By Phil LoPiccolo, Editor-in-Chief
Leading semiconductor market analysts were sharply divided at last week’s SEMI New England Breakfast Forum as to whether demand for NAND flash memory will keep pace with the expected supply in the foreseeable future, although all did agree that the future of flash holds the key to growth in semiconductor capital equipment spending over the next year.
“Any debate about this industry right now is ultimately going to get back to what your views are on NAND flash,” said opening speaker James Covello, managing director of the Investment Research Department at Goldman, Sachs & Co. “If you believe that NAND flash is going to be a terrific end market for a multi-year period, there’s no way you could possibly be anything but very bullish on the capital equipment industry. But if you’re like me, and believe that the NAND industry has excess capacity right now, you have to take a more cautious view.”
Covello’s concerns about excess capacity of flash memory led him to forecast a 5% decrease in capex spending next year, vs. general estimates of a 7% increase in chipmaker capex spending. “I absolutely believe in the long term demand for NAND flash — that we’re going to have 150%-180% demand growth over the next five years — but the problem is on the supply side of the equation, where there is a 200% supply growth in NAND flash this year.”
Some counter that there is an enormous amount of demand elasticity in NAND flash memory, so that as prices fall, more applications for NAND flash will be found. However, “when you have to cut price, your margins come down, to the point where for some of the industry leaders like Samsung, NAND margins are already lower than DRAM margins,” Covello noted, “and that’s why people like Samsung are starting to move some capacity back again to DRAM.”
Covello explained that, historically, three to four years of robust capex is followed by a couple of years of “cleaning up the excesses,” which is where we’re at right now. “The good news is that outside of NAND flash and microprocessors, the industry has not over-invested, and we’re cleaning up microprocessors pretty quickly,” he said. “But I think that NAND flash is going to create an overhang in the industry over the next couple of years.”
Seeking the perfect memory
SEMI breakfast panelist Ed White, managing director of Lehman Brothers, agreed that current trends in the memory market will largely determine capital equipment spending in the semiconductor market. But he offered a more bullish outlook based on an opposite view on the supply-versus-demand issue for NAND flash, forecasting a capex growth rate of 23% in 2006 and 10% in 2007.
White estimated that memory manufacturers spent heavily on equipment this year, adding some 298,000 wafer starts/month, and are planning to add another 422,000 wafer starts/month next year. “Most people look at that growth and say, there’s going to be way too much memory capacity coming online,” says White. But memory manufacturers are betting that a number of applications will drive demand for NAND flash over the next year — memory sticks for high-resolution cell phone cameras, flash memory in laptop PCs for lighter weight and instant boot-up capabilities, and higher-capacity video versions of Apple’s iPod and competing flash-equipped MP3 players.
Perhaps more significant, memory makers are also banking on the fact that for 30 years everyone’s been looking for the perfect memory: non-volatile, portable, and low in both cost and power consumption, said White. “This hasn’t been DRAM, and it hasn’t been hard disk drives,” he noted, but it now appears to be on the horizon with NAND flash. This “perfect memory” would proliferate as electronics companies create new industry segments around it — as has happened with Apple’s iPod, said White. “The investments by the flash manufacturers are not folly or over-exuberance; they’ve calculated this out and they see these opportunities.”
Taking a more guardedly optimistic view of the future of NAND flash was the third panelist, Stuart Muter, director and analyst at RBC Capital Markets, who sees a tough call whether new applications will generate enough demand for flash to keep up with the expected supply. “But so far, new applications have come along, as flash has been made more dense and at a lower cost. And I think they will continue to do so,” he said. — P.L.