Leader: Keep chips free of artificial ingredients

The movements in the memory market gives us a gut-wrenching example of how local difficulties can still affect the global economy. Who could have foreseen last month?s 25 per cent hike in memory prices on 23 January alone? It was a nerve-racking, rollercoaster ride for UK distributors, with prices eventually rising 35 per cent in all.

The integration of the global economy resembles Marshal McLuhan?s global village ? still prone to wild fluctuations as the village gossips put their Chinese whispers about. Admittedly it is unusual for a government to intervene so brutally as the Korean government has and order companies to reduce exports by 37 per cent. But it is a government on the brink of collapse after all.

The three companies that have had to slash production make 50 per cent of the world?s memory chips. It is not a good time for this to happen. Most of the Japanese chip makers have announced ambitious plans to increase capital spending on new fab plants, anticipating the continuation of strong demand. Toshiba said recently that unit prices for chips had fallen to about one-fifth of the levels before this downturn.

These appear to be long-term moves intended to reduce surplus capacity in memory chips, which saw prices drop 80 per cent last year alone. The market has reacted suspiciously, with brokers and the City moving quickly to force prices up at a time when products, particularly notebooks, are in high demand and desperately short supply.

This is not panic buying from customers, but market manipulation and shows the worst side of the City?s lack of understanding of the dynamics of our young and growing industry. Chips are not beans to be sold at a higher spot-price when the rainy season wipes out half of a Colombian crop. This is a complex market where rapid price fluctuations will affect everyone, from individual consumers to corporates installing thousands of machines. But as far as the City is concerned there is nothing like an old-fashioned famine to force prices up.

This is bad news for systems builders and resellers. Memory prices do need some adjustment and the semiconductor makers need to make some return from their vast capital spending. But creating an artificial shortage is not the way forward.