantage in the mobile DRAM.Micron: Micron is at a cost disadvantage compared to Elpida and Samsung in the mobileand specialty DRAM. However, it delivers more value than competitors in the server andspecialty segments. Micron is behind its competitors in the lucrative mobile DRAMsegment. To stay competitive, it will have to catch up.II. D6. Comparative Financial AnalysisExhibit 10 provides the financial ratios for the four firms under analysis. The financialsratios are not specific to the DRAM market; instead, they reflect the overall company’sbusiness. For example, Samsung is well diversified and the financials include data for all ofits divisions. Samsung and Hynix have their fiscal year ending in December while Micron’sfiscal year ends in September and Elpida’s ends in March. No financial data for Elpida wasavailable after its 2011 annual report, so the comparative analysis does not include 2012.Based on the financial analysis, Samsung is in the best financial position, followed byMicron, Hynix and Elpida in that order.ProfitabilitySamsung has the best profitability among the competitors. It has a consistently high grossmargin and is the only competitor that earned a profit in each of the past five years. Itsstrong performance is attributed to the diversified corporate portfolio, where profits inother business units cover for losses in the semiconductor business. Elpida presented theworst profitability. In 2008 and 2011, its gross margin was negative and it suffered heavylosses. Micron and Hynix both presented uneven performance, but, in 2011, Micron wasmore profitable than Hynix.LiquidityMicron has the best liquidity ratios in the industry, thanks to low levels of current liabilitiesachieved by maintaining a high level of cash & equivalents, and a 60 days turnover onaccounts receivable. Samsung is also in a healthy position in respect to its currentliabilities. Elpida’s liquidity worsened significantly in the year leading to its bankruptcy.Hynix’s liquidity improved from its 2008 low. Samsung has a large cash position of about 31
  32. 32. $12.7B at the end of 2011. Hynix has the lowest levels of cash among the competitors.Surprisingly, Elpida had a cash reserve of $1.17B at the time it filed for bankruptcy.LeverageSamsung has the lowest leverage in the industry. Its debt to equity ratio was at 0.53 for2011. Micron’s debt to equity ratio shows a well-balanced leverage. Hynix has a muchhigher leverage than Micron. Elpida, which used debt to finance its capital investments,had the highest debt to equity ratio. Elpida’s high debt levels brought it to file forbankruptcy with $5.6B in liabilities. This was the largest ever bankruptcy by a Japanesemanufacturer (Reuters, 2012).EfficiencyMicron is the least efficient competitor. Its inventory turnover indicates the highestinventory levels and its days sales outstanding indicate that its customers consistently get60 days payment terms. Elpida’s payment collection is slightly better than Micron’s in mostyears. Hynix was able to outperform Samsung in some years in its turnover and DSO ratios.Capital ExpendituresCompetitors in the DRAM market watch each other carefully for evidence of increasedcapital expenditure, as those expenditures indicate a strategic move into newer technologynodes. For this reason, some companies do not disclose capital expenditures in theirfinancial reports, so this analysis was completed based on data from other sources.What stands out in the comparison of the competitors is that, during the years of thedownturn (2008 and 2009), Elpida significantly increased its capital expenditures, whileother competitors contracted. Because revenues in these years were low, Elpida had tofinance its expenditures with debt instruments, which eventually brought it to bankruptcyin the beginning of 2012.Another interesting fact is that none of the competitors ramped up its capital expendituresto levels comparable to 2007 levels. That year all competitors increased their capacity,which led to oversupply and even faster erosion of prices.II. D7. Implications of Competitor Analysis 32
  33. 33. In the current competitive dynamics, Hynix, Elpida, and Micron are all playing catch-up toSamsung, which is the strongest player in the market in all aspects – market share,technological capabilities, and financial position. However, the technological gaps areexpected to shrink in the medium range of 2-3 years, because the equipment required to goup to the next node is not mature enough yet (see Section II E4 – Competitive Dynamicsbelow). This can give all players an opportunity to level the playing field, given that theymake the required investments.Elpida’s bankruptcy creates expectations for further industry consolidation. This cancontribute to less oversupply and more stable prices, a fact that will help the remainingcompanies strengthen their position.Differentiation in this market is very challenging and all the players are trying to