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Few industries have more self-destructive tendencies than the computer memory chip business. When semiconductor prices are high, manufacturers rush headlong into massive investments in new factories, leaving them vulnerable to supply gluts and economic slowdowns. Yet like mosquitoes to one of those electric zappers, chipmakers make the same mistake again and again, creating a binge-and-purge business pattern that occurs with sickening regularity. Of the top 10 largest manufacturers of dynamic random access memory chips, or DRAMs, in 1990, only one — Samsung Electronics of South Korea — remains on that list today.

These days, the DRAM business has entered into another destructive phase of the business cycle. Huge investments in new capacity in 2007 have created an oversupply of chips, while the global economic slowdown is drastically weakening demand for the slivers of silicon that go into computers, mobile phones, portable music players and a host of other consumer electronics products. The result has been plummeting prices. According to a price index compiled by research firm iSuppli, DRAM prices have plunged 48% in the past six months. That is good news for consumers — cheaper DRAMs mean electronics makers can pack more memory into their gadgets — but it is a disaster for manufacturers. At current price levels, chipmakers have a hard time making money. Kim Nam Hyung, chief memory chip analyst at iSuppli in El Segundo, Calif., estimates that the price of 1-gigabit DRAMs, for example, is at about half the manufacturers' break-even cost. "The situation is getting worse and worse," Kim says.

The crisis has already claimed one major victim. In late January, Germany's Qimonda, the world's fifth-largest DRAM maker, filed for bankruptcy. Several other chipmakers have sought emergency aid. In late December, the creditors of South Korea's Hynix, the world's second-biggest DRAM maker, agreed to provide $600 million of aid to the company, including new loans, as its losses mounted.

The worst-off of all the beleaguered chipmakers are the six major DRAM manufacturers in Taiwan, which lost a combined $3.5 billion in 2008, according to the Taiwan government. Taiwan's firms are in especially rough shape because they lack the scale, financial resources and technical prowess of their larger Korean and American rivals. The companies' woes are pushing the Taiwan government toward a bailout of the industry. "We have the intention and the resolve to help the DRAM companies through difficult times," Taiwan President Ma Ying-jeou reportedly told electronics industry executives in early January. Aid is crucial, policymakers believe, because Taiwan's chipmakers are simply too important to the economy, which specializes in manufacturing gear like notebook PCs. "It's bad for the whole high-tech industry here if the DRAM industry fails," says Lu Cheng-chin, an official at the industrial development bureau at Taipei's Ministry of Economic Affairs.

Any state aid, though, won't come without strings attached. ProMOS Technologies and Powerchip Semiconductor have asked the government for aid, and were told they must revise their proposals with more measures aimed at improving their competitiveness and technological capabilities. "The government sees this [aid] as an investment," Lu says, "We don't want to just bail out the industry." The result will likely be consolidation of the country's six major DRAM makers into fewer firms, including possible sales of stakes or entire companies to better capitalized foreign rivals. "It looks like merging is the direction of the industry," says Cecilia Shih, a manager at the Taiwan Semiconductor Industry Association.

The pressure on DRAM makers won't significantly ease up anytime soon. Though prices may stabilize in the short term, iSuppli's Kim doesn't expect a meaningful recovery until the second half of 2009. That turnaround will likely be driven by a sharp reduction in new capacity. Kim expects investment in chip-making facilities to fall 63% in 2009 as cash-strapped manufacturers finally scale back. Until then, however, DRAM makers will be lucky to survive — at least until the next downturn.

• MICHAEL SCHUMAN AND NATALIE TSO / TAIPEI
• Recession and an industrywide supply glut threatens to decimate manufacturers of memory chips, a key component of consumer electronics products