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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
TABLE OF CONTENTS
I.       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 ......................................................................................................... 12

II.      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
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 ........................................................................................... 38

III.   INTERNAL ANALYSIS .....................................................................................................39

PART 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 ............................................................................................................... 45

PART 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
III. E.   FINANCIAL ANALYSIS ............................................................................................................... 52

IV. 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 ........................................................................................................... 58

V.      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 ............................................................................................... 66

VI. CONCLUSIONS ................................................................................................................67

VII. BIBLIOGRAPHY ...............................................................................................................69

VIII. MAIN APPENDIX ..............................................................................................................76

IX. FINANCIAL BACKGROUND APPENDIX .......................................................................103




                                                                                                                                                      4
LIST OF EXHIBITS

EXHIBIT 1: DRAM INDUSTRY DIAGRAM .............................................................................................. 76

EXHIBIT 2: SIX FORCES ANALYSIS – LEVEL ONE ................................................................................ 76

EXHIBIT 3: DRAM CAPACITY AS A KEY REVENUE DRIVER ................................................................. 84

EXHIBIT 4: COST LEADERSHIP – SAMSUNG LEADING THE PACK ..................................................... 84

EXHIBIT 5: “THE GREAT IT SHIFT” – SMARTPHONES AND TABLETS OVERTAKE DESKTOPS AND
NOTEBOOKS........................................................................................................................................ 85

EXHIBIT 6: GROWTH AND DRIVERS FOR GLOBAL DATA TRAFFIC MEASURED IN EXABYTES ......... 85

EXHIBIT 7: VRIO ANALYSIS ................................................................................................................. 86

EXHIBIT 8: VALUE DRIVERS AND VALUE ESTIMATIONS.................................................................... 88

EXHIBIT 9: VALUES, COSTS AND PRICES ........................................................................................... 89

EXHIBIT 10: PRIMARY COMPETITORS FINANCIAL RATIOS ................................................................ 91

EXHIBIT 11: ANALYSIS OF ACQUISITIONS .......................................................................................... 95

EXHIBIT 12: ANALYSIS OF PARTNERSHIPS ........................................................................................ 95

EXHIBIT 13: BCG MATRIX FOR MICRON .............................................................................................. 98

EXHIBIT 14: MICRON’S VALUE CHAIN................................................................................................. 98

EXHIBIT 15: ELPIDA’S ORGANIZATION CHART .................................................................................. 99

EXHIBIT 16: ELPIDA’S CORPORATE GOVERNANCE BODIES AND COMMITTEES .............................. 99

EXHIBIT 17: ELPIDA’S VALUE CHAIN ................................................................................................. 100

EXHIBIT 18: ALLY OR ACQUIRE FRAMEWORK FOR ELPIDA’S ACQUISITION .................................. 100

EXHIBIT 19: COMBINED COMPANY’S VALUE MINUS COST ............................................................. 101

EXHIBIT 20: COMBINED COMPANY’S VRIO ANALYSIS .................................................................... 102

EXHIBIT 21: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS MICRON .............................. 103

EXHIBIT 22: CAPEX AND R&D EXPENDITURES – INDUSTRY AVERAGE VERSUS MICRON .............. 103

EXHIBIT 23: MICRON’S STANDALONE VALUATION ......................................................................... 104

                                                                                                                                                  5
EXHIBIT 24: MICRON’S GROWTH FORECAST ................................................................................... 105

EXHIBIT 25: MICRON’S GROWTH FORECAST FOR FCF COMPONENTS ........................................... 106

EXHIBIT 26: MICRON’S WACC CALCULATION ...................................................................................107

EXHIBIT 27: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS ELPIDA ................................ 109

EXHIBIT 28: ELPIDA’S STANDALONE VALUATION .......................................................................... 110

EXHIBIT 29: ELPIDA’S GROWTH FORECAST ...................................................................................... 111

EXHIBIT 30: ELPIDA’S GROWTH FORECAST FOR FCF COMPONENTS ............................................. 112

EXHIBIT 31: SENSITIVITY / REGRESSION ANALYSIS FOR ELPIDA’S STANDALONE VALUATION.... 112

EXHIBIT 32: “MOST LIKELY” SYNERGIES FROM ELPIDA’S ACQUISITION ........................................ 114

EXHIBIT 33: VALUATION OF SYNERGIES .......................................................................................... 114

EXHIBIT 34: COMBINED VALUATION – MOST LIKELY CASE SCENARIO ...........................................115

EXHIBIT 35: COMBINED VALUATION – BEST CASE SCENARIO ........................................................ 116

EXHIBIT 36: COMBINED VALUATION – WORST CASE SCENARIO.................................................... 116

EXHIBIT 37: SENSITIVITY/REGRESSION ANALYSIS OF THE COMBINED FIRM (MOST LIKELY CASE
SCENARIO) .......................................................................................................................................... 117

EXHIBIT 38: FINANCIAL EFFECT OF SHORT-TERM REVISION IN PRODUCT MIX FOR YEAR 2013 ... 118

EXHIBIT 39: FINANCIAL EFFECT OF NOT ACHIEVING THE 15NM TECHNOLOGY NODE BY 2016.... 119

EXHIBIT 40: STACKELBERG GAME MODEL VS. COURNOT GAME MODEL...................................... 119




                                                                                                                                                     6
I.      WALL STREET JOURNAL ARTICLE AND EXECUTIVE
        SUMMARY

I. A.   Wall Street Journal


Tech
Micron's Purchase of Elpida Seen as Positive for Chip Industry
By Juro Osawa And Lorraine Luk
735 words
3 July 2012
07:17 AM
The Wall Street Journal Online
WSJO
English
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved.

Micron Technology Inc.'s acquisition of Elpida Memory Inc. is good news for other major
suppliers of computer memory chips in Asia, as industry consolidation will likely help ease
the oversupply problem that has been plaguing the market for years.

When Micron takes over the failed Japanese rival and streamlines its operations, the whole
industry could benefit from more subdued supply and higher prices of dynamic random
access memory, or DRAM, chips, analysts said.

"Longer term, as the industry consolidates, we predict more rational supply behavior and
hence higher and more stable profits for survivors," Sanford Bernstein analyst Mark
Newman wrote in a report after Micron announced the $2.5 billion deal Monday.

With the Elpida acquisition, Micron will overtake South Korea's SK Hynix Inc. to become
the world's second-largest DRAM maker by revenue, behind another South Korean
company, Samsung Electronics Co. DRAM chips are widely used in personal computers and
mobile devices.

While there are several smaller Taiwanese players, analysts expect the DRAM market to
become increasingly dominated by Samsung, Micron and Hynix.

Micron's deal, expected to close in the first half of next year, comes at a time many DRAM
makers are trying to emerge from losses due to weak chip prices. After DRAM makers kept
building capacity to increase or maintain market share, the sector became a market with
few winners. As DRAM chips used in PCs have become highly commoditized and prices
have remained weak in recent years, many players are struggling to make money.

                                                                                           7
Elpida, Japan's only DRAM maker, filed for bankruptcy protection in late February after
struggling to repay hefty debts amid falling chip prices and as the yen's strength eroded its
overseas profits.

Shortly after Elpida's collapse, DRAM prices rose on expectations for a tighter global
supply.

"The consolidation of the DRAM market set off by Elpida's bankruptcy and the subsequent
purchase by Micron is bringing new stability to DRAM pricing," said Mike Howard, IHS
iSuppli analyst, in a report.

Thanks to more stable chip prices, the global DRAM industry's overall revenue is expected
to rise 3.3% this year to $30.5 billion, after it plunged 25% last year, according to IHS
iSuppli.

Micron, which was selected as Elpida's potential financial sponsor in May, said Monday that
it agreed to buy the Japanese company for $2.5 billion.

Sanford Bernstein's Mr. Newman expects Micron to convert some of Elpida's DRAM
facilities to produce NAND flash memory chips instead, while the U.S. company may also
shut down the Japanese firm's least efficient facilities. This process, he said, would result in
more subdued DRAM chip supplies. DRAM and NAND chips are different types of memory
chips, and mobile devices such as smartphones use both.

On Monday, Micron Chief Executive Mark Durcan declined to provide any details about
converting Elpida's DRAM capacity to flash memory chips, but said it was something that
Micron could do to address market demand.

While the expected increase in Micron's global market presence could mean more
challenges for rivals Samsung and Hynix, analysts say the South Korean companies are also
well positioned to benefit from industry consolidation and more stable chip prices.

Samsung and Hynix declined to comment on whether or how Micron's acquisition might
affect them.

By contrast, the environment remains tougher for Taiwanese players such as Nanya
Technology Corp., Inotera Memories Inc., a joint venture between Micron and Nanya, and
Winbond Electronics Corp.

As Taiwanese players have few advantages against larger South Korean players, there may
be more consolidation in Taiwan's DRAM industry over the next few years, analysts say.

While more stable DRAM prices would be positive for Taiwanese players, too, their ability
to take advantage of the improving environment is limited because they are already too far
behind the first-tier players like Samsung and Hynix in terms of technology and market
presence, said William Wong, an analyst at Taiwan's Fubon Securities.
                                                                                               8
Nanya and Inotera declined to comment on their competitive environment or possibility of
consolidation. Winbond couldn't 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] and
Lorraine Luk at

Dow Jones & Company, Inc.

Document WSJO000020120703e873006el




                                                                                       9
I. B. Executive Summary
Micron Technology, Inc. (Micron) designs, manufactures, and sells semiconductor memory
products of three main types – DRAM, NAND flash, and NOR flash. These products are used
in multiple applications, such as PCs and notebooks, mobile devices, servers and consumer
electronics, as well as in automobiles and medical devices. This paper focuses on the
DRAM business, in which Micron is the only American-based company left. The other
major players in this space are South Korean companies Samsung Electronics (Samsung)
and SK Hynix (Hynix), and Japanese Elpida Memory, Inc. (Elpida). This paper focuses on
Micron’s DRAM business.

I. B1. Strategic Move
In 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-free
installments. Micron was already acting as Elpida’s financial sponsor since May 2012, a few
months after Elpida filed for bankruptcy, in February 2012. This move will position Micron
as the second largest memory company after Samsung. With the acquisition, Micron also
gains significant presence in the mobile DRAM market where currently it is not a
meaningful player.

I. B2. Major Issues
Industry: The DRAM industry is generally an unfavorable one, with intense rivalry and a
trend of commoditization that makes it difficult for player to compete. The fact that
incumbents 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 are
above $6B, excluding R&D. At the same time, the Total Addressable Market (TAM) for
DRAM products is estimated at only $25B. The intense technology race is currently slowed
somewhat 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, any
player that is not yet engaged in the efforts to go up to the next level will find itself in a
disadvantage in 2-3 years.




                                                                                                 10
Competition: The industry is highly concentrated, with the above mentioned four
companies representing 91% of the market. Samsung is the strongest competitor with two
main factors that play to its advantage – forward integration into mobile devices and
consumer electronics, and a positive feedback loop of investments in future technology that
enable lower costs, higher margins, and better profits, which are, in turn, invested back in
technology. Those factors help Samsung remain profitable even in the downturns of the
semiconductor cycle. Hynix is the second largest competitor. Hynix experienced sharp
swings in profitability in recent years, yet it currently holds a strong position with mobile
devices manufacturers in China. Elpida is a DRAM-only company with the third largest
market 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 the
expenditures that were required to achieve that position burdened its debt level to the
point of bankruptcy. Micron held the fourth largest market share in DRAM. It is positioned
well in server and specialty DRAM, but lacks presence in mobile DRAM, which is the fastest
growing and most profitable segment. In the current market dynamics, Samsung is the
only 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 to
create value by appealing to market niches.

I. B3. Key Analysis
Our analysis shows that acquiring Elpida is a good move for Micron. The acquisition
successfully withstands various tests, such as “Ally or Acquire” and Porter’s three tests. In
addition, 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 company
standalone. The synergies are derived mainly from three areas: 1) Revenue – with Elpida’s
mobile DRAM capabilities, we assume that Micron will ramp up production of mobile
DRAM, thus increasing revenue of the combined company, 2) Cost of Goods – Elpida
achieved a more advanced technology node than Micron. We assume that Micron will use
the knowledge from Elpida to migrate its fabs to a higher node, thus improving its COGS (a
higher node means more chips on each wafer, so the cost of each chip is lower) and
profitability, and 3) Capital Expenditures – with the acquisition of Elpida, Micron is

                                                                                              11
essentially buying two operational fabs at about a third of the cost of building one fab in the
same technology node.

From a Value Minus Cost perspective, the combined company offers higher value and
improved costs over each company standalone. Micron was a negligible force in the mobile
DRAM space, but, with the acquisition of Elpida, it strengthens its offering and inherits
coveted customers. Micron can leverage its mobile offering further by bundling its NAND
flash 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 Elpida
offers.

I. B4. Final Recommendation
In 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 into
Micron, to allow Micron the most control over Elpida’s operations, 2) Improve its product
mix, preferably towards the more profitable mobile DRAM, and 3) Migrate Elpida’s
advanced 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 break
Samsung’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-exclusive
alternatives: 1) A merger with Hynix, 2) Getting acquired by Apple, which has a strong
incentive to limit Samsung’s growth, and 3) Develop the next generation of DRAM products
together 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 required
for the next technology node, and it can help Micron get better access to that critical
resource. Intel will benefit from the partnership by limiting Samsung’s growth, and by
making sure that it has the complementary DRAM needed for its Atom mobile processor.




                                                                                              12
II.    EXTERNAL ANALYSIS

II. A. Industry Definition
Micron competes directly in the Memory Chip & Module Manufacturing (“Memory”)
industry (Hoover's, 2012). This industry is part of the broader Semiconductor and Related
Device Manufacturing (NAICS: 334413) industry, where players engage in the
manufacturing of semiconductor and related devices parts (IBISWorld, 2012). The
Memory industry (see Exhibit 1) focuses primarily on the design and manufacturing of
memory components with diverse applications in personal computers, networking,
storage, mobile telecommunications and consumer electronics products. Given the nature
of Elpida’s position in the specific DRAM market, this analysis will focus on the DRAM
segment of the Memory industry.

II. B. Six Forces Analysis

II. B1. Level One Analysis
Exhibit 2 contains a Level One Analysis for the DRAM industry.

II. B2. Level Two Analysis
Threat of Entry/Barriers to Entry
The high fixed costs (time and money) are a large deterrent to market entry. A firm
would require two years to build a facility and another one or two years to ramp
memory production. This increasing cost is exceptionally prohibitive given the
average DRAM TAM that has remained at about $25B since 2000 (Credit Agricole
Securities, 2012). The combination of unpredictable long-term market developments
and a tendency for the incumbent firms to oversupply the DRAM market is also a
deterrent to market entry. The incumbent advantages owned by the largest four
players span broad product portfolios covering various markets. These firms share
their large patent portfolio over cross-licensing agreements, as well as form a linkage
of intellectual property and know-how that a new firm would need to overcome if
entering the market.