findniches where they can add value, like Micron in Specialty DRAM, and Hynix in the Chinesemobile market. Those positions, however, are fragile, and may not add significantly to thecompany’s economic contribution, so all players have to be able to also supply the massmarket.II. E. Intra-Industry AnalysisII. E1. Industry Evolution and Formation of Strategic GroupsDRAM’s original growth was fostered by investments from the U.S. defense industry andcold war efforts. From the 1970s until the early ‘80s, the DRAM industry was dominated byIntel, Micron, and seven other U.S. firms. Japanese firms later entered in the late 1980s andearly 1990s, outcompeting the U.S. firms with better patterns of investments and a closerelationship with their consumer customers in Japan. The majority of the U.S. firms wereforced to leave with only Texas Instruments (TI) and Micron remaining.Through the 1980s and 1990s, the main source of DRAM was derived from the PC marketand closely followed changes in PC sales. While the market showed an average $7B in salesin the early 1990s, it grew to an average $25B in the second half of the 1990s with twopeaks in 1995 ($42B) and 2000 ($32B) driven by new releases of the Windows operatingsystem which required increased computer DRAM and drove PC upgrades. 33
  34. 34. Korean memory firms successfully captured the peak of this boom in 1995, earning a totalof $5B more than total earned by other firms listed on the Korean Exchange at the time.These firms had aggressively entered into the market in the early 1990s, hiring American-trained Korean engineers and investing heavily during the Japanese economic downturn.Samsung licensed Micron’s DRAM IP and invested $1.2B to build their first fabricationfacilities (Mark & Ma, 2002). With a leading edge fabrication facility costing $500M tobuild, Samsung’s heavy investment helped it to quickly build a large share of capacity(Credit Agricole Securities, 2012).This success in the 1990s also led other Taiwanese firms, such as Nanya, Powerchip andWinbond, to enter the DRAM market, maintaining a total of 24 firms and offsetting the lossof U.S. firms exiting the industry. The entrance of these new firms grew DRAM supply toexceed demand leading to high levels of inventory and oversupply when the marketcrashed in 2001 (Mark & Ma, 2002).From the mid to late 1990s, the cost of competitive DRAM facilities jumped from $500M toover $2B, while the TAM stayed on average at $25B since year 2000. The higher costs ledto consolidations in the industry including Micron acquiring TI in 2001 (Mark & Ma, 2002).The exit in DRAM firms has notably been correlated to Samsung’s rising market share(Chung, Yamasaki, Ho, Marcello, & Hiraga, 2012).II. E2. Strategic Industry GroupsDRAM-Only FirmsThe DRAM-only strategic group includes Elpida, Inotera, and Nanya. These firms have lesscash flow and decided to best achieve economies of scale by focusing primarily on DRAM.They are more dependent on developing competitive and high-ASP DRAM products.Currently, only Elpida has achieved this position with a competitive 32nm mobile DRAMproduct where as Inotera and Nanya are one to two generations behind in technologydevelopment.Diversified Semiconductor SuppliersThis group began to emerge in 2004 with Micron, Hynix, and Samsung presenting their firstNAND flash products. Their portfolios now include two or more of the following: NAND 34
  35. 35. flash, NOR flash, CMOS image sensors, logic design, or end consumer products. Theincreased diversity in product portfolios can enable a more stable operating margin. Cashflow can also be generated from other semiconductor operations to pursue DRAM processdevelopment and capital investments. This strategic group can also utilize MCP solutionsto sell bundled solutions (e.g. Micron’s Memory Cube), increasing both customer value andresulting ASP.Forward Integrated SuppliersThe group is comprised of a single firm – Samsung – that has forward integrated intonumerous consumer products including smartphones, tablets, and laptops. Samsung isable to closely align its DRAM development, including product and capacity planning, withits consumer products. Similar to the “Diversified Semiconductor Group”, operational cashflow generated from other business units can be invested into DRAM capital investmentand R&D spending.II. E3. Mobility Barriers, Threats and OpportunitiesMobility BarriersDRAM-Only and Diversified Semiconductor Supplier: The high cost of R&D and capitalspending is a barrier for DRAM-Only suppliers to expand their semiconductor portfolio intoother products, such as NAND flash or CMOS image sensors. Micron had successfullygained a competitive standing in NAND through a co-development agreement with Intelstarting in 2006. Micron’s shared cost for this arrangement was $1.4B which is stillsignificant for cash-poor members of the DRAM Only group (Micron, 2012).Moving into the “Forward Integrated Supplier” Group: Recent buyer sentiment has shownthat Samsung’s forward integration has hurt its relationship within the mobile and serverbuyer groups. For example, Apple has recently announced that it is cutting back Samsung’sshare in its product line after a recent copyright trial (Ilbo, 2012). Apple’s share of themobile market in 2011 was 93.2 million iPhones (6% share) and 40 million iPads (62%share). Buyers in the server market have also expressed their hesitation to work withSamsung for fear that any collaboration weakens Samsung’s barrier to entry into serverproducts. Samsung’s forward integration therefore requires it not only to have cost- 35
