DRAM manufacturers may have a problem. Spot prices of the commodity have plunged almost 10% during the first week of March, and DRAMeXchange expects the downtrend to continue till the third quarter of fiscal year 2014. Let's understand the rationale behind this pessimistic outlook, and its potential impact on Micron (NASDAQ:MU) and Samsung (NASDAQOTH: SSNLF)

Rising output
The basis of the problem partly lies in the rising DRAM output. The fire-damaged Wuxi plant, for instance, is expected to fully recover in the current quarter. With that, I'M Investment & Securities estimates that SK Hynix's DRAM shipments will rise by 20% in the first quarter. If the recovery is sustainable, the chipmaker can increase its factory utilization rate and further hike its output in the coming quarters.

Investors should note that Samsung had hiked its DRAM production by 30,000 wafers per month, shortly after the Wuxi plant caught fire. But now that the plant is nearing full recovery, the giant has no plans to roll back its production levels. In fact, TrendForce estimates that Samsung will allocate about 25% of its wafer manufacturing capacity in 2014 -- up from the current 20%.

These output hikes have led management of Nanya Technology to conclude that DRAM supply will rise sharply by 26% during fiscal year 2014, and put pressure on DRAM spot prices.

Shrinking lithography
The shrinking fabrication process can fuel the downtrend of DRAM spot prices, as well. Since the development of volatile memory, manufacturers have been striving to shrink their manufacturing process. This allows them to increase chip density without inflating their fabrication costs.

Samsung, for instance, unveiled its 20nm DDR3 modules earlier this month. As compared to its equivalent 25nm DRAM modules, the consumer goods conglomerate claims that these next-gen chips are about 25% more energy efficient, and allow 30% higher fab productivity.

Micron intends to follow suit. The pure-play chipmaker is currently mass-producing 25nm DRAM modules, and plans to introduce its 20nm DRAM chips in the second half of fiscal year 2014. Technology-wise, it will be able to catch-up with Samsung only then.

With shrinking fabrication process, the average chip density increases, but the average cost of benchmark DRAM chips tends to plunge. Therefore, memory manufacturers may have to rely on volumetric growth to retain their profitability.

What to watch out for
The upcoming DDR4 memory standard, however, might turn things around. Intel (NASDAQ:INTC) will unveil its Skylake processors in the first half of 2015. According to its road map, these processors will add support to DDR4 memory, offering about 50% more bandwidth than equivalent DDR3 modules. This will allow Intel to deliver an unrivaled user experience, and contribute in extending its lead against Advanced Micro Devices in terms of raw processing power.

Samsung and Micron intend to initiate the volume production of these next-gen modules in the first half of fiscal year 2014; following this, these modules will be made available to retail, as well as enterprise customers. And if actual benchmarks reveal significant performance gains, Samsung and Micron might as well charge a premium for their new technology.

Final words
DRAM spot prices have historically been volatile. Therefore, risk-averse investors might want to limit their exposure to the industry.

With that said, I believe DRAM industry can deliver exceptional returns during the coming years. As I explained in my previous article, the introduction of LPDDR4 modules in 2014 will propel the growth of mobile DRAM industry. Where Micron -- being a pure-play memory manufacturer -- offers volatile, but explosive, growth, Samsung's diversified business operations result in modest, but balanced, growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.