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NAND shortage could slow pace of flash price drops, squeeze SSD makers

Carol Sliwa

A flash supply tightness that industry analysts predict will turn into a NAND shortage in the second half of this year could slow the usual pace of price drops for the chips

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and leave some small suppliers of solid-state drives in the lurch.

But well-established enterprise solid-state drive (SSD) makers should have no trouble getting the NAND chips, and their storage OEM and business IT customers will likely see no significant impact in terms of flash price and availability, according to analysts who track the market.

"The guys who are supplying NAND flash are getting their highest prices from the enterprise SSD makers. Those are the customers they're going to work hardest to satisfy," said Jim Handy, chief analyst at Objective Analysis in Los Gatos, Calif. "That means enterprise SSDs are going to be available right through the shortage to any enterprise end users or OEMs who want them.

"And the pricing will be stable" for the chips and drives, Handy said. "What typically happens with memory prices is they go down or flat, but they don't tend to go up. They've been going down for the past two years, and those price declines are going to come to a halt."

Framingham, Mass.-based International Data Corp. (IDC) predicted that NAND flash price declines will slow in comparison to historical trends. NAND pricing fell by 42% in 2012 but will decrease by only 26% in 2013, according to Jeff Janukowicz, research director in solid-state storage and enabling technologies at IDC. "The strong demand may force OEMs to accelerate plans to restart idle supply or add additional capacity depending on the market conditions," he said via email.

Unlike the hard drive shortage of 2012, no catastrophic event or lack of raw materials caused the NAND supply tightness. Cyclical shortages occur due to fluctuations in supply and demand, as NAND manufacturers adjust capital spending and production in response to market conditions. Slower NAND lithography process transitions and limited additional fabrication (fab) plant capacity might also factor into manufacturers' challenges to meet growing demand this year, Janukowicz said.

NAND supply tightness has already become apparent for certain densities, and price increases have surfaced that are atypical for this time of year, Janukowicz claimed. He expects the tightness to continue into the second half of 2013, as demand picks up for SSDs, smart phones and tablets. IDC forecasts that overall NAND demand will spike 45% this year.

Allen Holmes, vice president of the NAND solutions group marketing at Micron Technology Inc., which makes both NAND chips and SSDs, said it's difficult to forecast a NAND shortage. He said Micron has seen the average sale price and ASP outlook improve. "We don't have to remind ourselves that it wasn't that long ago the market was oversupplied. We were in a different kind of outlook just less than nine months ago," he said. "From my perspective, forecasting out is probably a dangerous game."

Greg Wong, founder and principal analyst at Forward Insights in North York, Ontario, said some NAND manufacturers reduced their fab output after losing money in the second and third quarters of last year. The current NAND market tightness is supply-related, as manufacturers reduce shipments to the channel during the typically slow first and second quarters, he said. But the shortage projected for the second half of the year will be demand-driven, as new smartphones and tablets emerge, potentially spurring manufacturers to loosen their purse strings, he added.

"Even though there's an expectation that there's going to be shortages in the second half of the year, you also have to be careful, because that could change," Wong said. "Everybody's expecting the smartphones and the tablets to do well, but if they do less than expected, then that could turn a tight situation into a not-so-tight situation."

Citing historical precedence, Objective Analysis' Handy took a more definitive stance. He asserted that NAND supply tightness will increase over the next two years and affect all six flash chip manufacturers: Samsung, Toshiba, Micron, SK Hynix, SanDisk (which has a joint manufacturing relationship with Toshiba) and Intel. "It's because of a lack of capital spending that began in mid-2011," he said. "It takes about two years for capital spending changes to influence production capacity."

Capital spending ramped up from mid-2009 to mid-2011, leading to a NAND oversupply through mid-2013, Handy said. NAND manufacturers' shutdown of capital spending from mid-2011 to mid-2013 will result in shortages from mid-2013 to mid-2015, he predicted. He expects capital spending to turn on hard again from mid-2013 to mid-2015, causing another oversupply and another flash price collapse starting in mid-2015.

Michael Yang, a senior principal analyst at IHS iSuppli Corp., a division of IHS Inc. in Englewood, Colo., explained that a single fab has a specific output and when manufacturers build new ones, supply exceeds demand until demand catches up and surpasses supply. The latter will be the case in the second half of 2013, he said.

Yang predicted the second-half NAND shortage will amount to only a small percentage and subside by the end of 2013. But he predicted a fairly balanced supply-vs.-demand environment in the next three years that will lead to NAND flash's ASP decreasing much less than historic levels and perhaps even going up in pockets. "It's going to impact everybody," he said, "but enterprise is going to see less volatility than the rest of the market."

The flash drive makers with close relationships and long-term agreements with NAND suppliers stand to fare the best in a tight market, while some small drive manufacturers could get squeezed out, industry analysts said. "The eventual winners are going to be the NAND players because they have the NAND in-house," Forward Insights' Wong said. "Everybody else has to buy it from them, and they have to pay more for it."

Brendan Collins, vice president of product marketing at Hitachi Global Storage Technologies Inc., a Western Digital-owned company that manufactures enterprise SSDs, said HGST deals with cyclical shortages by adding to its buffers of raw materials and finished goods through negotiations with Intel, its NAND supplier. The likely impact of the current shortage will be price take-downs that may not be as steep as normal, he said.

IDC's Janukowicz predicted that the price of enterprise drives will continue to decline because of the transition to lower-cost multilevel designs that will help drive volume deployments with data center customers.

Although companies that purchase finished SSDs may not see price fluctuations, any businesses that buy flash directly will see fewer price decreases than they expect because of the NAND shortage, according to IHS iSuppli's Yang. "Whenever there's a shortage of any kind, suppliers are less likely to give you a discount," he said.


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