News Analysis: EU goes slow on move to help DRam market

Industry doubts that EU?s phased introduction of reference prices will help stabilise memory sector

The decision by the EU to impose tariffs on Far Eastern DRam is being heralded by the industry as a positive move towards re-establishing a sense of stability in the market. It is hoped that the move will stop Japanese and Korean memory being offloaded on to the European market at less than cost price. But the fact that the reference prices for DRam will be phased in over a number of stages has been greeted with less enthusiasm.

Following last year?s dramatic fall in the price of memory, many companies backed away from making long-term buying decisions. The 80 per cent decline in prices during 1996 came about mainly due to the market being swamped with DRam.

In 1995 the European DRam market was estimated to be worth $5.7 billion. Healthy chip sales in that year led many chip manufacturers to boost production and invest in new plants. Many set up plants in Europe, some of which were subsidised by public money. The sudden decline in prices has left many chip manufacturers in a weakened position.

Reference prices are not a new thing, they were first introduced by the EU back in January 1990. A tariff of about 25 per cent is likely to be imposed on Korean-made DRam and 60 per cent on that coming from Japan, a move that one chip distributor said would put an end to any grey importing of DRam. The reference price policy was suspended in June 1995. At the time, the Japanese prime minister Ryutaro Hashimoto had complained bitterly to the EU that the practice should be brought to an end.

The European Electronic Components Association (EECA) has recently been pressing the EU to reimpose the tariffs on Japanese and Korean chip makers. The EECA represents Philips, Siemens and SGS Thompson, among others, and had been trying to persuade the EU that the chip market was in need of such action.

Eckhart Runge, secretary general of the EECA, said: ?DRam prices are spiralling down and the chip manufacturers see no reason for the continued suspension. Before last year, the measures were unnecessary because chip prices were higher. The suspension was a nice gesture but did not have any practical effect.?

The fact that the EU is now taking action has not received the rapturous welcome that could have been expected, though. Ed Bateman, product manager at Ideal Hardware, is pleased that something is being done, but expresses doubt over the need for tariffs.

?This move will introduce stability into the market, which will be very welcome. Violent swings in the chip market have led to a situation where people back off from making large purchasing decisions and distributors shy away from carrying lots of chips in stock because they don?t want to catch cold if prices drop.?

Bateman goes on to suggest the market may have sorted itself out without the intervention of the EU. ?Chip production has been cut by around 30 per cent anyway, so prices have naturally been rising. This removes the need for reference prices, but having them in place should go some way to avoiding some of the more extreme peaks and troughs we?ve seen in the market.?

The action being taken by the EU is intended to help the market, but in the short term it appears to have done little more than add to the general air of confusion. Accusations of failing to understand the market have been levelled at the EU. Rather than step in and take decisive action, the EU has opted instead to implement a staggered series of tariffs.

The EU statement said: ?The overall review investigation of the measures will not be completed before June 1997. If measures continue after the review, new minimum prices would normally apply as from 1 July 1997.?

According to Sukh Rayat, general manager of chip distributor Flashpoint, the introduction of reference points will be done in three stages. ?A straightforward decision is needed,? says Rayat. ?Not only does it look like the EU doesn?t understand the market, but it also appears to have got cold feet. Why not come out with a bold step rather than doing things bit by bit??

Rayat is of the opinion that the EU hesitancy will only serve to make the market feel uncertain of the future. ?Stabilising the market will take decisive action. As things now stand, customers still won?t feel sure of prices, distributors will still be wary of holding stock. It is hard to see just what has been achieved.?

The EU action may well stabilise the European DRam market, but it is unlikely that it will upset the Far Eastern chip makers. First indications are that the measures will only apply to Japan and Korea and not to other chip producing nations, such as Singapore. Share prices for Samsung, LG Electronics and Hyundai all fell last week when news of the reintroduction of reference prices broke. This was explained away by an analyst from Hyundai as being due to the slowing down of the market and nothing to do with the EU.

If the chip market is in need of stability, the move by the EU to stave off stock dumping by the Far East?s chip giants can only be seen as a good idea. Like all good ideas, though, what matters is the way it will work in practice. The EU is likely to find it has rocked the market by deciding to phase in the tariffs that it hoped would smooth things over. Stability can only come from decisive action, the EU?s failure to seize the day may turn out to do more harm than good.