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Intel offloads NAND flash memory to SK Hynix for $9 billion

Intel exits NAND flash business with $9 billion sale to rival SK Hynix to focus on faster Optane SSDs and memory modules, AI, 5G networking and edge computing.

Intel Corp. struck an $9 billion deal with SK Hynix Inc. to sell off its NAND flash memory and storage business and focus on long-term priorities in artificial intelligence, 5G networking and edge computing.

The acquisition came as no surprise to industry analysts who got wind of discussions last year, after Intel CEO Bob Swan publicly stated the company was evaluating options to improve NAND profitability. Intel plans to retain its distinctive Optane business that uses higher-performance 3D XPoint memory technology co-developed with Micron Technology.

NAND memory prices have been in decline since 2018 -- with the exception of a short-lived spike in early 2020 -- making the market more favorable to buyers than to manufacturers. Industry analysts recently predicted the downward price trend would continue into 2021.

"It's difficult [for NAND manufacturers] to have sustained profitability to afford the massive capital expense burdens," said Joseph Unsworth, a research vice president at Gartner. "With Kioxia delaying its IPO due to market conditions, Intel wanted to get this deal done fast. The market pricing outlook has already deteriorated, and we believe the NAND industry margins peaked in the third quarter."

SK Hynix will vault to No. 2

South Korea-based semiconductor supplier SK Hynix plans to acquire Intel's NAND SSD, component and wafer business, as well as its NAND memory manufacturing facility in Dalian, China. Intel's NAND business accounted for roughly $2.8 billion of the $3 billion in revenue that its non-volatile memory solutions group generated during the first six months of this year.

The Intel deal will vault SK Hynix from fourth place, at 12.4%, into second place behind Samsung's market-leading 33.7% in NAND revenue. Kioxia (16.7%) was No. 2, trailed by Western Digital (14.2%) and Intel (11.2%), according to second-quarter market statistics from Forward Insights.

"Intel's CEO has a financial background and to compete in a commodity market would require huge investments to increase scale," said Greg Wong, founder and principal analyst at Forward Insights. "From Intel's perspective, the ROI didn't justify continuing the NAND flash business, especially with seven players increasing process complexity and slowing long-term demand growth."

Wong said the addition of Yangtze Memory Technologies Co. (YMTC) into the NAND memory business would make it even more difficult for manufacturers to earn a healthy return.

Jim Handy, general director and semiconductor analyst at Objective Analysis, saw YMTC as a more likely purchaser of Intel's NAND business than SK Hynix, because the Chinese manufacturer has not ramped up its flash products as quickly as hoped. He speculated that the U.S. political climate might have prevented Intel from selling its Dalian plant to YMTC, which is part owned by China's government, but he was not surprised to see Intel sell its NAND business.

"Commodity memories are not a good match to Intel's high-margin business model," Handy said. "The NAND business dilutes Intel's margins and makes their earnings less predictable than they would be without memories."

Minimal impact to IT users

Industry analysts predict the impact of the SK Hynix acquisition will be minimal to IT end users in the near term, especially because the deal is not expected to close for some time.

Intel and SK Hynix said they hope to obtain required governmental approvals by late 2021, paving the way for SK Hynix to acquire Intel's NAND SSD business and Dalian facility with the first payment of $7 billion. SK Hynix intends to acquire the remainder of Intel's NAND assets -- including intellectual property related to the manufacture and design of NAND flash wafers, R&D employees and the Dalian fab workforce -- for $2 billion at the final closing, projected for March 2025.

The deal is a good thing for IT users. Consolidation will help bring some additional stability to the overall NAND flash market.
Jeff JanukowiczResearch vice president, IDC

"The deal is a good thing for IT users. Consolidation will help bring some additional stability to the overall NAND flash market," said Jeff Janukowicz, a research vice president at IDC. He said the Intel deal would help SK Hynix continue to grow its DRAM and NAND memory ecosystem with the necessary scale to support customers more effectively.

But the potential long-term impact of the SK Hynix-Intel deal is less clear to some other industry analysts because the vendors use different underlying technology to manufacture NAND flash. SK Hynix's products are based on charge-trap flash, and Intel uses floating-gate technology. Intel claimed SK Hynix expects to continue investing in floating-gate R&D.

"We'll have to see if SK Hynix can smoothly manage the integration and transition," Wong said.

Intel doubles down on Optane

Meanwhile, Intel asserts that it will continue to invest, develop and scale its "next-generation" Optane memory business. Intel began shipping Optane SSDs in 2017 and persistent memory modules in 2019, and the business finally appears to be picking up momentum after a slow ramp that saw the company struggle to build revenue.

Intel and Micron ended their joint manufacturing partnership to produce the 3D XPoint chips that the Optane SSDs and memory modules use. But industry analysts said customers shouldn't worry about Intel pulling the plug on its Optane business any time soon.

"Intel maintained its Optane products because of the opportunity to grow it further in the future," Janukowicz said. "Plus, Optane helps move data closer to its core competency in the CPU, which can ultimately help differentiate Intel platform products."

Although Optane adoption is currently limited, IDC expects it to increase during the next few years, especially now that Intel can focus on its Optane roadmap after its NAND flash divestiture, Janukowicz said.

Indeed, Optane is a significant element of Intel's strategy to stay ahead of AMD, Objective Analysis' Handy said.

"A system with cheap persistent memory on the memory bus will always outperform a system that only uses standard DRAM and persists data through I/O channels," Handy said. "Intel has spent several billion dollars to create an unlevel playing field. The company cannot afford to give up that advantage. Optane will be here for the foreseeable future."

But Handy expects Intel to unload Optane once it proves the business can be profitable to another supplier.

"The reason for Intel to get out of Optane is the same as for getting out of NAND," Handy said. "Optane has to sell at half the price of DRAM, and DRAM prices swing wildly. Margins on Optane will therefore always be unpredictable, and likely to always be relatively low, neither of which is good for Intel's financials."

Forward Insights' Wong added, "If the uptake is underperforming expectations in the next two years, ROI decisions would have to be made."

Meanwhile, Intel is working to compete in the emerging 5G and artificial intelligence hardware markets. The company recently partnered with VMware to provide 5G infrastructure and is building out AI-focused processors on technology it acquired from Habana Labs in December for $2 billion.

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