NAND sails into 'commodity storm'

San Jose, Calif. -- One of the fastest-growing chip sectors in the semiconductor industry may be slowing down. Citing a weak pricing environment and a lackluster iPod introduction from Apple Computer Inc., Gartner Inc. last week slashed its 2006 NAND flash memory growth forecast by a whopping $1.5 billion, and predicted a sluggish market for 2007.

The NAND flash market, which has been in the "oversupply" mode since the beginning of this year, is fast becoming a mere commodity. "I would call it a classical commodity storm for NAND," said Gartner analyst Joseph Unsworth. "There is too much capacity coming online, and we've hit a soft patch in demand."

Average selling prices (ASPs) for NAND devices are projected to fall by some 65 percent in 2006. This, in turn, is beginning to take a bite out of the bottom lines at Micron, Samsung and Toshiba, among other vendors. At the same time, several NAND vendors are bringing up new capacity. Hynix, IM Flash, Samsung, STMicroelectronics and the Toshiba/SanDisk duo are all separately ramping up giant 300-mm fabs for NAND production.

The competitive dynamics have already caused some major changes in the NAND landscape. Two vendors--Qimonda AG (Munich, Germany) and Renesas Technology Corp. (Tokyo)--recently exited the market. At the same time, some new players are entering the NAND fray, including one surprising vendor: Semiconductor Manufacturing International Corp. (Shanghai, China). Just what the foundry's impact will be remains unclear. SMIC is sampling a 2-Gbit NAND device, but has not elaborated on its strategy in the arena. "They still want to be a pure-play foundry," said Joanne Itow, an analyst with Semico Research Corp. "They are trying to figure what to do about the flash business."

The market faces potentially more consolidation, while some of the weaker players could end up refocusing on niches, Unsworth said. "Pricing will also be under pressure, which will strain margins. Revenues will be leaner," he said.

The NAND market has been on a wild roller-coaster ride since the start of the year. Amid sudden and falling demand in the MP3 player market, spot prices for NAND fell by as much as 63 percent in the first quarter alone, according to the DRAMeXchange, a memory clearinghouse. NAND flash is used for storage applications in cellular phones, MP3 players, USB drives and other products.

For 2006, Semico predicts the NAND market will hit $14 billion in sales. That figure is up 17 percent over last year, but represents a big drop from Semico's earlier forecast of $16 billion.

"When you look at this year's growth and the current and expected trend of flattening price per gigabyte, you have to conclude that $14 billion [in worldwide NAND sales] is a realistic target for the year," said Semico analyst Jim Handy.

Overall NAND bit growth is still projected to increase at a staggering 199.8 percent rate this year, according to Gartner. ASPs are expected to stabilize for the reminder of October and into November.

Some blamed the lackluster market conditions on Apple's new iPods, which are one of the big drivers for NAND flash. The most recent iPod introductions were viewed as a disappointment. "Unfortunately for NAND flash vendors, Apple could have made a much greater impact with its long-awaited refresh of its flash-based music players through more aggressive pricing and capabilities, but perhaps it chose not to," said a recent Gartner report. For 2007, Gartner projects the NAND market will grow by 10 to 15 percent.

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