Flash memory forecast: prices rising, conditions changeable, outlook uncertain

The rate at which flash prices have been plummeting for the last decade is stunning. The predominant form of flash is NAND, and with average reductions of about 30% per year, NAND chip prices have halved every two years, in terms of dollars per bit data capacity. In 2005, NAND was more expensive than DRAM. Now, it is about 30 times cheaper. The tumbling prices were caused by advances in flash technology, alongside heavy investment in manufacturing plants that have driven up supply.

In 2016, however, NAND flash entered a period of shortages, and prices started rising. The cause was the current transition of the NAND flash manufacturing industry from two- to three-dimensional chips. Although worldwide NAND output has continued to grow during the transition, it has grown more slowly than in previous years. Meanwhile, growth in demand has not slowed. A gap has opened between supply and demand, creating shortages. Initially, the shortages were expected to end this year, but some are now predicting that they will continue well into 2018. Although the transition to 3-D has renewed the NAND technology curve and flash makers are confident that they can deliver several more years of technical advances, it is not clear what the price curve will look like in the future.

The 451 Take

Regardless of the current situation, flash will continue to displace disk as the predominant primary storage medium. In the short term, the hurdles facing NAND chip makers in the 2-D to 3-D transition can and will be overcome, as the suppliers that led that transition say they have already proven. But we would not be surprised if the current shortages continue for longer into 2018 than some of the more optimistic forecasters have predicted. In the long term, market economics will drive continuing investments in flash chip fabrication plants, maintaining supply growth to meet demand. However, 451 Research also believes that NAND flash prices are unlikely to return to their historically rapid descent rates because of the growing size of the capital spending involved in manufacturing flash.

Smooth output, volatile market

At this summer's Flash Memory Summit, Seagate gave a keynote that was in large part about the outlook for flash prices. A striking chart in the presentation compared global NAND flash output with revenue over the last 13 years. In terms of exabytes of data capacity, output followed a mostly smooth curve of steady growth. Revenue also grew, but it took a very different trajectory, in a jagged succession of peaks and plateaus and even valleys when revenue fell despite the ever-increasing output. The difference between the two curves was due to the very elastic relationship between demand, supply and pricing in the NAND market.

This makes life hard for those making decisions about the multi-billion-dollar investments needed to build or update NAND flash fabrication plants. Robert Palmer, former Digital CEO, once said, "Building semiconductors is like playing Russian roulette. You put a gun to your head, pull the trigger, and find out four years later if you blew your brains out." The NAND flash market has been described by one participant as even more volatile than the DRAM market.

Rising prices and vendor impact

Six suppliers dominate the NAND flash chip industry: Samsung, Toshiba, Western Digital (WD, via its ownership of SanDisk), Intel, Micron and SK Hynix. Beginning two to three years ago, all six have been changing production from 2-D to 3-D NAND chips, on varying timetables, and with an impact on output growth. Estimates vary, but Seagate says that between 2013 and 2016, annual growth averaged 42%, but for 2017, it will drop to 33% (taking the total for 2017 to around 175 exabytes.)

In the volatile NAND market, sellers and buyers are involved in a lot of what might be described as 'horse trading,' and neither side is prepared to disclose the prices it charges or pays. However, WD confirmed to 451 Research that NAND flash chip prices have been rising for the last 18 months, in stark contrast with their history of falling. Another chip market watcher has said that prices have been rising during 2016 and that even during the first quarter when seasonally low demand would be expected to reduce prices, contract prices rose by about 20%.

WD is also a flash drive maker and like its rival drive makers it declined to comment on changes in the prices it charges for flash drives. However, storage system makers that buy those drives confirmed that the prices they have been paying for flash drives have risen. In each of its last three earnings calls, Hewlett Packard Enterprise has also explicitly referred to shortages of flash drives affecting its sales of all-flash arrays.

All the major storage makers, including HPE, have told 451 Research that they did not pass on the drive price increases to their customers, and have instead absorbed the increased costs. We assume this generosity toward their customers is due to the competitiveness of the storage system market and OEMs' desire not to lose market share during the current customer transition from disk-based to all-flash storage.

Short-term outlook: uncertain

In September, HPE said it expects the shortages to continue for the rest of the year but said they have begun to moderate. Some other observers have said that although shortages may end this year, they could return during the second half of 2018. Micron also said that although growth in global NAND supply in 2H 2017 is proving to be lower than had been predicted earlier in the year, during 2018 it will rise to match the growth in demand. We presume this means that Micron is expecting shortages to ease off in 2018. Back in July, WD said that it expected 'favorable conditions' to persist 'at least' through the first half of 2018. 451 Research assumes the favorability is from the perspective of NAND suppliers, and means that WD was expecting shortages to continue well into 2018.

Long-term outlook: more capex

Seagate buys NAND chips to make flash drives and those chips are most of the bill of materials for the drives. Seagate said this summer that like others in this position of relying on external suppliers of flash memory, it has been working through the classic stages of grief over the current situation, beginning with denial and progressing through anger, bargaining and depression to reach acceptance.

But not passive acceptance. Seagate is now set to buy itself a share of a NAND-making operation. Toshiba recently signed an $18bn deal to sell its flash chip-making business to a consortium that includes Seagate. Other members of the consortium include Apple, flash drive maker Kingston Technology and Dell Technologies Capital. Clearly a common motivation for joining the consortium has been the desire to secure a flash supply. That was also the primary motive for WD's purchase of flash chip maker SanDisk for $19bn in 2016 (and that purchase is at the root of WD's belief that it can block the Toshiba sale in court, because SanDisk has interests in Toshiba's NAND operations.)

In its Flash Memory Summit presentation, Seagate concluded that there are three possibilities for the future NAND price curve. When the current 2-D to 3-D transition ends, the curve could return to the same previous downward gradient, it could take on an even steeper descent rate or it could assume a gentler downward slope. Although the drive giant stressed that any of these futures is possible, it also suggested that the last of those three possibilities is the most likely, because of the ever-growing capital expenditure involved in NAND chip making. Seagate pointed out that since 2013, capital spending on NAND fabrication plants has been rising sharply as percentage of revenue, increasing from roughly 25% between 2013 and 2015 and now running at over 40%. It also cited a Credit Suisse estimate that capex per 1% of increased NAND output has more than doubled over the last three years.

Others have made similar comments. This year, WD said that the manufacturing of 3-D flash chips involves six to seven times more capex than for 2-D flash chips. This does not mean, however, that flash will not continue to replace disk as a primary storage medium, and WD said that will happen because flash prices will head downward while the disk price curve will continue to flatten. Other chip makers have made very similar statements and have even predicted that in 2018 the latest generation of QLC flash will begin attacking the last redoubt of enterprise disk; namely, 7,200rpm high-capacity disk drives.

While Micron has described flash prices as currently far more volatile than those of DRAM, it has said that this will change over time. Investments in manufacturing will see output rise and become steadier, according to Micron, because as the industry becomes larger, the effect of new fabrication plants coming online will diminish. The Chinese government has declared a plan to spend a massive $150bn developing a home-grown (rather than foreign-operated) semiconductor industry in China. Current NAND makers say it will be some years before Chinese state-funded manufacturers can enter the market, and that even then, on a technical basis their products will be generations behind those of the incumbent suppliers.

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