  36. 36. competitive DRAM products, but also to maintain competitive smart phone and tabletofferings to overcome lost revenue opportunities (Vilches, 2012; Alexander, 2012).ThreatsASP Volatility in PC and Mobile Market: Vendors in the DRAM-Only group are moresensitive to falling PC DRAM ASPs. Both Nanya and Inotera posted a 90% loss in grossmargins due to DRAM demands. They have also had higher fixed costs due to producingDRAM on older technology nodes.Inventory shifts in DRAM supply may buoy PC DRAM ASPs, as firms in the DiversifiedSemiconductor Suppliers group (Hynix and Micron) shift their production away from PCDRAM. The increased mobile DRAM supply of 9% in 2011 to 15% in 2012 of total supplymay erode the 2-3x ASP premium commanded for this product (Nomura Equity Research,2012).II. E4. Competitive DynamicsCross-Licensing Agreements for All Strategic Groups: Micron received a net $160M fromcross-licensing agreements with Samsung during the 2012FY, with as much as $115Mattributed to DRAM intellectual property. Large firms within all buying groups are thoughtto demand dual-sourcing for all components forcing memory firms to license any productdifferentiator before that product is brought to market (MarketLine, 2012).Technology Migration: Extreme Ultraviolet Lithography (EUV) equipment is expected todelay a move to the 15nm node. (Trendforce, 2012) This delay is expected to allowmembers of the Diversified Semiconductor Suppliers group (Micron, Hynix) to catch up toSamsung in 2013 and 2014, narrowing Samsung’s cost-advantage. For example, whileHynix’s cost per gigabyte was 16% higher than that of Samsungs in 2011, this gap isexpected to narrow to 3% in 2012 and forecasted to reach parity in 2013. This opportunitymay be short-lived as Samsung is heavily investing in EUV equipment. This threat greatlyaffects the cash poor DRAM-Only segment that would face a 56% cost disadvantage if theyremain at the 32nm node, and a 26% disadvantage at the 22nm node when Samsung rampsto a 15nm DRAM process. 36
  37. 37. The fixed cost required to build a 22nm facility is $6B, while a 15nm facility is expected tobe much higher. The high technology cost and increased price competitiveness may forceDRAM firms in both DRAM-Only and Diversified Semiconductor Products to leave themarket (Pajjuri, Heller, & Goodman, 2012).II. E5. Firm’s Competitive PositionThe “Great IT Shift” is changing DRAM needs from PC to the server and mobile DRAMmarkets. Both smartphones and tablets are expected to exceed those of PCs and laptops by500% in 2015, shifting DRAM demand from commodity to more specialized low powermobile and highly reliable server components.Micron’s Competitive PositionMicron has done well to gain share in the server DRAM space, but it lacks the technologynode and supply to cater the mobile market. Failing to enter the mobile DRAM market nowmay lead to Hynix and Samsung forming a duopoly, which will lead to stronger, futurebarriers to entry. Additionally, increased mobile DRAM demand is expected to cannibalizedemand in the PC market thus reducing Micron’s achievable market share. To enter themobile DRAM segment and remain competitive in the server segment, Micron will need todevelop an attractive mobile DRAM offering that would include greater capacity and tomove from its 48nm to a lower-power and cost competitive 32nm or below technologynode.Elpida’s Competitive PositionElpida has attempted to ride the paradigm IT spending shift from PCs to mobile devices. Ithas developed a valued mobile DRAM product, but its capacity is still too heavily weightedin the commodity PC DRAM space. With 17% overall share in the DRAM market Elpida willalso struggle to expand into both the higher ASP mobile and server segments unless it canfurther expand its DRAM capacity.Micron & ElpidaMicron’s acquisition of Elpida will enable Micron to compete in the growing mobile andserver markets, placing it into second place to Samsung in DRAM production capacity.Having not forward integrated, the Micron/Elpida merger will appear to be a more 37