Threat of Rivalry
                                                                                         13
The DRAM industry is mature and highly concentrated (CR4 = 91%), and it is growing at a
decreasing rate. In addition, firms employ similar technological processes to manufacture
their 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. Those
that are unable to maintain steady R&D and process investments are eventually pushed out
by lower cost and more technologically advanced competition. Exhibit 4 identifies the
constant race for firms to achieve cutting-edge cost process nodes in order to maintain a
competitive variable cost structure. While each technology node reduces the variable costs
per product the increasingly higher levels of investments raises the overall break-even
point requiring the firm to sell even more DRAM memory. Despite the strong requirement
to commoditize in the PC space, DRAM firms are seeking ways to differentiate within
customer segments in order to raise Average Selling Prices (ASPs) and attract higher
revenues.

Threat of Suppliers/Supplier Power
DRAM buyers are a small percentage (11.6%) of the total semiconductor buyer group. The
CR1 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 to
serve a large majority of the market in order to stay profitable, and creating high (and near
impossible) switching costs for equipment buyers due to suppliers’ high concentration.
DRAM firms typically require 3-4 years from developing their semiconductor process until
production ramp up, further increasing their dependence on equipment availability and
support from suppliers. Other forms of supply (labor, utilities, shipping, and financing) are
considered easily attainable in most geographic locations; however, their impact is not
considered to counter-weight the unfavorable forces of equipment suppliers.

Threat of Buyers/Buyer Power
PCs and Notebooks [40% Market Share]: PC and notebook manufacturers place the highest
cost pressure on DRAM firms and face low switching costs due to standardized interfaces
and low requirements for differentiation. A main driver for these firms is cost of goods
given the low gross margins and low differentiation among computers and laptops.



                                                                                            14
Mobile Devices (Tablets & Smart Phones) [20% Market Share]: Mobile tablets and
smartphones are a growing segment with a medium level of concentration (CR4 = 58%).
Mobile DRAM products are more differentiated, with mobile buyers valuing small size, low
power, reliability, and ample manufacturing capacity. DRAM firms may reduce switching
costs 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, low
latency, and high reliability. Switching costs are slightly higher than in Mobile DRAM given
the 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 of
product costs is close to10%.

Specialty Memory [5% Market Share]: The specialty memory market is believed to be the
most attractive group given its high differentiation and relaxed focus on power
consumption or size. These firms enable high switching costs by favoring DRAM products
that are promised to be in production for long periods of time and are qualified for high
reliability across increased temperature ranges. This market is thought to have high gross
margins, leading to overall favorable buyer power conditions for this segment.

Summary: Despite high concentration and general pressure placed on DRAM ASPs, the
DRAM firms have found opportunities to raise switching costs based on differentiation that
represents value to the various buyer groups.

Threat of Substitutes
New, non-volatile high speed memory technologies are in development, yet they have not
reached a level of performance that can disrupt the DRAM industry. Micron has launched a
version 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 in
performance (speed and bandwidth) compared to DRAM.

Role of Complements
DRAM 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
CPUs in the form of both hardware and software redesign is beneficial to the DRAM
industry. Also, while NAND itself has a low switching cost, memory firms that sell both
types of memory (e.g. Samsung, Hynix, Micron) have developed low-profile high-
performance multichip packaging (MCP) solutions that increase overall value in the mobile
market. An unfavorable factor comes from the capabilities of NAND and CPU firms to have
equipment and technology know-how to enter the DRAM market if industry conditions are
to improve.

II. B3. Level Three Analysis
 Force Affecting Profitability                                    Strength Rank
Threat of Rivalry                     Moderately Unfavorable          4.5         1
Barriers to Entry                            Favorable                1           2
Buyer Power                                   Neutral                 2.5         4
Supplier Power                              Unfavorable               5           3
Threat of Substitutes                  Moderately Favorable           2           6
Role of Complements                   Moderately Unfavorable          4           5
Overall Industry                         MODERATELY                   4          N/A
Attractiveness                           UNFAVORABLE

DRAM firms face unfavorable forces through intense rivalry and threats from both supplier
and complement groups. The incumbents continuously battle for high volume sales needed
to generate the cash flow to fund an intense technology race. Further exacerbating this
rivalry, from the equipment supplier side, is the low percentage (11.6%) of semiconductor
equipment purchased by the DRAM industry as compared to other semiconductor
industries, 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 and
contain significant long-term market risk. In addition, many firms that create
complementary products (e.g. CPUs) arguably possess know-how and semiconductor
equipment required to move into the DRAM space. Given the higher profits obtained from
these other products, it is clear that these firms are choosing to stay out of DRAM unless
market conditions are to improve. DRAM firms have been able to improve traditionally low


                                                                                             16
switching costs in three (mobile, server, specialty memory) of the four buyer groups
through differentiating features or product strategies.

II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical
       Concerns

II. C1. Global
The Great IT Demand Shift
Year 2011 was noted as the first year where mobile device shipments (552M) exceeded
that of notebooks and PCs (365M), as identified in Exhibit 5. This cross-over point has
been labeled “The Great IT Shift” noting a paradigm shift as consumer values change from
high computing performance to long battery life and constant high-speed connectivity
(Nomura Equity Research, 2012). Mobile devices are expected to continue their high
growth to 1,800 million units in 2014 as compared to 600 million units for notebooks and
PCs. DRAM production for 2012 has also accounted for this shift with computer DRAM
production dropping below 50%.

Explosion of Data Content
The advent of social networking along with tablets and smart phones is leading a sharp
increase in data traffic – from 200 EB (billion gigabytes) in 2001 to a projected 55,000 EB
in 2013. This increase has driven demand for servers and server DRAM. Exhibit 6
identifies both the growth in traffic and notable events driving increased demand, including
the advent of YouTube (2004), Facebook (2005), Android 2.0 mobile operating system
(2009), iPad (2010), and Netflix Streaming over mobile devices (2011). Overall mobile
traffic usage is growing as forecasted to a CAGR of 78% from 2011 to 2016 (CISCO, 2012).

Shift Away from PC Development
Microsoft’s Windows 8 release has disappointed the PC DRAM industry. Now centered
towards a tablet platform, the new operating system will not require an increase above the
current 2GB DRAM typically used in computers. This is a sharp contrast to the mid-1990s
and early 2000s, when each new release of Windows required increased DRAM needs in
PCs.



                                                                                          17
II. C2. Social
Social Media
Social networks such as Facebook, Twitter and LinkedIn are training the younger
generations to be permanently online and are driving the fast growth of
gaming/video/texting-capable mobile terminals, i.e., smartphones and tablets. These
devices require increasing amounts of DRAM to support their increasingly powerful
processors, networking, and audio-visual chips. If social networking ever proves to be a
fad, the growth rate of the memory industry will be affected.

II. C3. Technological
DRAM-to-NAND Flexibility
Though 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 is
converting its “Line 14” plant in Korea from 28 nm NAND to 28 nm Logic circuit
manufacturing (Lapedus, 2012). Micron’s purchase of Elpida’s DRAM fabs in Japan and
Singapore is not a pure DRAM play, since the fabs can always be converted to NAND or NOR
production, albeit with some costs and down-time.

Move Towards 450 mm (18”) Wafers
The 300 mm (12”) wafer has ramped up now in newer foundries across the globe. The
move to 450 mm wafers will be the core of planned or under-construction plants, expected
to start production in 2017, at the earliest. Intel leads the investments, followed by
GlobalFoundries and TSMC. 37% of wafers produced in 2012 are still 200 mm. This move
is expected to lower the variable costs of memory production by 30-40%. (Pajjuri, Heller, &
Goodman, 2012).

Long Lead Time
Manufacturers and designers typically plan their multi-billion dollar investments to target
economic sweet spots 2-4 years in advance. Intel, GlobalFoundries, Samsung, and TSMC
have made public 2015 plans for 14 nm process manufacturing. These plans depend on
tools and technologies still under development, with no guarantee of their fruition or final


                                                                                            18
wafers/hour or yield/wafer results. This high-risk nature of the field has been the case for
decades and all players have got comfortable planning that far ahead.

Intel’s Dominance
Intel’s x86 CPUs are threatened by the emergence of ARM processors in mobile and tablet
devices. Tablets are cannibalizing laptops/netbooks, and increased power of the cheaper
low-power ARM processors will eventually threaten the x86 in PCs and servers. (Credit
Agricole Securities, 2012)

II. C4. Governmental/Political
Local Generosity
Semiconductor manufacturing is considered a matter of national security by many
governments across the globe. It is also a creator of mass high-paying jobs where foundries
are located. Generous tax and credit support is furnished by governments to lure
manufacturers to build their foundries locally. For example, NY State has committed more
than $1.2B in cash and tax breaks to GlobalFoundries (spin-off of AMD) to build a research
and manufacturing facility at Luther Forest Technology Campus (Kerr, 2011). Companies
typically auction their future plans to squeeze the most generous support from competing
states/regions. Hynix was bailed out by the Korean government in 2001, without serious
legal challenges from its competitors.

Need for Lobbying
Anti-trust lawsuits, anti-dumping policies, and penalties for collusion vary from one
country and government to another. The solar industry just witnessed a big win for
American manufacturers against their Chinese counterparts that were long known to be
flooding the market – aided with different forms of Chinese government subsidies – leading
to huge tariffs and shifts in the market. Similar incidents has happened in the memory
industry – Chinese dumping of DRAM in the 1980s – forcing current players to be involved
in lobbying and political campaigns, and to diversify their plant locations and suppliers.

Chinese Politics
Concentration of manufacturing in China is exposing the whole supply-chain to any
political instability in China. Foxconn, a contract manufacturer of electronics that employs


                                                                                             19
1.2 million in China, was heavily criticized by labor groups in 2010 after several workers
jumped to their death (Lorraine, 2012). Deceleration of Chinese GDP growth to 7.8% is
adding more risk to the industry, and might potentially cost the survival of less diversified
manufacturers.

II. C5. Ethical
Environmental Pollution
Semiconductor industry is a major contributor to environmental pollution in a number of
ways. 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 in
landfills. The rise of solar power has accelerated the growth of silicon recycling
technologies that recover gold and other expensive and toxic elements from obsolete chips,
while using re-processed silicon for use in solar panels.

Inhumane Recycling
The silicon scrapping and recycling industry, while beneficial to the environment, is now
being scrutinized for its own dependence on “e-waste” export to poor countries like India
and Nigeria, where labor is heavily supplied by children in dangerous facilities. The West is
turning more towards local e-waste management. For instance, the “Electronic Waste
Recycling Act”, in effect in California since 2003, requires consumers to pay a recycling fee
for certain types of electronics. This added fee is redirected to qualified companies that
recycle 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 of
California, 2012).

Water Consumption
A foundry consumes pure water (for rinsing chemicals) corresponding to a small city of
40,000 to 50,000 inhabitants. New technologies are emerging to minimize the need for
pure water (Yan, Dhane, Vermeire, & Shadman, 2009), thus having less impact on the
environment. Technology is allowing less environmental impact for semiconductor
manufacturing, in return for slightly higher COGS. Micron and most of its competitors




                                                                                             20
acknowledge the increasing costs to meet the environmental regulations and laws related
to health and safety.

II. C6. Macroeconomic Trends
Shaky Economic Recovery
By Q2 2012, the U.S. economy is growing at a 1.3% rate, barely recovering from the 2008
Great Recession. Europe is still unable to convince its members to forfeit their fiscal
sovereignty – a needed step before bailing out its weaker economies. Growth in China has
slowed down to 7.8% and the world is worried about another credit bubble busting in
Chinese construction loans. The world’s central bankers are running out of ammunition
after 4 years of credit easing, while governments will be forced to tighten their budgets to
avoid credit downgrading. The world economy is unstable, directly affecting the overall
demand for consumer electronics, and, consequently, the demand for DRAM products.

Made in Asia
With Asia fast becoming the world’s factory, semiconductor and electronics manufacturing
ecosystems are creating barriers to entry in other regions of the world. Supply chain Asian
dominance is exposing the market to shocks. For example, the supply of NAND Solid-State
Drives was directly affected by the flood that hit Thailand (where half of the HDD parts are
manufactured) in 2011 (Deloitte, 2012). Similarly, the Tsunami in Japan offered another
example of supply disruptions caused by concentration of suppliers in that region.

II. C7. Demographic Trends
With the fast aging of the Asian Tigers, the demographic dividend enjoyed by the current
centers of semiconductor manufacturing will run out. China’s median age is expected to
grow 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 Analysis

II. D1. Firm’s Competitors



                                                                                           21
The DRAM industry has consolidated from around twenty players in the first half of the
1990s to eight players (four major and four minor) in 2012 (Nomura Equity Research,
2012). The four major companies – namely, Samsung, Hynix, Elpida, and Micron – supplied
85% of DRAM products globally in 2011, and this number expected to grow to 91% in
2012. 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%, and
Micron’s was 9%. In 2012, Hynix and Micron are expected to increase their market share
to 27% and 11% respectively, taking market share away from the smaller players – Nanya
Technology Corp. (Nanya), Powerchip Technology Corp. (Powerchip), Winbond Electronics
Corp. (Winbond), and ProMOS Technologies (ProMOS). ProMOS is expected to exit the
DRAM 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% (Nomura
Equity Research, 2012).

II. D2. Primary Competitors
As indicated above, Samsung, Hynix, and Elpida represent the three primary competitors of
Micron in the DRAM market. All three companies and Micron itself will be included in the
analysis of competitors below.

Samsung
Samsung is a major player in two main business areas: 1) Consumer Electronics (referred
to 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 variety
of 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 country
in 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 process
design at the same time, helping the company achieve shorter product life cycles and
shorter time to market. As a result, it gained higher profits by being first to market and


                                                                                             22
improved costs faster than competitors (Woojai Kim, 2004). This capability plays to
Samsung’s benefit to this day. In 2011, Samsung’s market share in DRAM was 37%. The
company is forward integrated, which means that its semiconductors products are
components in its consumer electronics products. In that same year, 48% of the
semiconductors that were manufactured by Samsung were used in-house (Samsung,
2011).

