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Samsung memory factory mishap sends market spinning

On Friday, a power cut at a Samsung Electronics plant near Seoul forced the South Korean memory giant to shut down six of its chip production lines. The outage sparked expectations of decreases in memory supply and higher prices.

A Samsung spokeswoman explained to Reuters that a problem in the afternoon at the switchboard at a transformer substation led to a power shortage. The company’s advanced NAND flash memory lines was one of the lines affected by power issue.

Shares of competing memory makers Toshiba and Hynix gained on the market following the expectations of higher memory prices, while shares of Samsung dipped slightly. Shares major NAND flash memory clients, such as Apple for its use of flash in its iPod music players, also fell on expectations of higher NAND costs.

Although Samsung told the press that it could take up to two days to resume normal operations, the company was able to reach full operation around noon Saturday – making actual damage and losses of the power outage less than originally anticipated. The company now expects to lose 40 billion won ($43.4 million) from the outage.

"Some of the wafers that were being processed when the outage hit can be salvaged, and the potential yield from the recovered wafers was at a good level," said Choi Chang-sik, executive vice president at Samsung's semiconductor division, at a news conference in Kiheung.

In response to last week’s mishap, Samsung said today that it plans to increase production to help make up for lost ground. The company added that it would try to meet its monthly targets in spite of the downtime.

"Regarding any concerns about the lingering impact of this accident, our third-quarter results will show ... we'll do our best to outperform the market's expectation," said Hwang Chang-gyu, the president of Samsung's semiconductor business.

Samsung’s plan of increasing NAND production may have a negative effect on the memory maker’s other product lines. Tom Duong, vice president of business development at Mushkin, believes that Samsung may have to cut back on its DRAM production in order to make up for losses on NAND.

“From my understanding, the lines that are affected are the lines that produce NAND flash. So to subsidize, Samsung will probably have to switch some of their DRAM line to make up for the loss of NAND production,” Duong told DailyTech. “Thus, it will hamper supply of DRAM thus causing an increase in prices.”

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An "accident"
By ChronoReverse on 8/6/2007 6:46:08 PM , Rating: 3
With the current low prices and reports of lowered revenues, I was wondering when an accident would occur to help readjust things.

Maybe I'm just cynical, but the DRAM manufacturers have shown themselves to be rather underhanded.

RE: An "accident"
By KristopherKubicki on 8/6/2007 7:11:08 PM , Rating: 5
Considering the number of open lawsuits against these guys for price fixing (on both ends), predatory pricing, collusion, kickbacks, options fraud, backdating, predatory takeovers --- couldn't have happened to a nicer bunch of guys ;)

RE: An "accident"
By Samus on 8/6/2007 7:35:17 PM , Rating: 1

RE: An "accident"
By Christopher1 on 8/6/2007 11:19:05 PM , Rating: 1
With all due respect guys, while the NAND makers are kinda in the category of slime...... this could have happened to anyone. I am also sure that there were some inspectors sent out there to make sure that the power outage was actually an accident.

We had one of these accidents in our country recently, the old USA. If it can happen here, I can believe it would happen in a second-world country.

RE: An "accident"
By masher2 on 8/7/2007 12:09:35 AM , Rating: 4
I quote you Hanlon's Law, which says, "never attribute to malice that which can be explained by sheer stupidity."

RE: An "accident"
By JackBeQuick on 8/7/2007 1:35:15 AM , Rating: 2
It's not a Law! It's a Razor!!!!

RE: An "accident"
By Shadowmaster625 on 8/9/2007 9:52:56 AM , Rating: 2
What Hanlon failed to realize is that malice is an even more common element of human nature than stupidity.

Most of the time, we dont do stupid things because we're stupid. We do them for other reasons, such as malice.

RE: An "accident"
By tim851 on 8/7/2007 6:45:37 AM , Rating: 4
If it can happen here, I can believe it would happen in a second-world country.

South Korea is not a second-world country...

RE: An "accident"
By JeffDM on 8/8/2007 7:18:49 PM , Rating: 2
Actually, you are correct, but "first world" "third world" are outdated and not useful terms. "First world" was more or less the US and its allies, "second world" was the Soviet Union and its allies, and "third world" were the unallied countries. I think that would make South Korea a first world nation. I think it somehow had become some connotation of relative affluence, there's some amount of truth to it but it's not quite right.

