NAND Enters Tough Cycle

By Mark LaPedus
The NAND flash memory market is entering into a new and painful cycle, a period that will impact suppliers, OEMs and fab tool vendors alike.

For some time, there has been an oversupply and depressed pricing in the NAND market. In mid-2011, Micron, Samsung, SK Hynix and Toshiba put on the brakes in their capital spending plans. And in recent months, NAND suppliers in total have announced plans to cut 150,000 wafer starts per month, or about 12% of the world’s NAND capacity, amid ongoing losses and sluggish demand.

Just as suppliers moved to cut their production, spot shortages of NAND surfaced at some OEMs in early September. Most OEMs are not seeing any shortages, but that could all change. Apple, the world’s largest buyer of NAND, could cause some gyrations in the channels as it ramps up its new iPhone 5.

So what’s the outlook in the fluid and confusing NAND market? Amid a bitter legal battle with Samsung, speculation is rampant throughout the NAND industry about whether Apple will swap suppliers from Samsung to SK Hynix, Toshiba and Micron. If that happens, Samsung would face an oversupply in NAND, while others may see capacity shortfalls.

The outlook is also not so rosy for fab tool vendors, which counted on a big capital spending cycle for NAND. In fact, NAND suppliers are expected to push out their capital spending plans until June of 2013 and perhaps beyond, said Vijay Rakesh, an analyst with Sterne Agee.

The lack of capital spending is expected to create a shortfall in NAND capacity, creating perhaps a long cycle of acute shortages. Presently, there is a capacity glut for NAND. “Demand should catch up with capacity by mid-2013,” said Jim Handy, an analyst with Objective-Analysis. “Then, there could be NAND shortages from then until the middle of 2015.”

In total, suppliers are expected to ship 28.013 billion gigabits of NAND in 2012, which represents a bit growth of 49% over 2011, according to Stern Agee. The figure is lower than the historical averages in terms of bit growth, which ranges from 65% to 85%, according to the firm. In total, suppliers are expected to ship 43.756 billion gigabits of NAND in 2013, which represents a bit growth of 56%, according to Stern Agee.

Boom to bust
NAND has seen its share of boom and bust cycles. Several years ago, NAND vendors witnessed a meteoric rise amid a boom for cell phones, flash cards, USB drives and other products.

Then, over the last two or so years, Micron, Samsung, SK Hynix and Toshiba began to expand their NAND production at a dramatic pace. The goal was to meet the anticipated demand for the next wave of product drivers, such as smartphones, solid-state drives (SSDs), tablets and ultrabooks.

Seeking to drive down product costs, particularly for SSDs, NAND vendors took the lead in process technology. For example, the Toshiba-SanDisk duo has been ramping up parts based on the world’s most advanced process, a 19nm technology.

The bottom fell out of the NAND market in recent times. NAND vendors built up too much fab capacity. Average selling prices (ASPs) for NAND fell by 46% in the first half of 2012. Demand for NAND in smartphones and tablets remains overwhelming, but SSD and ultrabook shipments have been disappointing thus far.

“The adoption of solid-state drives is not ramping as quickly as forecast, and with only a modest increase in the bits per box for mobile devices, we now see NAND bit growth in the range of 60% to 65%,” said Mike Splinter, chairman and chief executive of Applied Materials, during a recent conference call. As a result, NAND vendors in total plan to cut production by roughly 150,000 wafer starts per month “on top of a reduction in their capital spending,” Splinter said.

Based on recent announcements, Toshiba is cutting 30% of its NAND production, Micron is reducing its output by 15%, and SK Hynix and Samsung are each at 10%, said Hans Mosesmann, an analyst with Raymond James. “Using these percentages, this would equate to a 12% reduction in supply,” he said.

NAND vendors expected bit growth of about 70% in 2012, but they have lowered their forecasts to about 45%, said Robert Witkow, president of Westwood Marketing, a research firm. “All manufacturers are regulating bit growth by slowing the transitions of 2xnm to the 1xnm node,” Witkow said. “All manufacturers are slowing their transitions from 64-Gbit to 128-Gbit devices.”

One OEM, OCZ Technology, lowered its quarterly forecast in September, saying it could not obtain enough NAND parts for its SSDs. “My price survey and other feedback I’ve received confirm some tightness (in NAND supply),” Witkow said. “If we have allocation in NAND, which I think is possible in 2012, it will be short-lived. I think the NAND market will ease at the end of October, as production sold for Christmas winds down.”

The average selling price (ASP) outlook is good for consumers, but horrific for suppliers. In September 2010, NAND crossed the $1.00/GB price point. The price dropped to $0.35/GB in May of 2012, according to Objective-Analysis’ Handy. “It hit $0.31/GB in June, but then it went back up to $0.36/GB in August,” Handy said. “The June pricing was below manufacturing costs, which is unsustainable. It could go as low as $0.31/GB again, but not temporarily as it did before. That would be permanent.”

NAND CapEx slows
On the fab tool side of the equation, Applied Materials and others saw a softening in demand for gear in the summer, due in part to sharp declines in foundry and NAND spending. By late August, tool vendors saw a further deterioration in NAND, causing more tool pushouts, according to Applied’s Splinter.

Capital spending will remain anemic in DRAMs. The foundries expanded their 28nm capacities earlier this year. But more recently, foundries put the brakes on spending to digest their new tool buys, Splinter said. In total, fab tool capital spending is expected to reach $30 billion to $33 billion in 2012, down 10% to 20% from 2011, he said. In its original projection, Applied forecasted a flat year in fab tool spending.

There’s good and bad news for fab tool vendors. For example, Samsung, the world’s largest NAND vendor, is cutting some NAND production. But the company also is converting some of its NAND production to system LSI and foundry services. As it turns out, logic is more profitable than NAND.

Samsung still wants to remain the leader in NAND. Last year, for example, the company began ramping up NAND production in Line 16 in Korea. “Samsung has slowed its expansion of Line 16, but it did not cut wafer starts,” said Westwood Marketing’s Witkow.

In Austin, Texas, Samsung has two 300mm fabs, plus a copper metallization facility. One fab is a foundry/logic plant. The fab, dubbed S2, is a foundry plant dedicated for Apple.

The other fab in Austin is currently a NAND facility. Austin represents about 20% of Samsung’s total NAND capacity, according to Barclays Capital. However, Samsung is converting that fab from NAND into a system LSI plant, said Christian Gregor Dieseldorff, an analyst with SEMI. “Ultimately, all of Austin will be converted to system LSI,” Dieseldorff said.

In Korea, Samsung’s main logic/foundry fab is called S1, which is being expanded. Samsung is converting its Line 14 plant in Korea from NAND to 28nm logic capacity. Line 14 is now part of S1, he said.

Meanwhile, Toshiba, the world’s second largest NAND vendor, in June announced plans to cut NAND production by about 30% at its Yokkaichi Operation fab in Mie Prefecture, Japan. At a minimum, this could remove 6% of worldwide NAND supply, according to Barclays Capital.

Micron, the world’s third largest NAND vendor, is re-balancing its capacity. “Micron increased its triple-level-cell (TLC) wafer production slightly, but reduced its multi-level-cell (MLC) slightly in June. My belief is that the move was taken to support the Lexar consumer product builds for Christmas. Micron will likely shift (its production) back to MLC shortly,” said Westwood Marketing’s Witkow.

SK Hynix, the world’s fourth largest NAND vendor, added 10,000 wafer starts at its new M12 fab in Korea. But SK Hynix is also mulling plans to shift its capacity from NAND to DRAM in M12, according to Barclays Capital.