New memory chips on hold

Hurt by falling memory chip prices, memory chip market leader NEC is postponing production of what has been billed as the next generation of memory chips.

NEC had planned to start the 256-megabit DRAM chips in the first half of 1998 in Japan and at a new plant in California. A precipitous fall in prices for its existing products, however, is forcing the company to put off investing in the new facilities needed to produce the 256-megabit chips.

The company says it now plans to begin mass production of the chips in 1999, according to a report in the Nihon Keizai Shimbun, the leading Japanese business daily.

The 16-megabit DRAM is the mainstay memory chip currently used in personal computers.Memory chip makers are already making the move to production of 64-megabit DRAMs, but the 256-megabit chip constitutes the next generation of ultra-high-capacity memory chips.

While users are applauding the current low prices, the loss of revenue to chip makers may lead to higher prices in the future. Like NEC, more and more companies are postponing investing in the production facilities need to make future memory technologies. That may well mean a shortage of production capacity, and therefore higher prices, down the road.

"Year after year, the industry plays out that cycle. The industry is based on capacity, and how the capacity situation plays out is really reflected in prices," according to Brian Matas, senior analyst with Integrated Circuit Engineering. "An increase in demand causes a shortage of chips, the market price takes a jump, then when you complete that product lifecycle and have surplus of capacity, prices crumble," he added.

From a tactical viewpoint, NEC is probably still doing the right thing by delaying the 256-megabit chips, according to Matas. He doesn't expect the demand for the new chips to surpass the demand for 64-megabit chips until the years 2000 or 2001.