Micron Technology (NASDAQ:MU) is one of a handful of manufacturers of a type of computer memory known as NAND flash, which is used as permanent storage across a range of devices, from smartphones to mega data centers. Last quarter, about 30% of Micron's revenue came from sales of products based on NAND flash. 

On the company's most recent earnings call, management explained how the company's transition to a new NAND flash memory design -- one that uses a so-called "replacement gate" architecture rather than a "floating gate" architecture -- will improve performance and pave the way for future generations of NAND flash.

A Micron building.

Image source: Micron.

Unfortunately for Micron, that technology shift is going to have a painful consequence in the near term. 

Where's the cost reduction?

Memory makers develop new generations of NAND flash because those more-advanced designs allow for better performance and improved per-bit cost. That's why, over time, it becomes more economical to equip devices with greater amounts of NAND flash-based storage. Your smartphone might have had, perhaps, 32GB of storage many years ago, but today 128GB and 256GB of storage are commonplace; there are even smartphones with up to 1TB of storage.

Micron says that the transition from its floating gate technology to replacement gate technology will lead to a cost increase that stands to negate much of the cost benefit that the generational increase in bit density will deliver. 

To that end, CEO Sanjay Mehrotra said that the company's first-generation replacement gate NAND flash technology "will provide limited cost reduction, and hence we are planning to deploy this node across select NAND products, with the rest of the portfolio converting later to the second node of replacement gate."

Put simply, Micron needs to make this transition because it feels that the future of its NAND flash products will be based on replacement gate technology, but it doesn't want to invest too much in manufacturing capacity for the first-generation of that technology. Once it iterates on that technology, it should get a large enough cost reduction in that second generation that it can invest more heavily in production capacity and, ultimately, transition the bulk of its product portfolio over to it. 

Check out the latest earnings call transcript for Micron Technology.

This will have a market share impact

Micron admitted that because of the dynamics of this transition, it will see slower growth in its NAND flash bit shipments (bits are a measure of storage capacity) than the overall market will in calendar year 2020. Put simply, that means it'll lose some market share.

However, the situation looks far from dire. CFO David Zinsner explained that the company's plan is to "carry higher levels of [NAND flash] inventory into 2020 such that that would support the demand from our customers." 

Explained another way, Micron appears to be planning to stockpile inventory now so that when 2020 rolls around, it'll be able to sell the NAND flash that it had set aside to meet future demand as it undergoes that technology transition. 

Investor takeaway

Ultimately, Micron is taking an important long-term step by making the transition from floating gate to replacement gate -- the company seems to think that this move will help it to improve its competitive positioning in the market and, in the end, support its long-term ambitions.

To get there, it will need to feel some slight pain across 2020 as its bit shipment growth trails that of the overall industry. The key for Micron will be to make sure that in calendar 2021 and beyond, it can at least keep pace with the overall industry bit shipments -- in other words, not lose NAND bit share -- and, ideally, try to gain share. 

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