Hynix
Hynix was founded in 1983 as “Hyundai Electronics Industries”, the electronics arm of the
Hyundai conglomerate. In 1999, it acquired LG Semicon (the semiconductor unit of LG
Group) and created a meaningful force in the memory market. In 2001, the company
disaffiliated 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 part
of SK group and giving it a much needed injection of capital, after more than a decade of
financial woos and swings from profits to losses. Hynix develops, manufactures, and sells
memory products in the DRAM and NAND markets. It is the second largest manufacturer of
DRAM products with 22% market share in 2011, a share that is expected to grow to 27% in
2012 (Nomura Equity Research, 2012).

Elpida
Elpida was founded in 1999 by combining the DRAM units of electronics giants NEC and
Hitachi. In 2003, Elpida acquired the DRAM operations from Mitsubishi Electric Corp. The
firm specializes in the manufacturing of DRAM products and, as of 2011, holds 18% market
share, only behind Samsung and Hynix (Nomura Equity Research, 2012). Elpida is known
for its advanced process engineering capabilities, which has allowed the company to skip
technology generations from 60nm DRAM to 40nm and to spearhead the move to 30nm
DRAM. However, the combination of volatile DRAM prices, lack of product diversity, and
huge R&D and capital investments brought the company to declare bankruptcy in February
2012.

Micron
Micron 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
McDonald’s. In the 1980s, when Japanese manufacturers were dumping chips on the U.S. to
gain market share, Micron filed an antidumping petition, which resulted in the
Semiconductor 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, but
the deal was not approved by Hynix’s directors. Over the years, Micron has made a few
attempts to diversify its portfolio – it had a PC business from 1995 to 2001, it had a flat
panel display division for a few years, and it developed and manufactured CMOS image
sensors with the acquisition of Photobit. Micron spun-off the imaging business in 2008. All
those years, however, memory products remained as a core business (Hoover's, 2012). In
2006, Micron diversified its memory offerings by entering into a joint venture with Intel to
develop 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 share
is expected to grow to 11% in 2012 (Nomura Equity Research, 2012). DRAM was Micron’s
best selling product for many years. In 2012, for the first time, NAND sales outpaced DRAM
sales (Micron, 2012).

II. D3. Primary Competitors’ Business Level and Corporate Level
Strategies
Corporate Level Strategy
The corporate level strategy of each firm was determined based on an analysis of the level
of granularity observed in the memory market. It was concluded that, although DRAM
products can belong to different segments, they are often grouped under a single business
unit.

Samsung: Samsung breaks down its revenue by product-based operating segments which
include Digital Media, Telecommunication, Semiconductor, and LCD. In 2011, Digital Media
accounted 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 strong
synergy between our set and component business areas” (Samsung, 2011). Samsung,

                                                                                              24
therefore, can be classified as a related constrained corporation under Rumelt’s
classification.

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 related
constrained 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 DRAM
representing 39% of sales in 2012, NAND with 44% and NOR with 12%, Micron qualifies to
the definition of a related constrained corporation.

Business Level Strategy
The business level strategy of the DRAM business of each competitor was determined
based on the characteristics of the different DRAM products, which were combined under
four segments:

1) PC/Notebook DRAM: DRAM chips used in PCs and notebooks are considered
commoditized. Any PC manufacturer can buy PC DRAM from any DRAM supplier and there
will be no apparent difference in quality, operational and technical specifications.

2) Mobile DRAM: Smartphone and tablet companies (such as Apple and Motorola) require
that the DRAM used in their devices will be smaller in size and will consume less power
than PC DRAM. A DRAM firm that wishes to supply mobile DRAM must be able to comply
with different power requirements from different customers.

3) Server DRAM: Server companies (such as HP and IBM) require higher quality standards
and 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 in
consumer electronics and appliances, automotive applications, and medical applications.



                                                                                          25
Another important factor in the analysis is that DRAM prices are determined by market
forces, and a single supplier has no power of price differentiation. On top of that, a
company that achieves economies of scale will not typically transfer the cost reduction to
the DRAM buyer, as this will erode its margins very quickly given that prices are in
constant decline.

In light of the above segmentation and pricing scheme, it was concluded that all DRAM
companies are employing a differentiation strategy (as opposed to low cost) according to
Porter’s generic business level strategies. In addition, all firms have characteristics of
broad differentiation in the PC DRAM business, and of focused differentiation in the other
DRAM segments. Because no single company supplies only one type of DRAM, all
competitors employ a hybrid business level strategy.

II. D4. How Competitors Achieve their Strategic Position
Exhibit 7 presents a complete VRIO analysis of the four players. Following are the main
findings from the analysis.

Samsung
Since 1994, Samsung has been the global leading supplier of DRAM products. Samsung’s
sustainable leadership stems from two primary factors: 1) a positive feedback loop, from
earnings to R&D to sales and back to earnings, and 2) vertical integration.

Positive Feedback Loop: Samsung entered the semiconductor business in the early 1980s
when it injected $100 million into developing its first DRAM product. It then acquired
technology from outside the company, and embarked on a rapid learning process that
resulted in outstanding product design and process design capabilities, and, ultimately,
leading to advanced, high-quality DRAM products (Woojai Kim, 2004). This learning
capability, driven by injections of capital, is what keeps the company’s leadership position
to this day. In the last twenty years, Samsung has consistently been the first DRAM
company to invest in the next technology node. This fact enables Samsung not only to be
the first to market with the new technology, but also to achieve production efficiencies and
improved yields before its competitors. As a result, Samsung has enjoyed higher margins



                                                                                             26
than competitors and greater profitability. Those profits are then invested back in R&D and
capital expenditures, and the positive feedback loop continues.

Vertical Integration: Overall, semiconductor companies (including DRAM companies) face a
multidimensional capacity planning problem. In the short term, they have to decide their
DRAM product mix, i.e., how many wafers to manufacture for each DRAM type. In the
medium 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 decide
whether 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 two
years for the fab to be fully functional. All these decisions have to be made in a highly
uncertain and volatile environment. Vertical integration gives Samsung an edge over other
competitors by making known some of the unknown – information about demand, future
market requirements, and product mix is readily available from in-house customers.
Because those internal customers are leaders in their respective markets, Samsung is on
the right track to keep its technological leadership.

Hynix
Hynix is the second largest manufacturer of DRAM products, but in recent years it was not
profitable. The company experienced profitability and liquidity problems in the past and
was bailed out by the Korean government in 2001. Recently, in a strategic move that seems
to 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 (SK
Hynix, 2012). However, our VRIO analysis shows that Hynix does not currently hold a
sustainable competitive advantage.

Elpida
Elpida continues a long standing Japanese tradition of delivering high quality products to
customers. The company has a strong presence in the mobile DRAM space, with a
reputation 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 highly
valuable. However, none of its resources and capabilities provides the company with a
sustainable competitive advantage.

                                                                                             27
Micron
Micron was able to survive in the DRAM market through acquisitions and strategic
alliances that allowed it to diversify within the memory market and enhance its
technological capabilities. Currently, however, Micron is at a disadvantage compared to its
competitors in the mobile DRAM space, mainly because it did not upgrade its technology to
be on par with new mobile requirements. Ironically, Micron’s sustainable competitive
advantage 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”, in
which it guarantees to make products available for at least ten years. This value
proposition is appealing to many customers in the automotive, industrial, medical, and
aerospace industries. The Product Longevity Program is part of Micron’s focus on specialty
DRAM, which carries higher margins.

II. D5. Value Minus Cost Analysis
Value
Exhibit 8 shows a list of value drivers by segment and assigns scores to the primary players
across 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 received
similar value scores.

Mobile DRAM: In mobile DRAM, important value drivers include power, size, as well as
guaranteed supply, given the high growth rate this industry is experiencing. In this
segment, Elpida provides the highest value among competitors due to its strong reputation
for supplying low power, high quality DRAM products. One of Elpida’s most coveted assets
is its relationship with Apple, while its lacking capability is in bundling. Many mobile
manufacturers are starting to use packages that bundle DRAM and NAND. Elpida does not
have a NAND operation, hence is not able to bundle. Micron scored low on mobile because
it is on an older technological node than its competitors, and is not able to meet the power
and speed requirements of mobile customers. Samsung and Hynix received similar value
scores. The fact that Samsung is forward integrated is affecting its score on guaranteed




                                                                                           28
capacity, under the assumption that its in-house needs will get higher priority over other
customers in times of shortage.

Server DRAM: Micron has only two competitors in the server DRAM space, since Elpida
does 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 on
DRAM’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 DRAM
chip, and so far has developed good relationships with important customers, such as HP
and IBM (Employee1, 2012) (Employee1, 2012).

Specialty: All of Micron’s competitors scored 50% lower on specialty DRAM. A few years
ago, Micron made a strategic decision to go after the smaller, but higher margin segment of
specialty DRAM. This segment is comprised of customers with a unique requirement: to
keep product life cycles longer than those typical of PC or mobile applications. For
example, a DRAM used in a car computer can last ten years before the car company changes
the design of its computer. Micron has developed the capability to answer this specific
need, focusing primarily on automotive and industrial applications, as well as consumer
electronics.

Price
DRAM ASPs are in constant decline. Specifically, between 2007 and 2008 prices took a dive
because of oversupply in the market, and then continued to decrease because of the
economic 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 DRAM
firms sell their products for the same prices, whether it is by contract or by occasional
sales. The differentiation in prices comes from the segmentation according to the DRAM
usage. PC/Notebook DRAM carry the lowest price. Mobile DRAM enjoys a 2.5x multiplier
above PC DRAM, Server DRAM enjoys a premium of 2x, and specialty DRAM carries a
premium of 1.5x.


                                                                                             29
Cost
The prohibitively high fixed costs that are required to build a fab were discussed in Section
II B – Six Forces Analysis. For the Value Minus Cost analysis, only variable costs were
considered. These costs are largely dependent on the technological node the company has
achieved. Historically, each new technology node, named after the line width that the
lithography process was able to achieve, such as 60nm or 40nm, enabled doubling the
number of transistors on a wafer. This resulted in reduced cost per transistor. The cost
reduction was not reduced to half because of low initial yields. As the manufacturer
increased its yields, margins improved.

To determine the cost for each competitor, the node each one achieved for each of the
DRAM 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 the
next node before its competitors. Micron and Hynix, both on older technology nodes, suffer
currently from a cost disadvantage. Elpida has already achieved the 2x nm technology, but
its production mix in 2011 was mostly PC DRAM, for which margins are close to zero.

Summary of Value Minus Cost Analysis
Because prices are the same for all competitors in all DRAM segments, advantages or
disadvantages originate from the value that the company is capable of delivering to
customers, as well as from costs. Following is a summary of each competitor’s position in
the V-C framework.

Samsung: Samsung enjoys cost advantages across the board and is the only company that
turns a profit even in the low periods of the DRAM cycle. Samsung delivers comparable
value to Hynix in the mobile and server DRAM. Overall, Samsung’s power comes from its
ability 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 comparable
values in PC/Notebook, mobile, and server DRAM.



                                                                                           30
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 mobile
and specialty DRAM. However, it delivers more value than competitors in the server and
specialty segments. Micron is behind its competitors in the lucrative mobile DRAM
segment. To stay competitive, it will have to catch up.

II. D6. Comparative Financial Analysis
Exhibit 10 provides the financial ratios for the four firms under analysis. The financials
ratios are not specific to the DRAM market; instead, they reflect the overall company’s
business. For example, Samsung is well diversified and the financials include data for all of
its divisions. Samsung and Hynix have their fiscal year ending in December while Micron’s
fiscal year ends in September and Elpida’s ends in March. No financial data for Elpida was
available 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 by
Micron, Hynix and Elpida in that order.

Profitability
Samsung has the best profitability among the competitors. It has a consistently high gross
margin and is the only competitor that earned a profit in each of the past five years. Its
strong performance is attributed to the diversified corporate portfolio, where profits in
other business units cover for losses in the semiconductor business. Elpida presented the
worst profitability. In 2008 and 2011, its gross margin was negative and it suffered heavy
losses. Micron and Hynix both presented uneven performance, but, in 2011, Micron was
more profitable than Hynix.

Liquidity
Micron has the best liquidity ratios in the industry, thanks to low levels of current liabilities
achieved by maintaining a high level of cash & equivalents, and a 60 days turnover on
accounts receivable. Samsung is also in a healthy position in respect to its current
liabilities. 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
$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.

Leverage
Samsung has the lowest leverage in the industry. Its debt to equity ratio was at 0.53 for
2011. Micron’s debt to equity ratio shows a well-balanced leverage. Hynix has a much
higher 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 for
bankruptcy with $5.6B in liabilities. This was the largest ever bankruptcy by a Japanese
manufacturer (Reuters, 2012).

Efficiency
Micron is the least efficient competitor. Its inventory turnover indicates the highest
inventory levels and its days sales outstanding indicate that its customers consistently get
60 days payment terms. Elpida’s payment collection is slightly better than Micron’s in most
years. Hynix was able to outperform Samsung in some years in its turnover and DSO ratios.

Capital Expenditures
Competitors in the DRAM market watch each other carefully for evidence of increased
capital expenditure, as those expenditures indicate a strategic move into newer technology
nodes. For this reason, some companies do not disclose capital expenditures in their
financial 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 the
downturn (2008 and 2009), Elpida significantly increased its capital expenditures, while
other competitors contracted. Because revenues in these years were low, Elpida had to
finance its expenditures with debt instruments, which eventually brought it to bankruptcy
in the beginning of 2012.

Another interesting fact is that none of the competitors ramped up its capital expenditures
to 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
In the current competitive dynamics, Hynix, Elpida, and Micron are all playing catch-up to
Samsung, which is the strongest player in the market in all aspects – market share,
technological capabilities, and financial position. However, the technological gaps are
expected to shrink in the medium range of 2-3 years, because the equipment required to go
up to the next node is not mature enough yet (see Section II E4 – Competitive Dynamics
below). This can give all players an opportunity to level the playing field, given that they
make the required investments.

Elpida’s bankruptcy creates expectations for further industry consolidation. This can
contribute to less oversupply and more stable prices, a fact that will help the remaining
companies strengthen their position.

Differentiation in this market is very challenging and all the players are trying to find
niches where they can add value, like Micron in Specialty DRAM, and Hynix in the Chinese
mobile market. Those positions, however, are fragile, and may not add significantly to the
company’s economic contribution, so all players have to be able to also supply the mass
market.

II. E. Intra-Industry Analysis

II. E1. Industry Evolution and Formation of Strategic Groups
DRAM’s original growth was fostered by investments from the U.S. defense industry and
cold war efforts. From the 1970s until the early ‘80s, the DRAM industry was dominated by
Intel, Micron, and seven other U.S. firms. Japanese firms later entered in the late 1980s and
early 1990s, outcompeting the U.S. firms with better patterns of investments and a close
relationship with their consumer customers in Japan. The majority of the U.S. firms were
forced 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 market
and closely followed changes in PC sales. While the market showed an average $7B in sales
in the early 1990s, it grew to an average $25B in the second half of the 1990s with two
peaks in 1995 ($42B) and 2000 ($32B) driven by new releases of the Windows operating
system which required increased computer DRAM and drove PC upgrades.


