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Technology Stocks : WDC/Sandisk Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Art Bechhoefer who wrote (20154)	4/20/2001 2:22:14 PM
From: Ausdauer	Read Replies (2) \| Respond to of 60323

Art, You stated... But Eli had a few comments about the smaller companies probably being unable to weather the current conditions and leaving the market as a result. The other comment that I thought was interesting was the emphasis on the "very important" relationship between SNDK and Toshiba. Even though SNDK gave up its right to any royalties from this relationship, it got in return the muscle and the manufacturing/marketing/management experience of a really big company involved in electronic appliances. The two will share the output of the Virginia plant equally, and when that plant is in full operation later this year, it will be the lowest cost producer. SanDisk and Toshiba Yes, I think the Toshiba support is important as well. But what I see developing is smaller players dropping out of the flash card market while others try to fortify their position at whatever near-term cost. How will this work? I suspect some of the larger memory assemblers like Simple, Viking and PNY will try to arrange flash purchasing contracts with a specific flash vendor. The vendors are primarily Hitachi, Samsung and FlashVision. As demand at retail remains below expectations we are still faced with an oversupply/inventory workdown situation for all players. Price wars will continue as retailers try to move product. Vendors will facilitate this by making sharp pricing concessions so that inventory can be assembled and shipped. The fact that SanDisk wrote off a big chunk of inventory in Q1 is bothersome for two reasons. First, the quarter represents the peak aftermarket period following the holiday season. Second, Eli indicated in January that most of the inventory was raw material and reflected advanced process (read: low cost basis?) flash. Despite these favorable factors we had negative margins. And you can imagine that Lexar, Simple, Viking, PNY,... all have similar inventory problems. Add to this the ongoing output of UMC, Yokkaichi, the Hitachi production agreement from Q4 of 2000, and FlashVision coming on-line and I still see several quarters of oversupply ahead for SanDisk. You will recall that one of John Reimer's objections to SanDisk's licensing terms was the lack of flexibility regarding the source of flash memory used in Lexar's products. It suggests that SanDisk was trying at that time to leverage '987 licenses for long-term purchasing agreements of output from a preferred flash manufacturer. The logical source is FlashVision in this instance. In retaliation, Lexar appears to be flaunting its licensing successes and thumbing its nose at FlashVision by alligning themselves with Samsung. (This despite the fact that Toshiba was an early investor in Lexar Media.) In the mean time Lexar and others not saddled with fabs to run profitably will see sharp reductions in raw material costs. Lexar is working out a consignment package with Samsung which should help to insulate the company from depreciation of their finished product. Other assemblers must be thinking along similar lines. Meanwhile SanDisk and Toshiba are going to have a lot of flash wafer to divide amongst themselves. Toshiba is also going to be competing with SNDK in the SDMC market. It will be unreasonable to sell cards of SanDisk origin selectively and expect Toshiba to take a loss on their portion of the production. There must be a lot of potential for friction between SanDisk and Toshiba in this regard. I will plan to record and listen to the c.c. over the weekend. Perhaps some of my concerns were addressed by Frank and Eli. Aus