Supply & Demand: September 2008 Archives

Charles Arthur blogging at the Guardian has pointed to the loss of confidence in the technology sector as helping to bring on a bid from chipmaking giant Samsung for flash-memory company SanDisk. Amid a massive glut of NAND flash, SanDisk has taken a pummelling in the stock markets this year. On the one hand, the company looks cheap. But not many people want to take a risk on a rollercoaster business like NAND flash, especially not now when borrowing is relatively expensive.

That is, unless you're Samsung. The company already has a massive chunk of the NAND flash business. Does it really want more when it's been busily shutting down older fabs to take some capacity out of the market and shift production to newer, more cost-effective fabs?

For SanDisk, yes. The company might look troubled but it has some important technology buried inside its research labs. There are big changes coming in the flash business and Samsung is prepared to spend a lot of money to make sure it is ready. The problem is that conventional flash technologies are running out of steam. You can make the memories smaller, but it's getting harder to get them to store any data reliably and the cost reductions aren't coming through, which is a big problem for a commodity market like this.

One answer is to build high. NAND memories are arranged as strings of bits, all laid out neatly in rows. Stack the strings vertically and suddenly you have increased memory density 16-fold. If you do this, you don't have to make the memory cells smaller to get much denser storage. You can even make them a bit bigger and buy some time for the coming generations. This is what SanDisk demonstrated with Toshiba last year.

Samsung is very keen on 3D flash memories as well, but is building them up layer by layer, which looks to be a more expensive process. Assuming they can translate it into production, the SanDisk/Toshiba memory is much simpler and cheaper. The two companies have also collaborated on 3bit and 4bit-per cell memories. These are slower than today's flash memories but potentially a lot cheaper. And, in media players, speed does not matter all that much.

In the long term, the smaller players will simply get shaken out of the NAND business, leaving more to the likes of Samsung and number-two manufacturer Toshiba when the business finally turns up. By buying SanDisk, Samsung gets more flash capacity. It stops having to pay $0.5bn a year in royalties. It gets an armlock on 3D and multibit technologies and it gets to disrupt Toshiba's plans. It's not going to be fun competing with a much larger player who has a share in the same technology you planned to use.

Plus, cash-rich Samsung can force Toshiba into making a counter-bid, tying up its nearest competitor in a proxy war that it cannot really afford to win financially. But, unless Toshiba is betting on US regulators coming to its rescue - I would expect Micron Technologies to make a complaint at the very least - Toshiba has little choice but to make a bid of its own.

OK, that's almost certainly a lie. But an upbeat missive from Frost & Sullivan claims that, for the first in its history, the semiconductor industry might cruise through a US recession. Malcolm Penn of Future Horizons has long argued that the semiconductor industry can create its own recessions even in times of economic boom but that it never breezes through a recession.

Frost & Sullivan claims that the rise of Asia as a consumer market in its own right will prevent the semiconductor industry from being dragged down by a poor US market. Also, the prospect of a US presidential election should help the economy there. However, it's worth bearing in mind that the wheels last came off the technology sector when Bush and Gore were arguing over hanging chads.

I take the view that the Asian consumer market is much more sensitive to conditions in the West than it currently seems because Asian economies are export intensive. But, maybe, confidence in Asia can outrun a Western recession.

If the optimistic scenario turns out to be the case, it would be one of the last elements that link together the entire semiconductor industry which, according to Bill Maclean of IC Insights has fractured into four or five segments that operate according to their own boom-and-bust cycles, resulting in the overall business growing at a moderate but more consistent rate.