                                                                                               33
Korean memory firms successfully captured the peak of this boom in 1995, earning a total
of $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 fabrication
facilities (Mark & Ma, 2002). With a leading edge fabrication facility costing $500M to
build, 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 and
Winbond, to enter the DRAM market, maintaining a total of 24 firms and offsetting the loss
of U.S. firms exiting the industry. The entrance of these new firms grew DRAM supply to
exceed demand leading to high levels of inventory and oversupply when the market
crashed in 2001 (Mark & Ma, 2002).

From the mid to late 1990s, the cost of competitive DRAM facilities jumped from $500M to
over $2B, while the TAM stayed on average at $25B since year 2000. The higher costs led
to 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 Groups
DRAM-Only Firms
The DRAM-only strategic group includes Elpida, Inotera, and Nanya. These firms have less
cash 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 DRAM
product where as Inotera and Nanya are one to two generations behind in technology
development.

Diversified Semiconductor Suppliers
This group began to emerge in 2004 with Micron, Hynix, and Samsung presenting their first
NAND flash products. Their portfolios now include two or more of the following: NAND


                                                                                          34
flash, NOR flash, CMOS image sensors, logic design, or end consumer products. The
increased diversity in product portfolios can enable a more stable operating margin. Cash
flow can also be generated from other semiconductor operations to pursue DRAM process
development and capital investments. This strategic group can also utilize MCP solutions
to sell bundled solutions (e.g. Micron’s Memory Cube), increasing both customer value and
resulting ASP.

Forward Integrated Suppliers
The group is comprised of a single firm – Samsung – that has forward integrated into
numerous consumer products including smartphones, tablets, and laptops. Samsung is
able to closely align its DRAM development, including product and capacity planning, with
its consumer products. Similar to the “Diversified Semiconductor Group”, operational cash
flow generated from other business units can be invested into DRAM capital investment
and R&D spending.

II. E3. Mobility Barriers, Threats and Opportunities
Mobility Barriers
DRAM-Only and Diversified Semiconductor Supplier: The high cost of R&D and capital
spending is a barrier for DRAM-Only suppliers to expand their semiconductor portfolio into
other products, such as NAND flash or CMOS image sensors. Micron had successfully
gained a competitive standing in NAND through a co-development agreement with Intel
starting in 2006. Micron’s shared cost for this arrangement was $1.4B which is still
significant for cash-poor members of the DRAM Only group (Micron, 2012).

Moving into the “Forward Integrated Supplier” Group: Recent buyer sentiment has shown
that Samsung’s forward integration has hurt its relationship within the mobile and server
buyer groups. For example, Apple has recently announced that it is cutting back Samsung’s
share in its product line after a recent copyright trial (Ilbo, 2012). Apple’s share of the
mobile 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 with
Samsung for fear that any collaboration weakens Samsung’s barrier to entry into server
products. Samsung’s forward integration therefore requires it not only to have cost-


                                                                                              35
competitive DRAM products, but also to maintain competitive smart phone and tablet
offerings to overcome lost revenue opportunities (Vilches, 2012; Alexander, 2012).

Threats
ASP Volatility in PC and Mobile Market: Vendors in the DRAM-Only group are more
sensitive to falling PC DRAM ASPs. Both Nanya and Inotera posted a 90% loss in gross
margins due to DRAM demands. They have also had higher fixed costs due to producing
DRAM on older technology nodes.

Inventory shifts in DRAM supply may buoy PC DRAM ASPs, as firms in the Diversified
Semiconductor Suppliers group (Hynix and Micron) shift their production away from PC
DRAM. The increased mobile DRAM supply of 9% in 2011 to 15% in 2012 of total supply
may erode the 2-3x ASP premium commanded for this product (Nomura Equity Research,
2012).

II. E4. Competitive Dynamics
Cross-Licensing Agreements for All Strategic Groups: Micron received a net $160M from
cross-licensing agreements with Samsung during the 2012FY, with as much as $115M
attributed to DRAM intellectual property. Large firms within all buying groups are thought
to demand dual-sourcing for all components forcing memory firms to license any product
differentiator before that product is brought to market (MarketLine, 2012).

Technology Migration: Extreme Ultraviolet Lithography (EUV) equipment is expected to
delay a move to the 15nm node. (Trendforce, 2012) This delay is expected to allow
members of the Diversified Semiconductor Suppliers group (Micron, Hynix) to catch up to
Samsung in 2013 and 2014, narrowing Samsung’s cost-advantage. For example, while
Hynix’s cost per gigabyte was 16% higher than that of Samsungs in 2011, this gap is
expected to narrow to 3% in 2012 and forecasted to reach parity in 2013. This opportunity
may be short-lived as Samsung is heavily investing in EUV equipment. This threat greatly
affects the cash poor DRAM-Only segment that would face a 56% cost disadvantage if they
remain at the 32nm node, and a 26% disadvantage at the 22nm node when Samsung ramps
to a 15nm DRAM process.



                                                                                        36
The fixed cost required to build a 22nm facility is $6B, while a 15nm facility is expected to
be much higher. The high technology cost and increased price competitiveness may force
DRAM firms in both DRAM-Only and Diversified Semiconductor Products to leave the
market (Pajjuri, Heller, & Goodman, 2012).

II. E5. Firm’s Competitive Position
The “Great IT Shift” is changing DRAM needs from PC to the server and mobile DRAM
markets. Both smartphones and tablets are expected to exceed those of PCs and laptops by
500% in 2015, shifting DRAM demand from commodity to more specialized low power
mobile and highly reliable server components.

Micron’s Competitive Position
Micron has done well to gain share in the server DRAM space, but it lacks the technology
node and supply to cater the mobile market. Failing to enter the mobile DRAM market now
may lead to Hynix and Samsung forming a duopoly, which will lead to stronger, future
barriers to entry. Additionally, increased mobile DRAM demand is expected to cannibalize
demand in the PC market thus reducing Micron’s achievable market share. To enter the
mobile DRAM segment and remain competitive in the server segment, Micron will need to
develop an attractive mobile DRAM offering that would include greater capacity and to
move from its 48nm to a lower-power and cost competitive 32nm or below technology
node.

Elpida’s Competitive Position
Elpida has attempted to ride the paradigm IT spending shift from PCs to mobile devices. It
has developed a valued mobile DRAM product, but its capacity is still too heavily weighted
in the commodity PC DRAM space. With 17% overall share in the DRAM market Elpida will
also struggle to expand into both the higher ASP mobile and server segments unless it can
further expand its DRAM capacity.

Micron & Elpida
Micron’s acquisition of Elpida will enable Micron to compete in the growing mobile and
server 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
guaranteed offering of DRAM supply. With a more complete portfolio, Micron/Elpida will
be able to compete in both segments and offer bundled solutions using Elpida’s DRAM and
Micron’s NAND flash products.

II. F. Threats and Opportunities Analysis
Litigation
DRAM firms have increasingly faced lawsuits on patent infringement and price
manipulation. Patent litigation has primarily come from patent holding firms. These
litigations can significantly damage firms’ reputation, and represent a financial burden that
will adversely affect their bottom line (MarketLine, 2012).

Liquidity Crisis
With volatility in DRAM pricing affecting operational cash flow, these firms are increasingly
dependent on debt financing to continue their technology investments. The threat of
default within the European Union may freeze these firms access to credit.

Chinese Semiconductor Firms
The three DRAM strategic groups face the threat of Chinese firms entering this industry.
China’s manufacturing industry has grown due to favorable manufacturing conditions: low
labor costs, government support, and easy access to capital. This growth has been
dampened 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 considered
possible for Chinese firms to acquire both the required know-how and to eventually catch
up to the fast-paced DRAM industry (Park, 2012).

II. G. Summary of External Analysis
Overall, the DRAM industry has evolved into a mature industry with increased
consolidation and favorable barriers to entry for incumbents. All firms within the industry
compete 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 industry
and has incentivized incumbents to oversupply the market even further reducing profits.



                                                                                             38
Elpida and other firms within the “DRAM Only” strategic groups are especially vulnerable
to 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 buyer
power more favorably towards DRAM firms. These trends have shifted DRAM demand
more 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 firms
shifting towards a more favorable product mix emphasizing these segments which demand
a higher price premium.

Micron and other firms within the “Multiple Semiconductor Product” groups have also
increased their market value by building NAND flash that can be bundled with mobile
DRAM. Through Elpida’s merger, Micron will be positioned with a competitive portfolio
with strengths in higher premium mobile, server, and specialty segments. It will also
control over 25% of the total DRAM market capacity.



III. INTERNAL ANALYSIS
PART 1 – MICRON

III. A. Business Definition/Mission
Micron’s mission statement was best described by the CEO Mark Durcan in the press
release announcing Elpida’s acquisition: “We are creating the industry leading pure-play
memory company” (Micron, 2012). Micron strives to be the leader in memory products by
serving all memory needs of every customer. Micron’s strategic decisions and actions in
recent years confirm this statement. Unlike Samsung, Micron is not forward integrated, so
all of Micron’s capacity is available to its customers. It has also not diversified into other
semiconductor products, so all its efforts are geared towards improving its memory
products.

III. B. Management Style
Much of Micron’s organizational culture can be explained by its location in Boise, Idaho. In
its early days, Micron was a shoestring operation, funded by potato farmers and

                                                                                                 39
McDonald’s. Neither did it have the support of experienced venture capitalists, nor an
abundance of skilled workers to choose from, but it enjoyed lower costs for land, rent, and
labor. To this day, Micron is able to retain employees for long periods of time, due to lack
of 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 many
of them started at entry level positions in engineering or operations (Micron, 2012).

From interviews with employees (Employee1, 2012; Employee2, 2012) and reviews on
Glassdoor.com, Micron’s management style is highly centralized and dictated top-down
from the headquarters in Boise. The company is described by many reviewers as
conservative 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 hard
for outsiders to break into. In large part, promotions also depend on each individual’s
connections to that group of managers.

In general, reviewers on Glassdoor.com find the compensation package fair and
competitive relative to alternatives in the area. Micron also pays for employees’ schooling
and higher education, and matches 401K contributions. Manufacturing personnel work in
shifts 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 than
technicians, and describe Micron as a good company to start a career in and to gain
valuable experience. However, many others advise against staying long due to a lack of
clear career path and crippling office politics.

III. C. Organization Structure, Controls and Values

III. C1. Organizational Structure
Starting 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 in
PC/notebook, consumer electronics, server, and networking; 2) NAND Solutions Group – a
NAND 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
DRAM, NAND and NOR to customers in automotive, industrial, consumer electronics,
server, and networking; 4) Wireless Solutions Group – sells DRAM, NAND, and NOR to
customers in the mobile space (Micron, 2011). This structure is a partial separation from
the previous structure that was guided only by product line. The four BUs report to the
president, and each has its own sales and marketing team (Employee2, 2012).

Micron’s structure is a hybrid between the business oriented structure that was described
above and geographical/functional structure. There are two country managers, one in
Italy, following the acquisition of Numonyx, and one in Singapore, following the joint
venture with Intel. Functional areas such as human resources, legal, finance, and IT report
to the CEO.

As of August 2012, Micron had approximately 27,400 employees, of which 16,000 were
abroad, including 7,800 in Singapore, 3,400 in Italy, 2,200 in China, 1,100 in Israel and
1,000 in Malaysia (Micron, 2012).

III. C2. Organizational Controls
Micron’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 governance
issues: 1) The audit committee works with Micron and its independent auditors to monitor
the integrity of the company’s financial reports; 2) The governance committee nominates
and appoints board members and oversees director compensation, 3) The compensation
committee is responsible for monitoring executive compensation.

From the interview with a Senior Quality Director (Employee2, 2012), who has worked for
Micron for 29 years, we learned that performance reviews are done every six months. At
the same time, he referred to those reviews as pure formality, since it is not taken seriously
by either employees or managers. Interestingly, despite being a Quality Director, he was
not aware of quality control programs or training, although Micron’s website boasts itself
as a company widely dedicated to quality.

III. C3. Organizational Values
Innovation


                                                                                            41
Micron refers to its engineers as “dreamers” and “visionaries” and emphasizes its
innovation capabilities (Micron, 2012). Until 2007, Micron was among the top 10 patent
recipients 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 companies
whose technologies are salient to Micron’s strategic interests.

Integrity and Ethics
Micron continuously updates and reaffirms its ethics and compliance policies and practices.
Micron operates a dedicated compliance hotline where employees can anonymously report
violations of the company’s Code of Business Ethics. In addition, the Vice President of Legal
Affairs acts also as a Chief Compliance Officer. Training programs had been developed and
put in place regarding compliance and anti-bribery/corruption policies.

Environmental Policies
Micron 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 process
is lead-free and is able to offer “green” products to customers who ask for them. Green
products, according to Micron’s definition, adhere to standards of maximum trace amounts
of harmful materials, such as Chlorine and Bromine. Micron makes an effort to reduce its
water consumption and recycles 70-80% of the water that is used in its manufacturing
processes. An effort is also made to continuously reduce the amounts of chemicals that are
used in those processes.

Quality
Micron received its ISO 9001 certification back in 1994, and it since has been renewed
several times. Recently, the company made an effort to comply with the extended ISO
standard TS 16949, which details additional technical specifications and touches on supply
chain management, delivery standards, and environmental stewardship.

III. D. Strategic Position Definition

III. D1. Corporate Level
Business Portfolio


                                                                                          42
Micron’s core business is in memory products, which, in 2011, accounted for 95% of
Micron’s revenue. Within the memory business, DRAM accounted for 41% of revenue,
NAND for 36%, and NOR for 18% (Micron, 2011). Recently, however, as it can be seen
from the 2012 annual report, NAND sales (44% of revenue) surpassed DRAM sales (39% of
revenue), indicating a shift in customer demand.

The other 5% of Micron’s revenue comes from the company’s holdings in Aptina Imaging,
which develops and manufactures CMOS image sensors, and from sales of photomasks,
through a joint venture with Photronics Inc. by the name of M P Mask Technology Center.

Rumelt’s Classifications
As mentioned in Section II D3 – Primary Competitors’ Business Level and Corporate Level
Strategies, Micron is a related constrained corporation. This classification is derived by
Micron’s division into business units, each carrying strong ties with one another.

