This year is looking like a remarkably good time to be in the market for a NAND SSD, with drive prices cratering across the board. It’s not, however, a very good time to be a NAND manufacturer. As prices have fallen, multiple companies have announced plans to draw down manufacturing and attempt to protect their profit margins.
According to Intel in its Q1 2019 conference call, NAND price declines were a drag on its earnings, falling nearly twice the expected amount. This boom and bust cycle is common in the DRAM industry, where it drove multiple players to exit the market over the past 18 years. This is one reason we’re effectively down to just three DRAM manufacturers — Samsung, SK Hynix, and Micron. There are still a few more players in the NAND market, though we’ve seen consolidations there as well.
Pretty much everyone is planning to trim NAND production or phase out lower-producing lines to cut overall costs. As the industry has moved to 64-layer and 96-layer NAND, effective capacity has increased. Multiple companies have also invested in bringing up new foundries for NAND production in recent years, to fuel the growing demand for smartphone storage.
According to a DRAM Exchange press release in March, overall NAND prices fell 20 percent in Q1. Intel, however, saw greater exposure than this. Here’s Bob Swan, Intel CEO, from the company’s latest conference call.
The not planned in the quarter was just the ASP declined much greater than we had anticipated for NSG. We were in the — we were expecting kind of mid-20s to 30 percent ASP declines. The reality is it was closer to the mid-40s. And as a result, and George flagged this, but as a result, we had to take a lower cost or market reserve against our inventory balance in the quarter. That cost us over 1 point of gross margins in the quarter. That we did not quite anticipate.
NSG is Intel’s Nonvolatile Solutions Group, which sells Optane and NAND. This also explains rumors we heard about NAND pricing putting pressure on Optane earlier this year — a greater than 40 percent decline in NSG ASPs is enormous. Micron and Hynix have both announced that they will phase out older manufacturing, in order to optimize their own cost structures.
We saw something similar in hard drives when the HDD shortage hit back in 2011 — hard drive manufacturers never rebuilt old lines and phased out production of smaller drive capacities as a long-term result of the shortage. Of course, that was a capacity crunch, not a supply glut, but there was an impact on available products and manufacturing in both cases. SK Hynix is cutting its production of 36-layer and 48-layer NAND, as it moves to 72-layer and 96-layer NAND, and is slowing the ramp of its M15 fab in South Korea. Total shipments of NAND are still expected to increase this year, so the companies in question aren’t slashing absolute production.
The central difficulty of navigating the DRAM/NAND boom-and-bust cycle is managing when your foundry is expanding versus when it optimizes for lower costs. But keep an eye on storage prices as the year goes by — this is likely going to be the best year out of the next several in terms of overall cost per bit.