RE: An "accident"
By porkpie on 8/15/2007 7:33:41 AM , Rating: 2
The politically correct terms now are "developed" and "developing" nations.

RE: An "accident"
By FITCamaro on 8/7/2007 8:09:09 AM , Rating: 2
I worked out at NASA for a summer in college and even there we lost power a few times.

Good old FPL. Known locally as Florida Flicker n Flash.

RE: An "accident"
By webdawg77 on 8/6/2007 7:44:13 PM , Rating: 2
Makes you wonder if some of the "power" company employees were mad at Samsung for some obvious reason :).

RE: An "accident"
By masher2 on 8/6/2007 7:56:05 PM , Rating: 3
In a tight market, you don't make money by cutting your own output, you gain when the other guys cut theirs.

This outage will cost Samsumg, and put money in the pockets of their competitors. Not exactly what a wise company wishes to do.

RE: An "accident"
By KristopherKubicki on 8/6/2007 8:13:44 PM , Rating: 2
Of course, the tin-foil-hatter inside all of us would say that Samsung's accident may have had no impact on actual production at all, and that the company made tons of money off the rampant speculation on the spot market since Friday.

RE: An "accident"
By AlexWade on 8/6/2007 10:01:16 PM , Rating: 2
This sounds a lot like the "unplanned" and "accidental" refinery outages that coincidentally all occurred at about the same time. Hold did that affect Big Oil's bottom line? If reducing supply reduces profit, why is anybody who sells oil except the gas station making record profits?

RE: An "accident"
By Dfere on 8/7/2007 8:07:37 AM , Rating: 3
Same argument here Masher began to articulate. You are sort of postulating that by restricting supply, prices increase to the point that total proft increases despite the total number of units sold decreasing. This is a highly elastic relastionship and it does occur in markets. The problem is one manufacturer does not a market make, in this case. Masher is right. One company would not cut its own supply so others in the industry would make more (this is the basis of anti-trust , monopoly and even oligopolic market manouvering which is illegal. (I just had to finally throw in some jargon- I am not a tech head like most of you.. I never get a chance).

RE: An "accident"
By jay401 on 8/7/2007 8:46:35 AM , Rating: 2
Not only that but wtf is with "zomg we're doomed, there will be huge shortages, quick - jack up the prices!"? Dude, power went out for a day or so. Is supply and production so tightly tied to demand for flash memory that it's as volatile a market as oil? Come on now...

RE: An "accident"
By mindless1 on 8/7/2007 12:28:26 PM , Rating: 2
If Samsung can't fill orders, OTHER company's production lines stop (unless they find an immediate 3rd party supply). You can't have many millions in flash memory sitting around for any length of time (as you would need have every other discrete too) more than to fill immediate production demands.

The real impact will depend on Samsung's surplus stock levels at the time. Yes it can raise prices but that doesn't keep those prices from readjusting either.

They were right about the prices
By HaZaRd2K6 on 8/6/2007 8:15:35 PM , Rating: 2
They did go up. Got into work Friday morning and all the NAND memory prices (from SD cards to USB keys and everything in between) had gone up about $5-$15 on average. Cards that I had previously recommended at the $30 price range were now $40 or in some cases $45. Caused a lot of headache because the increase was completely unexpected. But hey, such is the volatility of today's markets.

RE: They were right about the prices
By brian26 on 8/6/2007 11:57:30 PM , Rating: 1
Explain to me how a company that can lose 41 million from a power outage hasnt taken steps to put in a backup system. I mean seriously, generators and solar panels could help the plant finish out the day without a big deal..

RE: They were right about the prices
By ChipDude on 8/7/2007 12:35:03 AM , Rating: 4
Fabs cost multi-billions and run 7x24 to get the most out of them before they get outdated a couple years later.

The equipment in them are very touchy. Most equipment has lots of backup to survive small power bumps and such.

But if your primary feed from a central station goes no amount of local backup can cut in. There is a reason that fabs are built where there is a good reliable source of electricity.

A few batteries, solar panels, even local generators don't provide enough for just moving the air in a fab much less all the tools.

Its the worst nightmare for a fab and its engineers to lose power. You dust the tools, dust the fab, and the steppers if you lose temperature in them can take weeks if not longer to get them back, provided you don't crash the stages. Best case you lose a few wafers actual the worst case it could be everything.

