Turning point near for brutal NAND market conditions, iSuppli says

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 3/26/2007

In a bit of good news for suppliers of NAND-type flash memory that have been battered by nearly six months of severe price erosion, El Segundo, Calif.-based market research firm iSuppli Corp. has upgraded its rating of near-term market conditions to “neutral” from “negative.”

The firm has held a “negative” assessment since the week of October 2, 2006, and noting just two weeks ago, that circumstances for suppliers were the worst in the history of the market.

While the brutal conditions are persisting, the turning point is near, the firm believes.

iSuppli says it’s “NAND Momentum Indicator,” a metric that tracks various factors that determine market status, moved into positive territory last week, the first time this has happened since the week of November 13, 2006.

Nam Hyung Kim, director and principal analyst at iSuppli explained in a statement, “The major factor behind iSuppli’s upgrade is a slowing in the growth of supply, which is helping to mitigate the severe price erosion that has been the dominant driver of market conditions over the past half year.”

“The South Korean suppliers, Samsung Electronics Co. Ltd. and Hynix Semiconductor Inc., are decelerating their NAND production growth, leading to a more balanced supply/demand situation and firmer pricing in the market,” he noted.

These companies controlled 63 percent of the NAND market and 45 percent of DRAM sales last year, and have been shifting their NAND capacity to DRAM, Kim says.

The South Korean manufacturers started this process in Q4 2006, when their operating profit margins for DRAM surpassed those for NAND flash, and although downward pricing pressure persists, Kim said he believes this reduction in NAND supply growth is causing a significant decline of excess supply and surplus inventory in the supply chain.

On the demand side, iSuppli expects OEMs to buy more NAND flash as they attempt to secure large volumes at present fire-sale prices, and will do this in anticipation of a potential shortage in the second half of 2007, which should lead to a slowing in the rate of price erosion.

The firm notes that this development confirms its previous prediction that the NAND recovery would take place earlier than that for the DRAM market this year.

In general, the NAND market appears to be moving toward a more balanced supply/demand situation, while rising DRAM production from the South Korean suppliers—combined with the traditionally slow season in the first quarter—is having a deleterious impact on DRAM prices, the firm noted.

And while iSuppli has upgraded its rating for NAND, it said it is not unduly optimistic regarding the near-term market conditions for suppliers, and as a result, iSuppli is not considering an upgrade to “positive” at this time.

Further, the firm says it doesn’t expect that Korean DRAM suppliers will shift their capacity back to NAND in the second quarter, since NAND margins are worse than those for DRAM, and that DRAM margins will remain higher than those for NAND this year.

This is particularly the case for Hynix, which has lower NAND margins than its competition due to its lack of a 300-mm NAND fab. Without such an advanced fab, iSuppli believes Hynix’s introduction of its first 16Gbit NAND flash is likely to be delayed compared to rivals Samsung and Toshiba Corp., which plan to introduce 16Gbit parts in the second quarter.

Reflecting its challenges, Hynix recently announced a partnership with flash-card maker SanDisk, which iSuppli considers to be a positive for both SanDisk and Hynix.

SanDisk has secured additional royalty income and capacity, while Hynix has obtained rights to future technologies and will receive additional fab investments, the firm reminded.

iSuppli concluded that it remains cautious about market conditions and will wait and see if the current momentum is sustainable during Q2.