Acquisitions, Mergers, and Divestments
Micron has a rich history of growth by acquisitions which began in 1998 with the
acquisition of Texas Instruments’ (TI) memory operations. The most recent DRAM related
acquisition was in 2002, when Micron acquired Toshiba’s commodity DRAM operations.
To gain insight into Micron’s acquisition strategy, we examined the two most recent
acquisitions (Displaytech in 2009, and Numonyx in 2010), even though they are not DRAM
related.

Micron acquired Displaytech in May 2009 as part of its ongoing attempts to diversify the
company’s portfolio outside the core memory business. Displaytech developed and
produced tiny projectors, referred to as “microdisplays”, which enable a smartphone to act
like a projector (BusinessWeek, 2009). An analysis of this acquisition, as shown in Exhibit
11, shows that an equity alliance would have been a better strategic choice, mostly because
of uncertain market conditions. As an affirmation to this conclusion, in August 2012,
Micron sold its microdisplay business to a subsidiary of Citizen Japan (Citizen Finetech
Miyota Co., Ltd., 2012).

In February 2010, Micron acquired Numonyx B.V., a privately held flash-type memory chips
maker that was founded in 2008 by Intel, STMicroelectronics, and Francisco Partners. The


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Micron Acquisition of Elpida - Strategy Analysis

