Why oversupply could affect Micron’s NAND flash products

Market Realist

Must-know overview of Micron Technology: A DRAMatic growth story (Part 4 of 8)

(Continued from Part 3)

Micron’s NAND flash products

NAND flash products accounted for 40% of Micron’s net sales in 2013 and 28% for the second quarter of fiscal 2014. The products are electrically rewriteable, non-volatile semiconductor memory devices that retain content when power is turned off. Micron said the market for NAND Flash products is expected to see further growth while the company transitions its DRAM fabrication facility in Singapore into a NAND manufacturing facility. NAND Flash sales were up 35% for the first six months of 2014, as volumes increased amid a 17% fall in average selling prices or ASPs.

Micron NAND

Micron said its NAND Solutions Group (NSG) operating income for the second quarter of 2014 declined sequentially as fall in average selling prices outpaced manufacturing cost reductions. The company sells a portion of its NAND products to Intel (INTC) through its IMFT joint venture at long-term negotiated prices approximating cost. NSG sales to Intel under this arrangement were $104 million for the second quarter of 2014. The company said the remaining NAND Flash gigabits sold to trade customers increased due to the transition of the DRAM facility in Singapore to NAND Flash production and improved product and process technologies.

According to DRAMeXchange, in addition to NAND flash capacity adjustments due to the fire at SK Hynix, NAND flash vendors were overly optimistic towards OEM demand in the fourth quarter, resulting in supply that exceeded demand for the quarter. So NAND flash brand suppliers’ revenue fell to $6.168 billion in the fourth quarter of 2013, a 4.5% drop sequentially, but a 16% increase over the same period in 2012. The research firm believes that as advanced technology improves yield rates, the NAND flash industry will continue to experience steady growth.

Micron expects to begin transitioning its NAND Flash production from 20 nanometer to 16 nanometer line-width process technology in 2014. Last year, it announced that it’s sampling next-generation 16 nanometer process technology, enabling the industry’s smallest 128-gigabit multi-level cell (MLC) NAND Flash memory devices. The devices target applications like consumer SSDs, removable storage (USB drives and Flash cards), tablets, ultrathin devices, mobile handsets, and data center cloud storage. Micron also expects to release its 16 nanometer TLC (triple-level-cell) NAND flash memory in the last quarter of this year to better position its portfolio from a cost perspective in the retail and consumer segments. This will lead to a decline in the cost per bit, and Micron can benefit from the improving margins.

Rival Hynix (HSXCF) said last year that it has launched a full-scale mass production of 16 nanometer 64-gigabit MLC (multi-level cell) NAND flash chips. News reports said Hynix’s second version has a smaller chip size and could be more competitive in terms of price. Toshiba last year announced plans to set up a $4 billion memory chip production factory with Sandisk (SNDK) that is expected to build chips of 16 nanometers to 17 nanometers in circuit line width. The companies already have a joint venture for the production of NAND flash memory. Toshiba migrated from the 19 nanometer process to the A-19 nanometer process in the fourth quarter. The company’s advanced 19- nanometer (A19-nm) NAND is the world’s smallest MLC 64 gigabit NAND flash memory. Intel (INTC), which has the largest enterprise SSD market share and whose product portfolio consists mostly of high-end products, is rapidly advancing all SSD production to the 20 nanometer process to lower costs and increase its competitive advantage.

In terms of ASP outlook, Micron expects Trade NAND to be down low single digits, while cost per bit is expected to be flat for the third quarter of 2014. It forecasted a five-year NAND demand CAGR in the high 30% to low 40% range. Management added, “NAND additions to industry capacity can cause volatility in the market given the challenge of matching long-term capacity decisions with short-term demand trends. However, we’re very bullish about the future of NAND Flash and we believe that this will be a very healthy market.” Micron said in its analyst conference that it’s seeing a long-term trend in terms of the reduction of bit supply to the market, adding, “In order to have a low cost per bit, you have to leverage advanced technology to get more bits per square centimeter because you are building square centimeters.”

DRAMeXchange recently said NAND Flash contract prices fel nearly 14% in February. The research said demand is expected to remain sluggish for March and April, with a decline in orders from OEM clients in the off-peak quarter. The research firm said major NAND Flash manufacturers such as Samsung (SSNLF) and Toshiba/SanDisk (SNDK) have started slowing down the pace of its capacity expansions. SK Hynix is currently in the process of restoring its NAND Flash production following the Wuxi fire accident and might be able to return its NAND Flash output to pre-fire accident levels in the second quarter of 2014, DRAMeXchange said. Micron’s Singapore tech plant is about to complete the transition from DRAM to NAND Flash, and it could use its NAND Flash capacity fully in the second quarter. On the basis of the above factors and a slowdown in smartphone shipments, research predicted that the NAND Flash market’s oversupply situation and the price downtrend will continue until the third quarter of 2014.

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