2 Reasons to Be Bearish on the NAND Industry

NAND manufacturers may have a problem. Spot prices of the commodity have plunged by about 14% in February alone, and TrendForce expects the downward pricing trend to continue over the next few months. Let's understand the rationale behind this pessimistic outlook, and its potential impact on leading NAND manufacturers, namely Micron (NASDAQ: MU  ) , Samsung (NASDAQOTH: SSNLF  ) , and Toshiba (NASDAQOTH: TOSBF  ) . 

Rising output
The basis of the problem partly lies in the rising NAND output. SK Hynix, for instance, had allocated about 30% of its NAND production capacity last year to compensate for the loss of DRAM production at its fire-damaged Wuxi plant. In the second quarter of fiscal year 2014, however, its Wuxi fab is expected to be up and running and restore its NAND output back to normal levels. 

In addition, Samsung's new NAND manufacturing facility at Xian will commence operations in April. Developed with an investment of $7.5 billion, the fab can annually manufacture about 1.5 million NAND chips and generate $16.25 billion revenue. 

Micron and Toshiba are contributing to the rising DRAM output as well. Micron is converting its DRAM fab in Singapore into a NAND manufacturing facility. The transition will be complete by the second quarter of fiscal year 2014. The plant was producing about 70,000 DRAM chips per month in 2012. Toshiba, with a long-term view, is expanding its Fab-5 to accommodate the production of 3D NAND modules. 

On the back of these output hikes, TrendForce estimates that NAND production in the first quarter of fiscal 2014 will increase sharply by 6% sequentially, exceeding the demand growth of 1.1% over the same period. This indicates a price decline over the short term. 

Going smaller
Another concerning factor is that chipmakers are shrinking their NAND fabrication process. While this move boosts the average chip density, it also lowers the average cost per gigabyte of volatile and non-volatile memory.

Toshiba shifted its planar NAND process from 19nm to A-19nm in the fourth quarter of fiscal 2013. This essentially means that the chipmaker can increase its chip density by 17% without incurring any extra costs. DRAMeXchange expects yield improvements to occur in the ongoing quarter, which will eventually contribute in boosting Toshiba's NAND output. 

Speaking of Micron, the chipmaker aims to fully migrate to 16nm planar NAND process in the next quarter. It's the world smallest planar NAND lithography, which means that the chipmaker will theoretically be able to manufacture planar NAND drives with the lowest cost-per-GB prevailing in the industry. 

Samsung, on the other hand, is yet to announce the shrinkage of its planar NAND process and is counting on the growth of 3D NAND technology. The company has been mass-producing 40nm 3D NAND modules since July last year, which produces an equivalent planar lithography of 10nm. 

The shrinking fabrication process will result in a lower cost per GB. Consequently, lower price points will intensify market competition and limit the gains of smaller NAND manufacturers.

Foolish final thoughts
With increasing chip densities and rising production yields, NAND pricing will remain stressed for the next few months. Therefore, planar NAND manufacturers will benefit only if they boost their production.

So, NAND focused long-term investors can take advantage of this weak pricing, and invest in companies aiming to enter the 3D NAND industry. As I explained in my previous article, this next-gen technology holds the key to the NAND industry's long-term growth.

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  • Report this Comment On March 19, 2014, at 2:22 PM, arkhon wrote:

    Piyush,

    Won't NAND shrinks decrease their cost of production? So a lower price per gig wouldn't be much of a concern as long as they cost less to produce ie. margins shouldn't suffer.

  • Report this Comment On March 20, 2014, at 2:56 PM, BuzzVestor wrote:

    Hi arkhon,

    You are correct! Manufacturing cost goes down with shrinking process, thus margins are preserved.

    Your point, however, is valid only when all the manufacturers shrink their process together.

    For instance, Samsung has migrated to 20nm DRAM while Micron is still producing 25nm DRAM.

    Please note that Samsung's manufacturing cost will now be lower than Micron's.

    If the former decides to cut its DRAM ASP (while maintaining its margins), Micron will have to lower its prices to remain competent.

    This is how margins shrink.

    I hope that helped.

    Piyush

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