  • 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. TABLE OF CONTENTS I. 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 ......................................................................................................... 12 II. 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. 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 ........................................................................................... 38 III. INTERNAL ANALYSIS .....................................................................................................39 PART 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 ............................................................................................................... 45 PART 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. III. E. FINANCIAL ANALYSIS ............................................................................................................... 52 IV. 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 ........................................................................................................... 58 V. 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 ............................................................................................... 66 VI. CONCLUSIONS ................................................................................................................67 VII. BIBLIOGRAPHY ...............................................................................................................69 VIII. MAIN APPENDIX ..............................................................................................................76 IX. FINANCIAL BACKGROUND APPENDIX .......................................................................103 4
  • 5. LIST OF EXHIBITS EXHIBIT 1: DRAM INDUSTRY DIAGRAM .............................................................................................. 76 EXHIBIT 2: SIX FORCES ANALYSIS – LEVEL ONE ................................................................................ 76 EXHIBIT 3: DRAM CAPACITY AS A KEY REVENUE DRIVER ................................................................. 84 EXHIBIT 4: COST LEADERSHIP – SAMSUNG LEADING THE PACK ..................................................... 84 EXHIBIT 5: “THE GREAT IT SHIFT” – SMARTPHONES AND TABLETS OVERTAKE DESKTOPS AND NOTEBOOKS........................................................................................................................................ 85 EXHIBIT 6: GROWTH AND DRIVERS FOR GLOBAL DATA TRAFFIC MEASURED IN EXABYTES ......... 85 EXHIBIT 7: VRIO ANALYSIS ................................................................................................................. 86 EXHIBIT 8: VALUE DRIVERS AND VALUE ESTIMATIONS.................................................................... 88 EXHIBIT 9: VALUES, COSTS AND PRICES ........................................................................................... 89 EXHIBIT 10: PRIMARY COMPETITORS FINANCIAL RATIOS ................................................................ 91 EXHIBIT 11: ANALYSIS OF ACQUISITIONS .......................................................................................... 95 EXHIBIT 12: ANALYSIS OF PARTNERSHIPS ........................................................................................ 95 EXHIBIT 13: BCG MATRIX FOR MICRON .............................................................................................. 98 EXHIBIT 14: MICRON’S VALUE CHAIN................................................................................................. 98 EXHIBIT 15: ELPIDA’S ORGANIZATION CHART .................................................................................. 99 EXHIBIT 16: ELPIDA’S CORPORATE GOVERNANCE BODIES AND COMMITTEES .............................. 99 EXHIBIT 17: ELPIDA’S VALUE CHAIN ................................................................................................. 100 EXHIBIT 18: ALLY OR ACQUIRE FRAMEWORK FOR ELPIDA’S ACQUISITION .................................. 100 EXHIBIT 19: COMBINED COMPANY’S VALUE MINUS COST ............................................................. 101 EXHIBIT 20: COMBINED COMPANY’S VRIO ANALYSIS .................................................................... 102 EXHIBIT 21: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS MICRON .............................. 103 EXHIBIT 22: CAPEX AND R&D EXPENDITURES – INDUSTRY AVERAGE VERSUS MICRON .............. 103 EXHIBIT 23: MICRON’S STANDALONE VALUATION ......................................................................... 104 5
  • 6. EXHIBIT 24: MICRON’S GROWTH FORECAST ................................................................................... 105 EXHIBIT 25: MICRON’S GROWTH FORECAST FOR FCF COMPONENTS ........................................... 106 EXHIBIT 26: MICRON’S WACC CALCULATION ...................................................................................107 EXHIBIT 27: PROFITABILITY RATIOS – INDUSTRY AVERAGE VERSUS ELPIDA ................................ 109 EXHIBIT 28: ELPIDA’S STANDALONE VALUATION .......................................................................... 110 EXHIBIT 29: ELPIDA’S GROWTH FORECAST ...................................................................................... 111 EXHIBIT 30: ELPIDA’S GROWTH FORECAST FOR FCF COMPONENTS ............................................. 112 EXHIBIT 31: SENSITIVITY / REGRESSION ANALYSIS FOR ELPIDA’S STANDALONE VALUATION.... 112 EXHIBIT 32: “MOST LIKELY” SYNERGIES FROM ELPIDA’S ACQUISITION ........................................ 114 EXHIBIT 33: VALUATION OF SYNERGIES .......................................................................................... 114 EXHIBIT 34: COMBINED VALUATION – MOST LIKELY CASE SCENARIO ...........................................115 EXHIBIT 35: COMBINED VALUATION – BEST CASE SCENARIO ........................................................ 116 EXHIBIT 36: COMBINED VALUATION – WORST CASE SCENARIO.................................................... 116 EXHIBIT 37: SENSITIVITY/REGRESSION ANALYSIS OF THE COMBINED FIRM (MOST LIKELY CASE SCENARIO) .......................................................................................................................................... 117 EXHIBIT 38: FINANCIAL EFFECT OF SHORT-TERM REVISION IN PRODUCT MIX FOR YEAR 2013 ... 118 EXHIBIT 39: FINANCIAL EFFECT OF NOT ACHIEVING THE 15NM TECHNOLOGY NODE BY 2016.... 119 EXHIBIT 40: STACKELBERG GAME MODEL VS. COURNOT GAME MODEL...................................... 119 6
  • 7. I. WALL STREET JOURNAL ARTICLE AND EXECUTIVE SUMMARY I. A. Wall Street Journal Tech Micron's Purchase of Elpida Seen as Positive for Chip Industry By Juro Osawa And Lorraine Luk 735 words 3 July 2012 07:17 AM The Wall Street Journal Online WSJO English Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved. Micron Technology Inc.'s acquisition of Elpida Memory Inc. is good news for other major suppliers of computer memory chips in Asia, as industry consolidation will likely help ease the oversupply problem that has been plaguing the market for years. When Micron takes over the failed Japanese rival and streamlines its operations, the whole industry could benefit from more subdued supply and higher prices of dynamic random access memory, or DRAM, chips, analysts said. "Longer term, as the industry consolidates, we predict more rational supply behavior and hence higher and more stable profits for survivors," Sanford Bernstein analyst Mark Newman wrote in a report after Micron announced the $2.5 billion deal Monday. With the Elpida acquisition, Micron will overtake South Korea's SK Hynix Inc. to become the world's second-largest DRAM maker by revenue, behind another South Korean company, Samsung Electronics Co. DRAM chips are widely used in personal computers and mobile devices. While there are several smaller Taiwanese players, analysts expect the DRAM market to become increasingly dominated by Samsung, Micron and Hynix. Micron's deal, expected to close in the first half of next year, comes at a time many DRAM makers are trying to emerge from losses due to weak chip prices. After DRAM makers kept building capacity to increase or maintain market share, the sector became a market with few winners. As DRAM chips used in PCs have become highly commoditized and prices have remained weak in recent years, many players are struggling to make money. 7
  • 8. Elpida, Japan's only DRAM maker, filed for bankruptcy protection in late February after struggling to repay hefty debts amid falling chip prices and as the yen's strength eroded its overseas profits. Shortly after Elpida's collapse, DRAM prices rose on expectations for a tighter global supply. "The consolidation of the DRAM market set off by Elpida's bankruptcy and the subsequent purchase by Micron is bringing new stability to DRAM pricing," said Mike Howard, IHS iSuppli analyst, in a report. Thanks to more stable chip prices, the global DRAM industry's overall revenue is expected to rise 3.3% this year to $30.5 billion, after it plunged 25% last year, according to IHS iSuppli. Micron, which was selected as Elpida's potential financial sponsor in May, said Monday that it agreed to buy the Japanese company for $2.5 billion. Sanford Bernstein's Mr. Newman expects Micron to convert some of Elpida's DRAM facilities to produce NAND flash memory chips instead, while the U.S. company may also shut down the Japanese firm's least efficient facilities. This process, he said, would result in more subdued DRAM chip supplies. DRAM and NAND chips are different types of memory chips, and mobile devices such as smartphones use both. On Monday, Micron Chief Executive Mark Durcan declined to provide any details about converting Elpida's DRAM capacity to flash memory chips, but said it was something that Micron could do to address market demand. While the expected increase in Micron's global market presence could mean more challenges for rivals Samsung and Hynix, analysts say the South Korean companies are also well positioned to benefit from industry consolidation and more stable chip prices. Samsung and Hynix declined to comment on whether or how Micron's acquisition might affect them. By contrast, the environment remains tougher for Taiwanese players such as Nanya Technology Corp., Inotera Memories Inc., a joint venture between Micron and Nanya, and Winbond Electronics Corp. As Taiwanese players have few advantages against larger South Korean players, there may be more consolidation in Taiwan's DRAM industry over the next few years, analysts say. While more stable DRAM prices would be positive for Taiwanese players, too, their ability to take advantage of the improving environment is limited because they are already too far behind the first-tier players like Samsung and Hynix in terms of technology and market presence, said William Wong, an analyst at Taiwan's Fubon Securities. 8
  • 9. Nanya and Inotera declined to comment on their competitive environment or possibility of consolidation. Winbond couldn't 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] and Lorraine Luk at Dow Jones & Company, Inc. Document WSJO000020120703e873006el 9
  • 10. I. B. Executive Summary Micron Technology, Inc. (Micron) designs, manufactures, and sells semiconductor memory products of three main types – DRAM, NAND flash, and NOR flash. These products are used in multiple applications, such as PCs and notebooks, mobile devices, servers and consumer electronics, as well as in automobiles and medical devices. This paper focuses on the DRAM business, in which Micron is the only American-based company left. The other major players in this space are South Korean companies Samsung Electronics (Samsung) and SK Hynix (Hynix), and Japanese Elpida Memory, Inc. (Elpida). This paper focuses on Micron’s DRAM business. I. B1. Strategic Move In 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-free installments. Micron was already acting as Elpida’s financial sponsor since May 2012, a few months after Elpida filed for bankruptcy, in February 2012. This move will position Micron as the second largest memory company after Samsung. With the acquisition, Micron also gains significant presence in the mobile DRAM market where currently it is not a meaningful player. I. B2. Major Issues Industry: The DRAM industry is generally an unfavorable one, with intense rivalry and a trend of commoditization that makes it difficult for player to compete. The fact that incumbents 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 are above $6B, excluding R&D. At the same time, the Total Addressable Market (TAM) for DRAM products is estimated at only $25B. The intense technology race is currently slowed somewhat 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, any player that is not yet engaged in the efforts to go up to the next level will find itself in a disadvantage in 2-3 years. 10
  • 11. Competition: The industry is highly concentrated, with the above mentioned four companies representing 91% of the market. Samsung is the strongest competitor with two main factors that play to its advantage – forward integration into mobile devices and consumer electronics, and a positive feedback loop of investments in future technology that enable lower costs, higher margins, and better profits, which are, in turn, invested back in technology. Those factors help Samsung remain profitable even in the downturns of the semiconductor cycle. Hynix is the second largest competitor. Hynix experienced sharp swings in profitability in recent years, yet it currently holds a strong position with mobile devices manufacturers in China. Elpida is a DRAM-only company with the third largest market 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 the expenditures that were required to achieve that position burdened its debt level to the point of bankruptcy. Micron held the fourth largest market share in DRAM. It is positioned well in server and specialty DRAM, but lacks presence in mobile DRAM, which is the fastest growing and most profitable segment. In the current market dynamics, Samsung is the only 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 to create value by appealing to market niches. I. B3. Key Analysis Our analysis shows that acquiring Elpida is a good move for Micron. The acquisition successfully withstands various tests, such as “Ally or Acquire” and Porter’s three tests. In addition, 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 company standalone. The synergies are derived mainly from three areas: 1) Revenue – with Elpida’s mobile DRAM capabilities, we assume that Micron will ramp up production of mobile DRAM, thus increasing revenue of the combined company, 2) Cost of Goods – Elpida achieved a more advanced technology node than Micron. We assume that Micron will use the knowledge from Elpida to migrate its fabs to a higher node, thus improving its COGS (a higher node means more chips on each wafer, so the cost of each chip is lower) and profitability, and 3) Capital Expenditures – with the acquisition of Elpida, Micron is 11
  • 12. essentially buying two operational fabs at about a third of the cost of building one fab in the same technology node. From a Value Minus Cost perspective, the combined company offers higher value and improved costs over each company standalone. Micron was a negligible force in the mobile DRAM space, but, with the acquisition of Elpida, it strengthens its offering and inherits coveted customers. Micron can leverage its mobile offering further by bundling its NAND flash 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 Elpida offers. I. B4. Final Recommendation In 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 into Micron, to allow Micron the most control over Elpida’s operations, 2) Improve its product mix, preferably towards the more profitable mobile DRAM, and 3) Migrate Elpida’s advanced 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 break Samsung’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-exclusive alternatives: 1) A merger with Hynix, 2) Getting acquired by Apple, which has a strong incentive to limit Samsung’s growth, and 3) Develop the next generation of DRAM products together 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 required for the next technology node, and it can help Micron get better access to that critical resource. Intel will benefit from the partnership by limiting Samsung’s growth, and by making sure that it has the complementary DRAM needed for its Atom mobile processor. 12
  • 13. II. EXTERNAL ANALYSIS II. A. Industry Definition Micron competes directly in the Memory Chip & Module Manufacturing (“Memory”) industry (Hoover's, 2012). This industry is part of the broader Semiconductor and Related Device Manufacturing (NAICS: 334413) industry, where players engage in the manufacturing of semiconductor and related devices parts (IBISWorld, 2012). The Memory industry (see Exhibit 1) focuses primarily on the design and manufacturing of memory components with diverse applications in personal computers, networking, storage, mobile telecommunications and consumer electronics products. Given the nature of Elpida’s position in the specific DRAM market, this analysis will focus on the DRAM segment of the Memory industry. II. B. Six Forces Analysis II. B1. Level One Analysis Exhibit 2 contains a Level One Analysis for the DRAM industry. II. B2. Level Two Analysis Threat of Entry/Barriers to Entry The high fixed costs (time and money) are a large deterrent to market entry. A firm would require two years to build a facility and another one or two years to ramp memory production. This increasing cost is exceptionally prohibitive given the average DRAM TAM that has remained at about $25B since 2000 (Credit Agricole Securities, 2012). The combination of unpredictable long-term market developments and a tendency for the incumbent firms to oversupply the DRAM market is also a deterrent to market entry. The incumbent advantages owned by the largest four players span broad product portfolios covering various markets. These firms share their large patent portfolio over cross-licensing agreements, as well as form a linkage of intellectual property and know-how that a new firm would need to overcome if entering the market. Threat of Rivalry 13
  • 14. The DRAM industry is mature and highly concentrated (CR4 = 91%), and it is growing at a decreasing rate. In addition, firms employ similar technological processes to manufacture their 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. Those that are unable to maintain steady R&D and process investments are eventually pushed out by lower cost and more technologically advanced competition. Exhibit 4 identifies the constant race for firms to achieve cutting-edge cost process nodes in order to maintain a competitive variable cost structure. While each technology node reduces the variable costs per product the increasingly higher levels of investments raises the overall break-even point requiring the firm to sell even more DRAM memory. Despite the strong requirement to commoditize in the PC space, DRAM firms are seeking ways to differentiate within customer segments in order to raise Average Selling Prices (ASPs) and attract higher revenues. Threat of Suppliers/Supplier Power DRAM buyers are a small percentage (11.6%) of the total semiconductor buyer group. The CR1 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 to serve a large majority of the market in order to stay profitable, and creating high (and near impossible) switching costs for equipment buyers due to suppliers’ high concentration. DRAM firms typically require 3-4 years from developing their semiconductor process until production ramp up, further increasing their dependence on equipment availability and support from suppliers. Other forms of supply (labor, utilities, shipping, and financing) are considered easily attainable in most geographic locations; however, their impact is not considered to counter-weight the unfavorable forces of equipment suppliers. Threat of Buyers/Buyer Power PCs and Notebooks [40% Market Share]: PC and notebook manufacturers place the highest cost pressure on DRAM firms and face low switching costs due to standardized interfaces and low requirements for differentiation. A main driver for these firms is cost of goods given the low gross margins and low differentiation among computers and laptops. 14
  • 15. Mobile Devices (Tablets & Smart Phones) [20% Market Share]: Mobile tablets and smartphones are a growing segment with a medium level of concentration (CR4 = 58%). Mobile DRAM products are more differentiated, with mobile buyers valuing small size, low power, reliability, and ample manufacturing capacity. DRAM firms may reduce switching costs 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, low latency, and high reliability. Switching costs are slightly higher than in Mobile DRAM given the 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 of product costs is close to10%. Specialty Memory [5% Market Share]: The specialty memory market is believed to be the most attractive group given its high differentiation and relaxed focus on power consumption or size. These firms enable high switching costs by favoring DRAM products that are promised to be in production for long periods of time and are qualified for high reliability across increased temperature ranges. This market is thought to have high gross margins, leading to overall favorable buyer power conditions for this segment. Summary: Despite high concentration and general pressure placed on DRAM ASPs, the DRAM firms have found opportunities to raise switching costs based on differentiation that represents value to the various buyer groups. Threat of Substitutes New, non-volatile high speed memory technologies are in development, yet they have not reached a level of performance that can disrupt the DRAM industry. Micron has launched a version 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 in performance (speed and bandwidth) compared to DRAM. Role of Complements DRAM 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. CPUs in the form of both hardware and software redesign is beneficial to the DRAM industry. Also, while NAND itself has a low switching cost, memory firms that sell both types of memory (e.g. Samsung, Hynix, Micron) have developed low-profile high- performance multichip packaging (MCP) solutions that increase overall value in the mobile market. An unfavorable factor comes from the capabilities of NAND and CPU firms to have equipment and technology know-how to enter the DRAM market if industry conditions are to improve. II. B3. Level Three Analysis Force Affecting Profitability Strength Rank Threat of Rivalry Moderately Unfavorable 4.5 1 Barriers to Entry Favorable 1 2 Buyer Power Neutral 2.5 4 Supplier Power Unfavorable 5 3 Threat of Substitutes Moderately Favorable 2 6 Role of Complements Moderately Unfavorable 4 5 Overall Industry MODERATELY 4 N/A Attractiveness UNFAVORABLE DRAM firms face unfavorable forces through intense rivalry and threats from both supplier and complement groups. The incumbents continuously battle for high volume sales needed to generate the cash flow to fund an intense technology race. Further exacerbating this rivalry, from the equipment supplier side, is the low percentage (11.6%) of semiconductor equipment purchased by the DRAM industry as compared to other semiconductor industries, 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 and contain significant long-term market risk. In addition, many firms that create complementary products (e.g. CPUs) arguably possess know-how and semiconductor equipment required to move into the DRAM space. Given the higher profits obtained from these other products, it is clear that these firms are choosing to stay out of DRAM unless market conditions are to improve. DRAM firms have been able to improve traditionally low 16
