NAND market turnaround coming, thanks to iPhone, some analysts say

By Colleen Taylor, Contributing Editor -- Electronic News, 8/14/2007

The enormous success of Apple Inc.'s line of increasingly ubiquitous consumer electronics could ultimately spur a much-needed turnaround in the memory market.

Some analysts say that despite a marked increase in capital spending in the overall flash memory market and a host of new memory chip fabs, flash manufacturers are "scrambling" to meet demands brought about by an influx of orders for Apple's iPhones and iPods.

Such demand could bring tightness back to the memory market, which has suffered from oversupply and falling prices since the beginning of the year. Indeed, conditions for NAND flash profits have been characterized by analysts as nothing short of brutal throughout 2007. To be sure, the Semiconductor Industry Association (SIA)  reported earlier this month that in June, NAND saw unit shipments grow by almost 40 percent year-over-year, as average selling prices declined more than 15 percent.

But Apple's immensely successful iPhone and iPod products seem poised to help turn those conditions around. According to reports from market research firms Strategic Marketing Associates and DRAMeXchange, the iPhone and the iPod are on track to consume a whopping 25 percent of the industry's NAND flash production in Q3. 

The boost in demand is very good news for Samsung Electronics Co. Ltd., which is said to be the chief supplier of NAND products for both the iPhone and the iPod. Samsung did not respond to requests for comment on its relationship with Apple and the iPhone's effects on its NAND supply, however, a widespread rumor earlier this summer indicated that Apple had made a request for some 500 million 4-Gbit NAND flash equivalent chips from Samsung for use in all of its iPods and iPhones until the end of 2007.

It follows that such a healthy amount of flash consumption from just one company means that other vendors could have a hard time securing flash chips -- particularly because Samsung safely sits atop the industry in terms of memory production -- and such a squeeze could quickly and significantly driving up prices for NAND chips.

"During the third quarter a lot of companies are starting to make their purchases for the Christmas buying season," Brian Matas, an analyst with IC Insights, told Electronic News. "Manufacturers are realizing that the iPhone and the iPod are the 'devices to have,' and these products are probably going to be their first priorities."

Matas added that this shift in priorities, along with an inability from a number of suppliers to quickly ramp up their NAND flash supply, and unforeseen production stoppages, like the one caused by Samsung's brief power outage in late July, will almost certainly lead to a near-shortage of flash chips in Q3 and Q4.  Even though the power outage affected just one Samsung chip fab in South Korea and all six of the affected production lines back up and running within a few days of the shut-down, some analysts have predicted that there will indeed be tactile effects for the memory industry evident in Samsung and its competitors' Q3 earnings reports. According to market research firm iSuppli Corp., the affected lines represented about 35 percent of global NAND production. Samsung has said that it anticipates its losses from the power outage to be as much as $43.36 million (40 billion Korean won.) The firm has said that other memory players, particularly Toshiba Corp. and Hynix Semiconductor Inc., could see a boost in their sales due to shortages stemming from Samsung from the hours of lost production time.
 
"We can look for more pressure on the NAND market during the end of the year," Matas said. "The Samsung power outage is certainly going to produce a hiccup in the system" that will continue to drive up NAND flash prices."

One analyst, however, is slow to chalk up all of the NAND market's return to health to Apple's effect. According to Nam Hyung Kim, a chief analyst with iSuppli, the iPhone's unit shipments for 2007 would make "not even close to a meaningful impact" on the overall memory supply chain. But Kim does not dispute that a turnaround is under way in the NAND market and that the iPhone has made a significant, if indirect, impact on that change.

"[The iPhone] will drive higher density mobile handsets from other OEMs, which will potentially increase demand of flash memory," Kim told Electronic News. "The major reason for a NAND price increase is because of NAND suppliers' slow supply growth."