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

To: broozer who wrote (27112)	12/8/2004 10:34:08 AM
From: Art Bechhoefer	Read Replies (3) \| Respond to of 60323

Broozer--re: McKinsey study. Yes, a 5% reduction in ASP could be made up by an 18% increase in sales, but I think those figures are made on the assumption that there is little or no change on productivity. In the case of flash memory, productivity is changing very rapidly as a result of larger wafer size and smaller "wire" size. What worries me is an announcement by Samsung, reported earlier this week in the New York Times, that Samsung is planning on spending about $23 billion in new capital investment to increase its production of chips and other products. Apparently Samsung is determined to maintain its leadership and ultimate domination of the flash memory sector, which would place constant pressure on SNDK margins. You can call this an example of irrational pricing, but it is consistent with a long used strategy by Korean companies to dominate a sector and then slowly begin raising prices once they are in the cat bird seat. Depending on how ruthlessly Samsung sticks to this strategy, there could indeed be pressure on margins throughout the industry, including on SNDK. But there is also a favorable side to this scenario. Samsung cannot increase its market share without also increasing its royalty payments to SNDK, since a considerable portion of Samsung's flash products depend on SNDK proprietary technology. I do not believe that most analysts who predict a drop in earnings for SNDK for '05 are factoring in the INCREASE in royalties that would go from Samsung to SanDisk under such aggressive tactics. Furthermore, while Korean government policies make it easier for some of the top companies like Samsung to gain access to more capital (if spent in Korea), I think there is a limit on this generosity, especially if world wide economic conditions begin to falter as a result of the declining value of the dollar. In short, Samsung has thrown the gauntlet but may not be able to bring its bold moves to fruition. And in either case, SanDisk is likely to benefit. Art