Over the past 10 years, articles appearing in IHS iSuppli Market Watch have shaped opinions, defined issues and moved markets. The following article celebrates the 10-year anniversary of IHS iSuppli Market Watch, recapping some of the publication’s best articles over the last decade.
It’s official: Conditions for NAND flash suppliers are the worst in the history of the industry, according to iSuppli Corp.—and the situation is expected to deteriorate before it gets better. If that wasn’t bad enough, the suppliers have no one to blame but themselves for the sad state of pricing and profitability in the NAND flash business.
Average per-megabit pricing for NAND flash is expected to drop by 35 to 40 percent in the first quarter, compared to a 17 percent decline in the fourth quarter of 2006. This dramatic price plunge, which came on top of severe erosion in 2006, means that the NAND flash business as a whole likely will suffer an operating loss in the first quarter—the first time this has happened in the history of the market.
The major cause of the market’s poor conditions is the fact that the NAND suppliers were overly optimistic regarding demand elasticity in response to pricing cuts. These suppliers were left with lower pricing and no significant increase in volume sales, a devastating combination for their bottom lines.
It’s a basic lesson of economics: Unexpected price drops can stimulate demand, while anticipated declines merely can make buyers delay purchases until further cuts arrive. Unfortunately, NAND flash memory suppliers are learning this lesson the hard way in early 2007.
Demand Drivers Fizzle
While pure-play NAND suppliers like Toshiba Corp. and SanDisk Corp. are taking it on the chin, conditions are even worse for DRAM makers that also offer NAND, because both products now are experiencing declining prices. Average contract pricing for a 512Mbit Double Data Rate 2 (DDR2) DRAM fell to $38 in February, a 25 percent drop from January.
This pricing double whammy is coming despite the January rollouts of Microsoft Corp.’s Windows Vista operating system, which many expected to stimulate DRAM demand, as well as Apple Inc.’s iPhone music handset, which may emerge as a major consumer of NAND flash. Neither product has had a significant impact on memory pricing or demand so far.
So why are DRAM prices falling?
The major reason on the supply side is that prices were abnormally high throughout 2006—and now are returning to normal levels. In fact, because most suppliers’ production cost for 512Mbit DDR2 DRAM is about $3, there is more room for prices to fall. Furthermore, rising capacity among suppliers is sending prices down on a daily basis.
Meanwhile, DDR2 DRAM Days of Inventory (DOI) rose to more than 20 in February, up from 15 in January.
Unfortunately for the DRAM suppliers, iSuppli believes further price reductions are inevitable due to high inventories and weak demand. For example, the average price for 512MByte DDR2 UDIMMs is expected to fall to the $25 level during the second quarter of 2007, down from $50 in January. The current negative market conditions confirm iSuppli’s previous forecast that Vista would not trigger significant demand.
NAND to Recover Before DRAM
Is there any hope for what is shaping up to be a truly terrible year for the memory market?
iSuppli expects the NAND market to suffer a revenue contraction in 2007 compared to 2006. However, for all of 2007, NAND market conditions won’t be as bad as they were in the terrible year of 2006.
The NAND market is expected to hit bottom in the second quarter, as growth in bit production slows. This will bolster suppliers’ margins. With DRAM profits still higher than those for NAND, most DRAM suppliers are slowing NAND production growth, which will spur tightness in NAND supply during the fourth quarter, providing stabilization in pricing and profitability.
The DRAM market will begin to recover slightly after the NAND market in the third quarter, as attractive DRAM prices compel PC OEMs to install more memory in their systems during the seasonally strong sales period.
The Winter of Discontent
This is a brutal time for everyone in the memory market.
The depth of the problems for the memory suppliers didn’t become apparent until February, when SanDisk announced it would cut its workforce and reduce salaries.
iSuppli is maintaining its “negative” rating of near-term market conditions for DRAM and NAND suppliers, due to the lack of any factors that could lead to quick recovery.
However, conditions should improve in the second half when Vista demand materializes and high-density Portable Media Player (PMP) devices are introduced into the market.
Find Out More > IHS iSuppli Memory & Storage