  38. 38. guaranteed offering of DRAM supply. With a more complete portfolio, Micron/Elpida willbe able to compete in both segments and offer bundled solutions using Elpida’s DRAM andMicron’s NAND flash products.II. F. Threats and Opportunities AnalysisLitigationDRAM firms have increasingly faced lawsuits on patent infringement and pricemanipulation. Patent litigation has primarily come from patent holding firms. Theselitigations can significantly damage firms’ reputation, and represent a financial burden thatwill adversely affect their bottom line (MarketLine, 2012).Liquidity CrisisWith volatility in DRAM pricing affecting operational cash flow, these firms are increasinglydependent on debt financing to continue their technology investments. The threat ofdefault within the European Union may freeze these firms access to credit.Chinese Semiconductor FirmsThe three DRAM strategic groups face the threat of Chinese firms entering this industry.China’s manufacturing industry has grown due to favorable manufacturing conditions: lowlabor costs, government support, and easy access to capital. This growth has beendampened from rising labor costs (due to inflation) and concerns over product quality.While China faces barriers to entry such as those described in Exhibit 2, it is consideredpossible for Chinese firms to acquire both the required know-how and to eventually catchup to the fast-paced DRAM industry (Park, 2012).II. G. Summary of External AnalysisOverall, the DRAM industry has evolved into a mature industry with increasedconsolidation and favorable barriers to entry for incumbents. All firms within the industrycompete to achieve higher volume sales based on increasingly lower cost DRAM products,in order to fuel expensive technology investments that will result in future cost leadership.This intense re-enforcing feedback loop has pushed numerous firms to leave the industryand has incentivized incumbents to oversupply the market even further reducing profits. 38
  39. 39. Elpida and other firms within the “DRAM Only” strategic groups are especially vulnerableto volatility of DRAM ASPs, since it is their sole source of operational cash flow.Recent social trends such as social networking and mobile computing have shifted buyerpower more favorably towards DRAM firms. These trends have shifted DRAM demandmore evenly towards mobile (low-power) and server (high reliability) components,reducing commodity PC DRAM to close to a 40% market share. This has resulted in firmsshifting towards a more favorable product mix emphasizing these segments which demanda higher price premium.Micron and other firms within the “Multiple Semiconductor Product” groups have alsoincreased their market value by building NAND flash that can be bundled with mobileDRAM. Through Elpida’s merger, Micron will be positioned with a competitive portfoliowith strengths in higher premium mobile, server, and specialty segments. It will alsocontrol over 25% of the total DRAM market capacity.III. INTERNAL ANALYSISPART 1 – MICRONIII. A. Business Definition/MissionMicron’s mission statement was best described by the CEO Mark Durcan in the pressrelease announcing Elpida’s acquisition: “We are creating the industry leading pure-playmemory company” (Micron, 2012). Micron strives to be the leader in memory products byserving all memory needs of every customer. Micron’s strategic decisions and actions inrecent years confirm this statement. Unlike Samsung, Micron is not forward integrated, soall of Micron’s capacity is available to its customers. It has also not diversified into othersemiconductor products, so all its efforts are geared towards improving its memoryproducts.III. B. Management StyleMuch of Micron’s organizational culture can be explained by its location in Boise, Idaho. Inits early days, Micron was a shoestring operation, funded by potato farmers and 39
  40. 40. McDonald’s. Neither did it have the support of experienced venture capitalists, nor anabundance of skilled workers to choose from, but it enjoyed lower costs for land, rent, andlabor. To this day, Micron is able to retain employees for long periods of time, due to lackof competition from other semiconductor companies in the nearby vicinity. As an example,17 out of 31 company executives have worked for Micron for 13 years or longer, and manyof them started at entry level positions in engineering or operations (Micron, 2012).From interviews with employees (Employee1, 2012; Employee2, 2012) and reviews onGlassdoor.com, Micron’s management style is highly centralized and dictated top-downfrom the headquarters in Boise. The company is described by many reviewers asconservative and reluctant to change. The culture is described as a “Good Ol’ Boys” type,meaning that top and middle management have formed a close-knit group, making it hardfor outsiders to break into. In large part, promotions also depend on each individual’sconnections to that group of managers.In general, reviewers on Glassdoor.com find the compensation package fair andcompetitive relative to alternatives in the area. Micron also pays for employees’ schoolingand higher education, and matches 401K contributions. Manufacturing personnel work inshifts of 12 hours for 