  • 17. switching costs in three (mobile, server, specialty memory) of the four buyer groups through differentiating features or product strategies. II. C. Macro Environmental Forces Analysis, Economic Trends and Ethical Concerns II. C1. Global The Great IT Demand Shift Year 2011 was noted as the first year where mobile device shipments (552M) exceeded that of notebooks and PCs (365M), as identified in Exhibit 5. This cross-over point has been labeled “The Great IT Shift” noting a paradigm shift as consumer values change from high computing performance to long battery life and constant high-speed connectivity (Nomura Equity Research, 2012). Mobile devices are expected to continue their high growth to 1,800 million units in 2014 as compared to 600 million units for notebooks and PCs. DRAM production for 2012 has also accounted for this shift with computer DRAM production dropping below 50%. Explosion of Data Content The advent of social networking along with tablets and smart phones is leading a sharp increase in data traffic – from 200 EB (billion gigabytes) in 2001 to a projected 55,000 EB in 2013. This increase has driven demand for servers and server DRAM. Exhibit 6 identifies both the growth in traffic and notable events driving increased demand, including the advent of YouTube (2004), Facebook (2005), Android 2.0 mobile operating system (2009), iPad (2010), and Netflix Streaming over mobile devices (2011). Overall mobile traffic usage is growing as forecasted to a CAGR of 78% from 2011 to 2016 (CISCO, 2012). Shift Away from PC Development Microsoft’s Windows 8 release has disappointed the PC DRAM industry. Now centered towards a tablet platform, the new operating system will not require an increase above the current 2GB DRAM typically used in computers. This is a sharp contrast to the mid-1990s and early 2000s, when each new release of Windows required increased DRAM needs in PCs. 17
  • 18. II. C2. Social Social Media Social networks such as Facebook, Twitter and LinkedIn are training the younger generations to be permanently online and are driving the fast growth of gaming/video/texting-capable mobile terminals, i.e., smartphones and tablets. These devices require increasing amounts of DRAM to support their increasingly powerful processors, networking, and audio-visual chips. If social networking ever proves to be a fad, the growth rate of the memory industry will be affected. II. C3. Technological DRAM-to-NAND Flexibility Though 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 is converting its “Line 14” plant in Korea from 28 nm NAND to 28 nm Logic circuit manufacturing (Lapedus, 2012). Micron’s purchase of Elpida’s DRAM fabs in Japan and Singapore is not a pure DRAM play, since the fabs can always be converted to NAND or NOR production, albeit with some costs and down-time. Move Towards 450 mm (18”) Wafers The 300 mm (12”) wafer has ramped up now in newer foundries across the globe. The move to 450 mm wafers will be the core of planned or under-construction plants, expected to start production in 2017, at the earliest. Intel leads the investments, followed by GlobalFoundries and TSMC. 37% of wafers produced in 2012 are still 200 mm. This move is expected to lower the variable costs of memory production by 30-40%. (Pajjuri, Heller, & Goodman, 2012). Long Lead Time Manufacturers and designers typically plan their multi-billion dollar investments to target economic sweet spots 2-4 years in advance. Intel, GlobalFoundries, Samsung, and TSMC have made public 2015 plans for 14 nm process manufacturing. These plans depend on tools and technologies still under development, with no guarantee of their fruition or final 18
  • 19. wafers/hour or yield/wafer results. This high-risk nature of the field has been the case for decades and all players have got comfortable planning that far ahead. Intel’s Dominance Intel’s x86 CPUs are threatened by the emergence of ARM processors in mobile and tablet devices. Tablets are cannibalizing laptops/netbooks, and increased power of the cheaper low-power ARM processors will eventually threaten the x86 in PCs and servers. (Credit Agricole Securities, 2012) II. C4. Governmental/Political Local Generosity Semiconductor manufacturing is considered a matter of national security by many governments across the globe. It is also a creator of mass high-paying jobs where foundries are located. Generous tax and credit support is furnished by governments to lure manufacturers to build their foundries locally. For example, NY State has committed more than $1.2B in cash and tax breaks to GlobalFoundries (spin-off of AMD) to build a research and manufacturing facility at Luther Forest Technology Campus (Kerr, 2011). Companies typically auction their future plans to squeeze the most generous support from competing states/regions. Hynix was bailed out by the Korean government in 2001, without serious legal challenges from its competitors. Need for Lobbying Anti-trust lawsuits, anti-dumping policies, and penalties for collusion vary from one country and government to another. The solar industry just witnessed a big win for American manufacturers against their Chinese counterparts that were long known to be flooding the market – aided with different forms of Chinese government subsidies – leading to huge tariffs and shifts in the market. Similar incidents has happened in the memory industry – Chinese dumping of DRAM in the 1980s – forcing current players to be involved in lobbying and political campaigns, and to diversify their plant locations and suppliers. Chinese Politics Concentration of manufacturing in China is exposing the whole supply-chain to any political instability in China. Foxconn, a contract manufacturer of electronics that employs 19
  • 20. 1.2 million in China, was heavily criticized by labor groups in 2010 after several workers jumped to their death (Lorraine, 2012). Deceleration of Chinese GDP growth to 7.8% is adding more risk to the industry, and might potentially cost the survival of less diversified manufacturers. II. C5. Ethical Environmental Pollution Semiconductor industry is a major contributor to environmental pollution in a number of ways. 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 in landfills. The rise of solar power has accelerated the growth of silicon recycling technologies that recover gold and other expensive and toxic elements from obsolete chips, while using re-processed silicon for use in solar panels. Inhumane Recycling The silicon scrapping and recycling industry, while beneficial to the environment, is now being scrutinized for its own dependence on “e-waste” export to poor countries like India and Nigeria, where labor is heavily supplied by children in dangerous facilities. The West is turning more towards local e-waste management. For instance, the “Electronic Waste Recycling Act”, in effect in California since 2003, requires consumers to pay a recycling fee for certain types of electronics. This added fee is redirected to qualified companies that recycle 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 of California, 2012). Water Consumption A foundry consumes pure water (for rinsing chemicals) corresponding to a small city of 40,000 to 50,000 inhabitants. New technologies are emerging to minimize the need for pure water (Yan, Dhane, Vermeire, & Shadman, 2009), thus having less impact on the environment. Technology is allowing less environmental impact for semiconductor manufacturing, in return for slightly higher COGS. Micron and most of its competitors 20
  • 21. acknowledge the increasing costs to meet the environmental regulations and laws related to health and safety. II. C6. Macroeconomic Trends Shaky Economic Recovery By Q2 2012, the U.S. economy is growing at a 1.3% rate, barely recovering from the 2008 Great Recession. Europe is still unable to convince its members to forfeit their fiscal sovereignty – a needed step before bailing out its weaker economies. Growth in China has slowed down to 7.8% and the world is worried about another credit bubble busting in Chinese construction loans. The world’s central bankers are running out of ammunition after 4 years of credit easing, while governments will be forced to tighten their budgets to avoid credit downgrading. The world economy is unstable, directly affecting the overall demand for consumer electronics, and, consequently, the demand for DRAM products. Made in Asia With Asia fast becoming the world’s factory, semiconductor and electronics manufacturing ecosystems are creating barriers to entry in other regions of the world. Supply chain Asian dominance is exposing the market to shocks. For example, the supply of NAND Solid-State Drives was directly affected by the flood that hit Thailand (where half of the HDD parts are manufactured) in 2011 (Deloitte, 2012). Similarly, the Tsunami in Japan offered another example of supply disruptions caused by concentration of suppliers in that region. II. C7. Demographic Trends With the fast aging of the Asian Tigers, the demographic dividend enjoyed by the current centers of semiconductor manufacturing will run out. China’s median age is expected to grow 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 Analysis II. D1. Firm’s Competitors 21
  • 22. The DRAM industry has consolidated from around twenty players in the first half of the 1990s to eight players (four major and four minor) in 2012 (Nomura Equity Research, 2012). The four major companies – namely, Samsung, Hynix, Elpida, and Micron – supplied 85% of DRAM products globally in 2011, and this number expected to grow to 91% in 2012. 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%, and Micron’s was 9%. In 2012, Hynix and Micron are expected to increase their market share to 27% and 11% respectively, taking market share away from the smaller players – Nanya Technology Corp. (Nanya), Powerchip Technology Corp. (Powerchip), Winbond Electronics Corp. (Winbond), and ProMOS Technologies (ProMOS). ProMOS is expected to exit the DRAM 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% (Nomura Equity Research, 2012). II. D2. Primary Competitors As indicated above, Samsung, Hynix, and Elpida represent the three primary competitors of Micron in the DRAM market. All three companies and Micron itself will be included in the analysis of competitors below. Samsung Samsung is a major player in two main business areas: 1) Consumer Electronics (referred to 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 variety of 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 country in 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 process design at the same time, helping the company achieve shorter product life cycles and shorter time to market. As a result, it gained higher profits by being first to market and 22
  • 23. improved costs faster than competitors (Woojai Kim, 2004). This capability plays to Samsung’s benefit to this day. In 2011, Samsung’s market share in DRAM was 37%. The company is forward integrated, which means that its semiconductors products are components in its consumer electronics products. In that same year, 48% of the semiconductors that were manufactured by Samsung were used in-house (Samsung, 2011). Hynix Hynix was founded in 1983 as “Hyundai Electronics Industries”, the electronics arm of the Hyundai conglomerate. In 1999, it acquired LG Semicon (the semiconductor unit of LG Group) and created a meaningful force in the memory market. In 2001, the company disaffiliated 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 part of SK group and giving it a much needed injection of capital, after more than a decade of financial woos and swings from profits to losses. Hynix develops, manufactures, and sells memory products in the DRAM and NAND markets. It is the second largest manufacturer of DRAM products with 22% market share in 2011, a share that is expected to grow to 27% in 2012 (Nomura Equity Research, 2012). Elpida Elpida was founded in 1999 by combining the DRAM units of electronics giants NEC and Hitachi. In 2003, Elpida acquired the DRAM operations from Mitsubishi Electric Corp. The firm specializes in the manufacturing of DRAM products and, as of 2011, holds 18% market share, only behind Samsung and Hynix (Nomura Equity Research, 2012). Elpida is known for its advanced process engineering capabilities, which has allowed the company to skip technology generations from 60nm DRAM to 40nm and to spearhead the move to 30nm DRAM. However, the combination of volatile DRAM prices, lack of product diversity, and huge R&D and capital investments brought the company to declare bankruptcy in February 2012. Micron Micron 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. McDonald’s. In the 1980s, when Japanese manufacturers were dumping chips on the U.S. to gain market share, Micron filed an antidumping petition, which resulted in the Semiconductor 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, but the deal was not approved by Hynix’s directors. Over the years, Micron has made a few attempts to diversify its portfolio – it had a PC business from 1995 to 2001, it had a flat panel display division for a few years, and it developed and manufactured CMOS image sensors with the acquisition of Photobit. Micron spun-off the imaging business in 2008. All those years, however, memory products remained as a core business (Hoover's, 2012). In 2006, Micron diversified its memory offerings by entering into a joint venture with Intel to develop 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 share is expected to grow to 11% in 2012 (Nomura Equity Research, 2012). DRAM was Micron’s best selling product for many years. In 2012, for the first time, NAND sales outpaced DRAM sales (Micron, 2012). II. D3. Primary Competitors’ Business Level and Corporate Level Strategies Corporate Level Strategy The corporate level strategy of each firm was determined based on an analysis of the level of granularity observed in the memory market. It was concluded that, although DRAM products can belong to different segments, they are often grouped under a single business unit. Samsung: Samsung breaks down its revenue by product-based operating segments which include Digital Media, Telecommunication, Semiconductor, and LCD. In 2011, Digital Media accounted 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 strong synergy between our set and component business areas” (Samsung, 2011). Samsung, 24
  • 25. therefore, can be classified as a related constrained corporation under Rumelt’s classification. 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 related constrained 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 DRAM representing 39% of sales in 2012, NAND with 44% and NOR with 12%, Micron qualifies to the definition of a related constrained corporation. Business Level Strategy The business level strategy of the DRAM business of each competitor was determined based on the characteristics of the different DRAM products, which were combined under four segments: 1) PC/Notebook DRAM: DRAM chips used in PCs and notebooks are considered commoditized. Any PC manufacturer can buy PC DRAM from any DRAM supplier and there will be no apparent difference in quality, operational and technical specifications. 2) Mobile DRAM: Smartphone and tablet companies (such as Apple and Motorola) require that the DRAM used in their devices will be smaller in size and will consume less power than PC DRAM. A DRAM firm that wishes to supply mobile DRAM must be able to comply with different power requirements from different customers. 3) Server DRAM: Server companies (such as HP and IBM) require higher quality standards and 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 in consumer electronics and appliances, automotive applications, and medical applications. 25
  • 26. Another important factor in the analysis is that DRAM prices are determined by market forces, and a single supplier has no power of price differentiation. On top of that, a company that achieves economies of scale will not typically transfer the cost reduction to the DRAM buyer, as this will erode its margins very quickly given that prices are in constant decline. In light of the above segmentation and pricing scheme, it was concluded that all DRAM companies are employing a differentiation strategy (as opposed to low cost) according to Porter’s generic business level strategies. In addition, all firms have characteristics of broad differentiation in the PC DRAM business, and of focused differentiation in the other DRAM segments. Because no single company supplies only one type of DRAM, all competitors employ a hybrid business level strategy. II. D4. How Competitors Achieve their Strategic Position Exhibit 7 presents a complete VRIO analysis of the four players. Following are the main findings from the analysis. Samsung Since 1994, Samsung has been the global leading supplier of DRAM products. Samsung’s sustainable leadership stems from two primary factors: 1) a positive feedback loop, from earnings to R&D to sales and back to earnings, and 2) vertical integration. Positive Feedback Loop: Samsung entered the semiconductor business in the early 1980s when it injected $100 million into developing its first DRAM product. It then acquired technology from outside the company, and embarked on a rapid learning process that resulted in outstanding product design and process design capabilities, and, ultimately, leading to advanced, high-quality DRAM products (Woojai Kim, 2004). This learning capability, driven by injections of capital, is what keeps the company’s leadership position to this day. In the last twenty years, Samsung has consistently been the first DRAM company to invest in the next technology node. This fact enables Samsung not only to be the first to market with the new technology, but also to achieve production efficiencies and improved yields before its competitors. As a result, Samsung has enjoyed higher margins 26
  • 27. than competitors and greater profitability. Those profits are then invested back in R&D and capital expenditures, and the positive feedback loop continues. Vertical Integration: Overall, semiconductor companies (including DRAM companies) face a multidimensional capacity planning problem. In the short term, they have to decide their DRAM product mix, i.e., how many wafers to manufacture for each DRAM type. In the medium 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 decide whether 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 two years for the fab to be fully functional. All these decisions have to be made in a highly uncertain and volatile environment. Vertical integration gives Samsung an edge over other competitors by making known some of the unknown – information about demand, future market requirements, and product mix is readily available from in-house customers. Because those internal customers are leaders in their respective markets, Samsung is on the right track to keep its technological leadership. Hynix Hynix is the second largest manufacturer of DRAM products, but in recent years it was not profitable. The company experienced profitability and liquidity problems in the past and was bailed out by the Korean government in 2001. Recently, in a strategic move that seems to 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 (SK Hynix, 2012). However, our VRIO analysis shows that Hynix does not currently hold a sustainable competitive advantage. Elpida Elpida continues a long standing Japanese tradition of delivering high quality products to customers. The company has a strong presence in the mobile DRAM space, with a reputation 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 highly valuable. However, none of its resources and capabilities provides the company with a sustainable competitive advantage. 27
  • 28. Micron Micron was able to survive in the DRAM market through acquisitions and strategic alliances that allowed it to diversify within the memory market and enhance its technological capabilities. Currently, however, Micron is at a disadvantage compared to its competitors in the mobile DRAM space, mainly because it did not upgrade its technology to be on par with new mobile requirements. Ironically, Micron’s sustainable competitive advantage 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”, in which it guarantees to make products available for at least ten years. This value proposition is appealing to many customers in the automotive, industrial, medical, and aerospace industries. The Product Longevity Program is part of Micron’s focus on specialty DRAM, which carries higher margins. II. D5. Value Minus Cost Analysis Value Exhibit 8 shows a list of value drivers by segment and assigns scores to the primary players across 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 received similar value scores. Mobile DRAM: In mobile DRAM, important value drivers include power, size, as well as guaranteed supply, given the high growth rate this industry is experiencing. In this segment, Elpida provides the highest value among competitors due to its strong reputation for supplying low power, high quality DRAM products. One of Elpida’s most coveted assets is its relationship with Apple, while its lacking capability is in bundling. Many mobile manufacturers are starting to use packages that bundle DRAM and NAND. Elpida does not have a NAND operation, hence is not able to bundle. Micron scored low on mobile because it is on an older technological node than its competitors, and is not able to meet the power and speed requirements of mobile customers. Samsung and Hynix received similar value scores. The fact that Samsung is forward integrated is affecting its score on guaranteed 28
  • 29. capacity, under the assumption that its in-house needs will get higher priority over other customers in times of shortage. Server DRAM: Micron has only two competitors in the server DRAM space, since Elpida does 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 on DRAM’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 DRAM chip, and so far has developed good relationships with important customers, such as HP and IBM (Employee1, 2012) (Employee1, 2012). Specialty: All of Micron’s competitors scored 50% lower on specialty DRAM. A few years ago, Micron made a strategic decision to go after the smaller, but higher margin segment of specialty DRAM. This segment is comprised of customers with a unique requirement: to keep product life cycles longer than those typical of PC or mobile applications. For example, a DRAM used in a car computer can last ten years before the car company changes the design of its computer. Micron has developed the capability to answer this specific need, focusing primarily on automotive and industrial applications, as well as consumer electronics. Price DRAM ASPs are in constant decline. Specifically, between 2007 and 2008 prices took a dive because of oversupply in the market, and then continued to decrease because of the economic 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 DRAM firms sell their products for the same prices, whether it is by contract or by occasional sales. The differentiation in prices comes from the segmentation according to the DRAM usage. PC/Notebook DRAM carry the lowest price. Mobile DRAM enjoys a 2.5x multiplier above PC DRAM, Server DRAM enjoys a premium of 2x, and specialty DRAM carries a premium of 1.5x. 29
  • 30. Cost The prohibitively high fixed costs that are required to build a fab were discussed in Section II B – Six Forces Analysis. For the Value Minus Cost analysis, only variable costs were considered. These costs are largely dependent on the technological node the company has achieved. Historically, each new technology node, named after the line width that the lithography process was able to achieve, such as 60nm or 40nm, enabled doubling the number of transistors on a wafer. This resulted in reduced cost per transistor. The cost reduction was not reduced to half because of low initial yields. As the manufacturer increased its yields, margins improved. To determine the cost for each competitor, the node each one achieved for each of the DRAM 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 the next node before its competitors. Micron and Hynix, both on older technology nodes, suffer currently from a cost disadvantage. Elpida has already achieved the 2x nm technology, but its production mix in 2011 was mostly PC DRAM, for which margins are close to zero. Summary of Value Minus Cost Analysis Because prices are the same for all competitors in all DRAM segments, advantages or disadvantages originate from the value that the company is capable of delivering to customers, as well as from costs. Following is a summary of each competitor’s position in the V-C framework. Samsung: Samsung enjoys cost advantages across the board and is the only company that turns a profit even in the low periods of the DRAM cycle. Samsung delivers comparable value to Hynix in the mobile and server DRAM. Overall, Samsung’s power comes from its ability 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 comparable values in PC/Notebook, mobile, and server DRAM. 30
