Flash vendors show pricing restraint in surging market
By Will Wade
EE Times
(09/20/00, 04:11:35 PM EDT)
SAN MATEO, Calif. -- It's no surprise that the flash memory market is exploding. The astonishing growth of cellular telephones and other consumer devices couldn't happen without non-volatile memory. Flash is also emerging as a key element in the booming networking and telecommunications sectors, and the vendors are selling the chips as fast as they can make them.
Chip companies confirm that just about all of their capacity for this year is sold out, and they've already booked sales through much of next year as well. The only part of the flash market that isn't taking off like a rocket is pricing.
While prices for flash have swelled at a healthy clip since last year, several executives at flash suppliers say that they could have raised their prices even more. However, showing admirable restraint for companies in the memory segment, they have chosen instead to negotiate long-term agreements with many of their key, high-volume customers. This has kept prices reasonable and allowed the chip makers to forecast their future capacity needs with greater precision. It's a simple trade-off, they say: short-term profits for long-term stability. And if they manage to play this game skillfully, they may be able to fend off the next semiconductor downturn.
"A significant portion of the flash units shipped today are priced under long-term agreements," said Richard Wawrzyniak, senior analyst for Semico Research Corp. in Phoenix. "There is a severe shortage of flash and allocation is the rule of the day. You would think the ASPs this year would be sky-high, but they aren't."
That's not to say that flash pricing has been flat. Wawrzyniak said the average price for all flash chips sold this year is $5.26, up some 40.6 percent from last year's figure of $3.74. That gain reflects both higher prices and a different mix that saw increased shipment of the more expensive, higher density flash chips. "While the percentage gain is big, in dollar figures it's not that big," he noted. And over the next several years, that average price for flash chips should see only modest gains, increasing a projected 19% to reach $6.27 in 2004.
Over the same period, demand for flash bits is only going to increase, as Wawrzyniak's forecast calls for the total number of flash chips shipped to swell from 1.9 billion this year to 3.7 billion in 2004. But the long-term agreements are holding pricing down.
"We could have charged more for our chips," said Curt Nichols, general manager for the flash products group at Intel Corp., the leading flash vendor. Intel has more than 10 long-term sales agreements for its flash chips, including one to cell phone giant Ericsson, and Nichols said more than half of the company's total output is dedicated to these agreements. "I believe the flash industry is trying to get to a situation that allows for stable projections of both supply and pricing."
Intel is just one of many flash companies negotiating a few very large and long deals, which typically last about two to three years. Advanced Micro Devices Inc., which is part of a joint flash venture with Fujitsu and claims the number two spot in the flash market, has secured more than 20 of these deals, according to Kevin Plouse, vice president of technical marketing and business development for the company's memory group.
And Eugene Feng, director of worldwide marketing for fabless flash vendor Silicon Storage Technology Inc. in Sunnyvale, Calif., said his company has a few such agreements now, and expects to complete several more by next year. "Our goal is to have at least 50% of our output committed to LTAs," he said. "This type of deal has become a necessity for both suppliers and customers."
While the flash market is booming today, this was not always the case. The flash segment was hit just as hard as other sectors during the last semiconductor down cycle, in 1997 and 1998. With revenues down, the chip suppliers did not have the funds available to invest in fabs and increase their capacity. That is the reason for the shortage situation that the market is experiencing today.
However, when flash money started rolling in last year, the vendors began investing heavily in capacity, and those additional facilities are going to start delivering products soon. So far, this sounds just like the regular ebb and flow of the semiconductor cycle, but here is where the story diverges.
When thinking about the economics of the memory market, most people think about DRAM. In that space, memory vendors tend to price their chips as high as they can when the supply is tight, not only to sock away some profits for when the cycle heads down, but also to pay for capital investment in order to increase production capacity. In this purely commodity market, price and availability rank as some of the most important variables that can make or break a sale, which is why the vendors are so cutthroat in their pricing; a difference of pennies per chip can be huge.
"The flash market is very different," said AMD's Plouse. The main reason is that there are a wide variety of different products, rather than a few interchangeable designs. But even more important, the end applications for flash chips are seeing phenomenal growth, while the DRAM market is tied primarily to the more mature PC segment.
Flash customers need their parts, and without flash chips, they can't ship their products. And customers are not in a position to switch vendors easily, because there are so many different variables in the flash product portfolio, including density, voltage packaging, and whether the device uses the NAND or NOR architecture. They need their suppliers to keep supplying, even if the chip market heads into one of its periodical cyclical downturns, because there is no projected end in sight for growth in the cellular phone market.
"The flash and the cellular phone vendors are forging relationships that will lead to a more stable supply line," said Intel's Nichols. "If that means Intel gives up some of its ability to raise prices, that's OK. It's clear that the wild cyclical swings in the semiconductor industry are not conducive to good business practices."
So, with a more restrained approach to pricing, the chip companies are buying themselves a longer view of their customers' needs, and this allows them to better plan their own capacity expansion. In fabless SST's case, it allows them to secure better foundry terms because they can place larger orders with longer lead times, according to Feng, which keeps their costs lower. "Volatility in the market makes it hard for us to plan for the future," he said.
And it is in the future where this may all pay off. With a better view of the next several years, combined with amazing growth in cell phones and other end-use applications for flash, the segment may not fall into the trap of excess capacity leading into a downturn. According to Wawrzyniak, additional flash capacity coming on line will bring capacity almost perfectly in line with demand in 2002, and there could be a very slight oversupply through 2003. But by the following year, demand will again slightly outpace supply.
This is about the same period when some analysts expect other sectors of the chip market, notably DRAM, to start heading into an oversupply situation. "Some forecasts show that the unbelievable growth in cellular phones could well suck up all the available capacity that is coming on line," predicted Intel's Nichols.
That, combined with better long-term capacity forecasts — the by-product of long-term sales agreements — could allow the flash companies to build up only the capacity they need during that period, and avoid the oversupply situation that always leads to a downturn in other sectors. |