3 or 4 days a week, alternating weeks and day/night schedules.Employees are compensated for both night shifts and over time.Engineers who posted reviews on Glassdoor.com report higher satisfaction levels thantechnicians, and describe Micron as a good company to start a career in and to gainvaluable experience. However, many others advise against staying long due to a lack ofclear career path and crippling office politics.III. C. Organization Structure, Controls and ValuesIII. C1. Organizational StructureStarting from Q2-2011, Micron has been organized in four main business units (BUs): 1)DRAM Solutions Group – a DRAM only business unit that sells to customers inPC/notebook, consumer electronics, server, and networking; 2) NAND Solutions Group – aNAND only business unit that sells to customers in data storage, portable music players,and handles IMFT (see partnerships section below); 3) Embedded Solutions Group – sells 40
  41. 41. DRAM, NAND and NOR to customers in automotive, industrial, consumer electronics,server, and networking; 4) Wireless Solutions Group – sells DRAM, NAND, and NOR tocustomers in the mobile space (Micron, 2011). This structure is a partial separation fromthe previous structure that was guided only by product line. The four BUs report to thepresident, and each has its own sales and marketing team (Employee2, 2012).Micron’s structure is a hybrid between the business oriented structure that was describedabove and geographical/functional structure. There are two country managers, one inItaly, following the acquisition of Numonyx, and one in Singapore, following the jointventure with Intel. Functional areas such as human resources, legal, finance, and IT reportto the CEO.As of August 2012, Micron had approximately 27,400 employees, of which 16,000 wereabroad, including 7,800 in Singapore, 3,400 in Italy, 2,200 in China, 1,100 in Israel and1,000 in Malaysia (Micron, 2012).III. C2. Organizational ControlsMicron’s board of directors is comprised of five independent directors and Micron’s CEO,Mark Durcan. The board has appointed three committees to oversee corporate governanceissues: 1) The audit committee works with Micron and its independent auditors to monitorthe integrity of the company’s financial reports; 2) The governance committee nominatesand appoints board members and oversees director compensation, 3) The compensationcommittee is responsible for monitoring executive compensation.From the interview with a Senior Quality Director (Employee2, 2012), who has worked forMicron for 29 years, we learned that performance reviews are done every six months. Atthe same time, he referred to those reviews as pure formality, since it is not taken seriouslyby either employees or managers. Interestingly, despite being a Quality Director, he wasnot aware of quality control programs or training, although Micron’s website boasts itselfas a company widely dedicated to quality.III. C3. Organizational ValuesInnovation 41
  42. 42. Micron refers to its engineers as “dreamers” and “visionaries” and emphasizes itsinnovation capabilities (Micron, 2012). Until 2007, Micron was among the top 10 patentrecipients in the U.S., and most recently have received awards on its memory chips design.In 2006, Micron launched Micron Ventures, an early stage equity investor in companieswhose technologies are salient to Micron’s strategic interests.Integrity and EthicsMicron continuously updates and reaffirms its ethics and compliance policies and practices.Micron operates a dedicated compliance hotline where employees can anonymously reportviolations of the company’s Code of Business Ethics. In addition, the Vice President of LegalAffairs acts also as a Chief Compliance Officer. Training programs had been developed andput in place regarding compliance and anti-bribery/corruption policies.Environmental PoliciesMicron uses lead in the manufacture of its products, but it offers lead-free or “green”products to customers who specifically request for them. Micron’s manufacturing processis lead-free and is able to offer “green” products to customers who ask for them. Greenproducts, according to Micron’s definition, adhere to standards of maximum trace amountsof harmful materials, such as Chlorine and Bromine. Micron makes an effort to reduce itswater consumption and recycles 70-80% of the water that is used in its manufacturingprocesses. An effort is also made to continuously reduce the amounts of chemicals that areused in those processes.QualityMicron received its ISO 9001 certification back in 1994, and it since has been renewedseveral times. Recently, the company made an effort to comply with the extended ISOstandard TS 16949, which details additional technical specifications and touches on supplychain management, delivery standards, and environmental stewardship.III. D. Strategic Position DefinitionIII. D1. Corporate LevelBusiness Portfolio 42

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