  • 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 mobile and specialty DRAM. However, it delivers more value than competitors in the server and specialty segments. Micron is behind its competitors in the lucrative mobile DRAM segment. To stay competitive, it will have to catch up. II. D6. Comparative Financial Analysis Exhibit 10 provides the financial ratios for the four firms under analysis. The financials ratios are not specific to the DRAM market; instead, they reflect the overall company’s business. For example, Samsung is well diversified and the financials include data for all of its divisions. Samsung and Hynix have their fiscal year ending in December while Micron’s fiscal year ends in September and Elpida’s ends in March. No financial data for Elpida was available 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 by Micron, Hynix and Elpida in that order. Profitability Samsung has the best profitability among the competitors. It has a consistently high gross margin and is the only competitor that earned a profit in each of the past five years. Its strong performance is attributed to the diversified corporate portfolio, where profits in other business units cover for losses in the semiconductor business. Elpida presented the worst profitability. In 2008 and 2011, its gross margin was negative and it suffered heavy losses. Micron and Hynix both presented uneven performance, but, in 2011, Micron was more profitable than Hynix. Liquidity Micron has the best liquidity ratios in the industry, thanks to low levels of current liabilities achieved by maintaining a high level of cash & equivalents, and a 60 days turnover on accounts receivable. Samsung is also in a healthy position in respect to its current liabilities. 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. $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. Leverage Samsung has the lowest leverage in the industry. Its debt to equity ratio was at 0.53 for 2011. Micron’s debt to equity ratio shows a well-balanced leverage. Hynix has a much higher 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 for bankruptcy with $5.6B in liabilities. This was the largest ever bankruptcy by a Japanese manufacturer (Reuters, 2012). Efficiency Micron is the least efficient competitor. Its inventory turnover indicates the highest inventory levels and its days sales outstanding indicate that its customers consistently get 60 days payment terms. Elpida’s payment collection is slightly better than Micron’s in most years. Hynix was able to outperform Samsung in some years in its turnover and DSO ratios. Capital Expenditures Competitors in the DRAM market watch each other carefully for evidence of increased capital expenditure, as those expenditures indicate a strategic move into newer technology nodes. For this reason, some companies do not disclose capital expenditures in their financial 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 the downturn (2008 and 2009), Elpida significantly increased its capital expenditures, while other competitors contracted. Because revenues in these years were low, Elpida had to finance its expenditures with debt instruments, which eventually brought it to bankruptcy in the beginning of 2012. Another interesting fact is that none of the competitors ramped up its capital expenditures to 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. In the current competitive dynamics, Hynix, Elpida, and Micron are all playing catch-up to Samsung, which is the strongest player in the market in all aspects – market share, technological capabilities, and financial position. However, the technological gaps are expected to shrink in the medium range of 2-3 years, because the equipment required to go up to the next node is not mature enough yet (see Section II E4 – Competitive Dynamics below). This can give all players an opportunity to level the playing field, given that they make the required investments. Elpida’s bankruptcy creates expectations for further industry consolidation. This can contribute to less oversupply and more stable prices, a fact that will help the remaining companies strengthen their position. Differentiation in this market is very challenging and all the players are trying to find niches where they can add value, like Micron in Specialty DRAM, and Hynix in the Chinese mobile market. Those positions, however, are fragile, and may not add significantly to the company’s economic contribution, so all players have to be able to also supply the mass market. II. E. Intra-Industry Analysis II. E1. Industry Evolution and Formation of Strategic Groups DRAM’s original growth was fostered by investments from the U.S. defense industry and cold war efforts. From the 1970s until the early ‘80s, the DRAM industry was dominated by Intel, Micron, and seven other U.S. firms. Japanese firms later entered in the late 1980s and early 1990s, outcompeting the U.S. firms with better patterns of investments and a close relationship with their consumer customers in Japan. The majority of the U.S. firms were forced 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 market and closely followed changes in PC sales. While the market showed an average $7B in sales in the early 1990s, it grew to an average $25B in the second half of the 1990s with two peaks in 1995 ($42B) and 2000 ($32B) driven by new releases of the Windows operating system which required increased computer DRAM and drove PC upgrades. 33
  • 34. Korean memory firms successfully captured the peak of this boom in 1995, earning a total of $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 fabrication facilities (Mark & Ma, 2002). With a leading edge fabrication facility costing $500M to build, 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 and Winbond, to enter the DRAM market, maintaining a total of 24 firms and offsetting the loss of U.S. firms exiting the industry. The entrance of these new firms grew DRAM supply to exceed demand leading to high levels of inventory and oversupply when the market crashed in 2001 (Mark & Ma, 2002). From the mid to late 1990s, the cost of competitive DRAM facilities jumped from $500M to over $2B, while the TAM stayed on average at $25B since year 2000. The higher costs led to 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 Groups DRAM-Only Firms The DRAM-only strategic group includes Elpida, Inotera, and Nanya. These firms have less cash 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 DRAM product where as Inotera and Nanya are one to two generations behind in technology development. Diversified Semiconductor Suppliers This group began to emerge in 2004 with Micron, Hynix, and Samsung presenting their first NAND flash products. Their portfolios now include two or more of the following: NAND 34
  • 35. flash, NOR flash, CMOS image sensors, logic design, or end consumer products. The increased diversity in product portfolios can enable a more stable operating margin. Cash flow can also be generated from other semiconductor operations to pursue DRAM process development and capital investments. This strategic group can also utilize MCP solutions to sell bundled solutions (e.g. Micron’s Memory Cube), increasing both customer value and resulting ASP. Forward Integrated Suppliers The group is comprised of a single firm – Samsung – that has forward integrated into numerous consumer products including smartphones, tablets, and laptops. Samsung is able to closely align its DRAM development, including product and capacity planning, with its consumer products. Similar to the “Diversified Semiconductor Group”, operational cash flow generated from other business units can be invested into DRAM capital investment and R&D spending. II. E3. Mobility Barriers, Threats and Opportunities Mobility Barriers DRAM-Only and Diversified Semiconductor Supplier: The high cost of R&D and capital spending is a barrier for DRAM-Only suppliers to expand their semiconductor portfolio into other products, such as NAND flash or CMOS image sensors. Micron had successfully gained a competitive standing in NAND through a co-development agreement with Intel starting in 2006. Micron’s shared cost for this arrangement was $1.4B which is still significant for cash-poor members of the DRAM Only group (Micron, 2012). Moving into the “Forward Integrated Supplier” Group: Recent buyer sentiment has shown that Samsung’s forward integration has hurt its relationship within the mobile and server buyer groups. For example, Apple has recently announced that it is cutting back Samsung’s share in its product line after a recent copyright trial (Ilbo, 2012). Apple’s share of the mobile 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 with Samsung for fear that any collaboration weakens Samsung’s barrier to entry into server products. Samsung’s forward integration therefore requires it not only to have cost- 35
  • 36. competitive DRAM products, but also to maintain competitive smart phone and tablet offerings to overcome lost revenue opportunities (Vilches, 2012; Alexander, 2012). Threats ASP Volatility in PC and Mobile Market: Vendors in the DRAM-Only group are more sensitive to falling PC DRAM ASPs. Both Nanya and Inotera posted a 90% loss in gross margins due to DRAM demands. They have also had higher fixed costs due to producing DRAM on older technology nodes. Inventory shifts in DRAM supply may buoy PC DRAM ASPs, as firms in the Diversified Semiconductor Suppliers group (Hynix and Micron) shift their production away from PC DRAM. The increased mobile DRAM supply of 9% in 2011 to 15% in 2012 of total supply may erode the 2-3x ASP premium commanded for this product (Nomura Equity Research, 2012). II. E4. Competitive Dynamics Cross-Licensing Agreements for All Strategic Groups: Micron received a net $160M from cross-licensing agreements with Samsung during the 2012FY, with as much as $115M attributed to DRAM intellectual property. Large firms within all buying groups are thought to demand dual-sourcing for all components forcing memory firms to license any product differentiator before that product is brought to market (MarketLine, 2012). Technology Migration: Extreme Ultraviolet Lithography (EUV) equipment is expected to delay a move to the 15nm node. (Trendforce, 2012) This delay is expected to allow members of the Diversified Semiconductor Suppliers group (Micron, Hynix) to catch up to Samsung in 2013 and 2014, narrowing Samsung’s cost-advantage. For example, while Hynix’s cost per gigabyte was 16% higher than that of Samsungs in 2011, this gap is expected to narrow to 3% in 2012 and forecasted to reach parity in 2013. This opportunity may be short-lived as Samsung is heavily investing in EUV equipment. This threat greatly affects the cash poor DRAM-Only segment that would face a 56% cost disadvantage if they remain at the 32nm node, and a 26% disadvantage at the 22nm node when Samsung ramps to a 15nm DRAM process. 36
  • 37. The fixed cost required to build a 22nm facility is $6B, while a 15nm facility is expected to be much higher. The high technology cost and increased price competitiveness may force DRAM firms in both DRAM-Only and Diversified Semiconductor Products to leave the market (Pajjuri, Heller, & Goodman, 2012). II. E5. Firm’s Competitive Position The “Great IT Shift” is changing DRAM needs from PC to the server and mobile DRAM markets. Both smartphones and tablets are expected to exceed those of PCs and laptops by 500% in 2015, shifting DRAM demand from commodity to more specialized low power mobile and highly reliable server components. Micron’s Competitive Position Micron has done well to gain share in the server DRAM space, but it lacks the technology node and supply to cater the mobile market. Failing to enter the mobile DRAM market now may lead to Hynix and Samsung forming a duopoly, which will lead to stronger, future barriers to entry. Additionally, increased mobile DRAM demand is expected to cannibalize demand in the PC market thus reducing Micron’s achievable market share. To enter the mobile DRAM segment and remain competitive in the server segment, Micron will need to develop an attractive mobile DRAM offering that would include greater capacity and to move from its 48nm to a lower-power and cost competitive 32nm or below technology node. Elpida’s Competitive Position Elpida has attempted to ride the paradigm IT spending shift from PCs to mobile devices. It has developed a valued mobile DRAM product, but its capacity is still too heavily weighted in the commodity PC DRAM space. With 17% overall share in the DRAM market Elpida will also struggle to expand into both the higher ASP mobile and server segments unless it can further expand its DRAM capacity. Micron & Elpida Micron’s acquisition of Elpida will enable Micron to compete in the growing mobile and server 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. guaranteed offering of DRAM supply. With a more complete portfolio, Micron/Elpida will be able to compete in both segments and offer bundled solutions using Elpida’s DRAM and Micron’s NAND flash products. II. F. Threats and Opportunities Analysis Litigation DRAM firms have increasingly faced lawsuits on patent infringement and price manipulation. Patent litigation has primarily come from patent holding firms. These litigations can significantly damage firms’ reputation, and represent a financial burden that will adversely affect their bottom line (MarketLine, 2012). Liquidity Crisis With volatility in DRAM pricing affecting operational cash flow, these firms are increasingly dependent on debt financing to continue their technology investments. The threat of default within the European Union may freeze these firms access to credit. Chinese Semiconductor Firms The three DRAM strategic groups face the threat of Chinese firms entering this industry. China’s manufacturing industry has grown due to favorable manufacturing conditions: low labor costs, government support, and easy access to capital. This growth has been dampened 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 considered possible for Chinese firms to acquire both the required know-how and to eventually catch up to the fast-paced DRAM industry (Park, 2012). II. G. Summary of External Analysis Overall, the DRAM industry has evolved into a mature industry with increased consolidation and favorable barriers to entry for incumbents. All firms within the industry compete 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 industry and has incentivized incumbents to oversupply the market even further reducing profits. 38
  • 39. Elpida and other firms within the “DRAM Only” strategic groups are especially vulnerable to 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 buyer power more favorably towards DRAM firms. These trends have shifted DRAM demand more 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 firms shifting towards a more favorable product mix emphasizing these segments which demand a higher price premium. Micron and other firms within the “Multiple Semiconductor Product” groups have also increased their market value by building NAND flash that can be bundled with mobile DRAM. Through Elpida’s merger, Micron will be positioned with a competitive portfolio with strengths in higher premium mobile, server, and specialty segments. It will also control over 25% of the total DRAM market capacity. III. INTERNAL ANALYSIS PART 1 – MICRON III. A. Business Definition/Mission Micron’s mission statement was best described by the CEO Mark Durcan in the press release announcing Elpida’s acquisition: “We are creating the industry leading pure-play memory company” (Micron, 2012). Micron strives to be the leader in memory products by serving all memory needs of every customer. Micron’s strategic decisions and actions in recent years confirm this statement. Unlike Samsung, Micron is not forward integrated, so all of Micron’s capacity is available to its customers. It has also not diversified into other semiconductor products, so all its efforts are geared towards improving its memory products. III. B. Management Style Much of Micron’s organizational culture can be explained by its location in Boise, Idaho. In its early days, Micron was a shoestring operation, funded by potato farmers and 39
  • 40. McDonald’s. Neither did it have the support of experienced venture capitalists, nor an abundance of skilled workers to choose from, but it enjoyed lower costs for land, rent, and labor. To this day, Micron is able to retain employees for long periods of time, due to lack of 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 many of them started at entry level positions in engineering or operations (Micron, 2012). From interviews with employees (Employee1, 2012; Employee2, 2012) and reviews on Glassdoor.com, Micron’s management style is highly centralized and dictated top-down from the headquarters in Boise. The company is described by many reviewers as conservative 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 hard for outsiders to break into. In large part, promotions also depend on each individual’s connections to that group of managers. In general, reviewers on Glassdoor.com find the compensation package fair and competitive relative to alternatives in the area. Micron also pays for employees’ schooling and higher education, and matches 401K contributions. Manufacturing personnel work in shifts 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 than technicians, and describe Micron as a good company to start a career in and to gain valuable experience. However, many others advise against staying long due to a lack of clear career path and crippling office politics. III. C. Organization Structure, Controls and Values III. C1. Organizational Structure Starting 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 in PC/notebook, consumer electronics, server, and networking; 2) NAND Solutions Group – a NAND 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. DRAM, NAND and NOR to customers in automotive, industrial, consumer electronics, server, and networking; 4) Wireless Solutions Group – sells DRAM, NAND, and NOR to customers in the mobile space (Micron, 2011). This structure is a partial separation from the previous structure that was guided only by product line. The four BUs report to the president, and each has its own sales and marketing team (Employee2, 2012). Micron’s structure is a hybrid between the business oriented structure that was described above and geographical/functional structure. There are two country managers, one in Italy, following the acquisition of Numonyx, and one in Singapore, following the joint venture with Intel. Functional areas such as human resources, legal, finance, and IT report to the CEO. As of August 2012, Micron had approximately 27,400 employees, of which 16,000 were abroad, including 7,800 in Singapore, 3,400 in Italy, 2,200 in China, 1,100 in Israel and 1,000 in Malaysia (Micron, 2012). III. C2. Organizational Controls Micron’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 governance issues: 1) The audit committee works with Micron and its independent auditors to monitor the integrity of the company’s financial reports; 2) The governance committee nominates and appoints board members and oversees director compensation, 3) The compensation committee is responsible for monitoring executive compensation. From the interview with a Senior Quality Director (Employee2, 2012), who has worked for Micron for 29 years, we learned that performance reviews are done every six months. At the same time, he referred to those reviews as pure formality, since it is not taken seriously by either employees or managers. Interestingly, despite being a Quality Director, he was not aware of quality control programs or training, although Micron’s website boasts itself as a company widely dedicated to quality. III. C3. Organizational Values Innovation 41
  • 42. Micron refers to its engineers as “dreamers” and “visionaries” and emphasizes its innovation capabilities (Micron, 2012). Until 2007, Micron was among the top 10 patent recipients 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 companies whose technologies are salient to Micron’s strategic interests. Integrity and Ethics Micron continuously updates and reaffirms its ethics and compliance policies and practices. Micron operates a dedicated compliance hotline where employees can anonymously report violations of the company’s Code of Business Ethics. In addition, the Vice President of Legal Affairs acts also as a Chief Compliance Officer. Training programs had been developed and put in place regarding compliance and anti-bribery/corruption policies. Environmental Policies Micron 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 process is lead-free and is able to offer “green” products to customers who ask for them. Green products, according to Micron’s definition, adhere to standards of maximum trace amounts of harmful materials, such as Chlorine and Bromine. Micron makes an effort to reduce its water consumption and recycles 70-80% of the water that is used in its manufacturing processes. An effort is also made to continuously reduce the amounts of chemicals that are used in those processes. Quality Micron received its ISO 9001 certification back in 1994, and it since has been renewed several times. Recently, the company made an effort to comply with the extended ISO standard TS 16949, which details additional technical specifications and touches on supply chain management, delivery standards, and environmental stewardship. III. D. Strategic Position Definition III. D1. Corporate Level Business Portfolio 42
  • 43. Micron’s core business is in memory products, which, in 2011, accounted for 95% of Micron’s revenue. Within the memory business, DRAM accounted for 41% of revenue, NAND for 36%, and NOR for 18% (Micron, 2011). Recently, however, as it can be seen from the 2012 annual report, NAND sales (44% of revenue) surpassed DRAM sales (39% of revenue), indicating a shift in customer demand. The other 5% of Micron’s revenue comes from the company’s holdings in Aptina Imaging, which develops and manufactures CMOS image sensors, and from sales of photomasks, through a joint venture with Photronics Inc. by the name of M P Mask Technology Center. Rumelt’s Classifications As mentioned in Section II D3 – Primary Competitors’ Business Level and Corporate Level Strategies, Micron is a related constrained corporation. This classification is derived by Micron’s division into business units, each carrying strong ties with one another. Acquisitions, Mergers, and Divestments Micron has a rich history of growth by acquisitions which began in 1998 with the acquisition of Texas Instruments’ (TI) memory operations. The most recent DRAM related acquisition was in 2002, when Micron acquired Toshiba’s commodity DRAM operations. To gain insight into Micron’s acquisition strategy, we examined the two most recent acquisitions (Displaytech in 2009, and Numonyx in 2010), even though they are not DRAM related. Micron acquired Displaytech in May 2009 as part of its ongoing attempts to diversify the company’s portfolio outside the core memory business. Displaytech developed and produced tiny projectors, referred to as “microdisplays”, which enable a smartphone to act like a projector (BusinessWeek, 2009). An analysis of this acquisition, as shown in Exhibit 11, shows that an equity alliance would have been a better strategic choice, mostly because of uncertain market conditions. As an affirmation to this conclusion, in August 2012, Micron sold its microdisplay business to a subsidiary of Citizen Japan (Citizen Finetech Miyota Co., Ltd., 2012). In February 2010, Micron acquired Numonyx B.V., a privately held flash-type memory chips maker that was founded in 2008 by Intel, STMicroelectronics, and Francisco Partners. The 43