While many people are focused on the implosion of the housing market, another disaster may be lurking. Prices for NAND flash memory -- used in digital cameras and some MP3 players -- have been collapsing this year, falling by roughly 50% in the past two months. As a result, NAND flash memory maker SanDisk (Nasdaq: SNDK ) announced Friday that it is cutting prices of its products by 30%-40% from Q4 levels and laying off employees in the hopes of saving $30 million-$35 million per year.
Management plans to reduce its workforce by 10%, freeze salaries of the rank-and-file employees lucky enough to keep their jobs, and cut executive salaries. CEO Eli Harari will have to make do with 20% less this year. What SanDisk will not do, according to the press release, is reduce investment in new manufacturing capacity. It claims that additional capacity will be required to satisfy strong customer demand from 2008 through 2010. Let's hope so, for the sake of remaining employees and investors alike.
My, how things have changed. Way back in late 2005, NAND flash manufacturers Hynix Semiconductor and Samsung claimed that they saw "infinite" demand for NAND flash memory. The demand increase in 2005 was driven by the introduction of the Apple (Nasdaq: AAPL ) iPod nano, which stores music on NAND flash memory, rather than a hard drive. The iPod nano put such a strain on the world's flash-memory supplies that manufacturers had difficulty producing enough. In response, everyone started erecting NAND-flash manufacturing facilities.
Even Intel (Nasdaq: INTC ) and Micron (NYSE: MU ) jumped in. The pair formed a joint venture dedicated to NAND flash production. NAND flash producers must have assumed that additional devices would show up, continuing to drive demand at extremely high rates. So far, though, the iPod nano is it. Sure, cell phones are using more NAND flash these days, and big memory cards for digital cameras are cheap, but no application has yet caused the big leap in demand that the iPod nano did.
Given that supply of NAND flash memory has now exceeded demand, I can't figure out why producers don't think they should take a holiday from aggressive expansion and wait for demand to catch up. The 50% price decline during the past two months is a lot steeper than the 24% decline SanDisk experienced a year ago during Q1. How likely is it that another device will cause the kind of instant demand increase that the iPod nano did? While solid-state drives could certainly consume a lot of NAND flash memory, I expect that the adoption of such drives will be gradual, and that manufacturers won't have trouble keeping their manufacturing capacity at least even with demand.
SanDisk is probably the best-positioned firm involved in NAND flash manufacturing, but companies that produce memory have traditionally been less-than-stellar investments. While SanDisk is trying to differentiate its products using its strong retail presence -- and by producing devices that consume its NAND flash memory -- its recent travails show that it's not exactly insulated from the ups and downs of the memory market. Management may be correct in believing that the scale will tip toward inadequate supply beginning in 2008 -- but what happens if it's wrong?
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Fool contributor Dan Bloom owns shares of Intel. The Fool has a disclosure policy.
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