Samsung should consider itself lucky! NOBODY does this to themselves. Nothing is more expensive then an idle fab that is depreciating thousands by the second then one not producing revenue. Is it no wonder that even in overcapacity everyone runs fabs flat out vs. shutter them to prop up prices. You guys who think this is some devious plot don't understand the business!

By Xenoterranos on 8/7/2007 11:49:37 AM , Rating: 2
I worked at a company with many large power hungry machines that needed to operate 24/7 (medical industry). They had no less than 6 of these just in case (maybe not that exact one, but you get the picture). One of them was always running directly into a giant UPS so that they would have time to turn on the rest of the generators in case of a full power outage.

Now, I'm not saying that it wouldn't be ridiculously expensive, but it is possible to have 100% power backup for some length of time. Maybe they did, does anyone here know for sure? I'm kind of a geek for independent power systems and would actually like to know!

RE: They were right about the prices
By Pwnt Soup on 8/7/2007 7:14:20 PM , Rating: 2
i work in the HVAC industry and have a few data centers as customers. They all have 100% backup power on hand 24-7-365, its factored in the cost of business ownership. realizing the fabs have much greater energy needs and they are just as critical I would think they would have either co-generation plants or full backup power at hand. just like hospitals, data centers and other life and death or critical aplications. if they dont, they are getting estimates rite now for backup power i would bet. either way, we the consumers will pay for it.

RE: They were right about the prices
By ChipDude on 8/7/2007 8:29:35 PM , Rating: 2
Its sounds simply, with so much at stake in such a huge investment it seems simple enough to have a few generators and such to backup power. The power usage of fabs are huge, ever tool has pumps, cooling, heating, then you have all the computers that run the place, fans to push tons of air thru it by the minute, automation/robotics and everything else. The simplest analogy would be to expect a major automobile plant to have backup power to run the place for a few days if they lost the utility. Most fabs I've been to have multiple feeds and backup from the local utilities but $hit happens. And Samsung I'm sure will soon be commission some studies on the pros and cons of putting so much production in one place vs the cost of spreading it out a bit. Of course in a small country like Korea that is limited.

RE: They were right about the prices
By Eskimo on 8/7/2007 11:10:23 PM , Rating: 2
You are absolutely correct ChipDude. That's likely one reason Samsung recently completed construction of a $3.5 billion fab in Austin, Texas to diversify NAND flash production. As you mentioned power loss to a fab is a very serious problem and I wouldn't fault any analyst for predicting the impact they did. Keep in mind when power for an extended period of time you don't just lose the equipment processing the wafers but you lose the cleanliness of the cleanroom in which they are fabricated. With loss of laminar air flow it's extremely hazardous to the functionality of any wafer not sealed from the cleanroom environment.

By Pwnt Soup on 8/8/2007 8:04:45 PM , Rating: 2
yes i see your points, however, 43 million in losses can motivate a company too consider a cogen plant and/or other alternitives. if energy costs are a big factor then it makes even more sense too have your own power plant.

By jay401 on 8/7/2007 8:49:37 AM , Rating: 2
It's not really that volatile, they just want you to believe it is so they can 'adjust' the prices.

Sh** Happens
By ChipDude on 8/7/07, Rating: 0
RE: Sh** Happens
By Dfere on 8/7/2007 8:14:33 AM , Rating: 2
How big does a fab have to be to get an economy of scale? The fact that these huge investments are placed around the world is quite simple- there is a risk with placing all this capital investment in one place, plus I believe there are logistics and personnel benefits to diversifying geographically. I know you can work on tax planning issues with international companies as well. What if you had all your fabs in Taiwan and China decided to take it over? Stick them all in southern India and let another monsoon hit, or put them on the coast for another Tsunami? Put them all in the Midwest and we get another power outage, or labor strike? Businesses do not like to gamble.

By DLeRium on 8/7/2007 3:25:17 AM , Rating: 2
Yeah, we have line down situations at my company... I don't know. To be honest our products cost a lot more than Samsung's individual chips they make because semiconductors are such a commodity now, but to understand the manufacturing process of our plant vs theirs... its like multi million vs multi billion. Line down issues are annoying but damn... I guess when anything goes down in the semiconductor industry it hits the news.

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