Reports gauge impact of Samsung NAND power outage

August 6, 2007 – Samsung says it has resumed normal full operations of six production lines at its K2 fab in Giheung (lines 6, 7, 8, 9, 14, and S), one day after they were brought down on Aug.3 due to “a switchboard malfunction,” though industry watchers have been quick to speculate about potential larger ramifications.

A Bloomberg report noted the affected lines make up 91% of Samsung’s NAND flash capacity. Reuters cited wary analysts suggesting as many as half of all chips on the lines would have to be scrapped, resulting in up to a 15% drop in Samsung’s 3Q shipments.

The Korea Times — noting Samsung’s “nonchalant” attitude — quoted semiconductor division president Hwang Chang-gyu saying that “the third-quarter earnings will tell it all” and “will exceed the market’s expectations,” though the paper also pointed out that it could take more than a month to verify quality for the affected products. Samsung’s insurance easily covers the damage, up to 5.5 trillion won ($6B), but it’s not clear if the company will invoke the policy, the paper pointed out.

Other industry watchers noted how the outage indicates possible weak spots in Samsung’s chipmaking infrastructure, in that a single blown power supply taking down all the lines in the K2 area means there was only one common power point. “A Japanese chip plant would never allow that,” noted an unidentified “industry expert” quoted by the Nikkei Business Daily. By comparison, Hiroshima Elpida Memory Inc. has two power points in its chip plant and each of three production areas has a station for switching high-voltage current, and several transformers work at only ~50% of load capacity to help prevent such shutdowns, the paper noted.

Korea’s Chosun Ilbo pointed out what others speculated or stated, that the outage might have a silver lining by pushing semiconductor prices up, possibly tacking as much as a $700M on top of annual profits.

iSuppli also thinks that the short downtime probably won’t have a major impact on Samsung’s financials, but the temporary production outage could give some upside to the global NAND flash memory market by causing a parts shortage rippling through August that bumps up prices. Any downtime on the Samsung lines by more than a few days would cause significant supply problems for customers including flash-hungry Apple, which needs the devices for both its iPods and new iPhone.

The firm anticipates that any drain in NAND flash device supplies would be quick to recover, though, as companies switch capacity from DRAM to NAND in 3Q. Even though Samsung represents 35% of global NAND wafer output, rival suppliers are planning to increase their production in 3Q anyway (e.g., Hynix wants to double its output), helping to mitigate any shortages, iSuppli noted.

Some analysts agree that there won’t be much market opportunity for Samsung rivals to take some business because of the temporary outage. Robert Van Batenburg of Louis Capital Markets suggests maybe not major Samsung customer Apple, but other flash customers may seek second sources with SanDisk and Micron, notes Barron’s blogger Tiernan Ray. And as CNet’s Tom Krazit notes, that’s possibly because of Apple’s “favorable” supply terms that give it priority once Samsung’s lines are proven back up and running.


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