Weak NAND Flash demand, SSD market is under expectation. The 2009 market is still under oversupply

DDR2 667MHz 1GB contract price dropped another 10% again. The 2H December contract price may fall again.

DRAM chip price still can’t fight against the weak spot market demand, although the drop range was smaller than the previous week, the price is still in the down trend. Last week (Dec 2nd to Dec 8th), the DDR2 1Gb eTT chip price dropped from US$ 0.67 to US$ 0.61, with the drop range of 9%. The DDR2 667 MHz 1Gb also dropped from US$ 0.64 to US$ 0.61, with the drop range of 5%. The DDR2 512 Mb eTT slightly dropped 3%, but the price was already closed to the packaging and testing price. There is no cash inflow for the DRAM vendors and the output reduction has been taking into consideration to decrease loss. From the spot market point of view, with the month end window dressing finishing, market pressure has slightly decreased, but the total inventory level of the spot market is still high. With the global recession and the low Christmas Holiday demand, the time period of consuming inventory will be elongated. The recovery of demand in 1H09 will face certain difficulties.

In the contract market, 1H December contract price was still in the down trend, the drop range was about 10%. The DDR2 667 MHz 1GB average price was around US$ 8.5. The DDR2 667 MHz 2GB was only around US$ 18. The contract price has dropped 37% since the beginning of 4Q08 and surpassed the 34% drop range of 3Q08. From the market side, since the PC OEMs have no need to pull in inventory and with the freezing Christmas demand, the DRAM vendors are suffering from heavy inventory pressure and have to ship products caused the contract price to drop again. With the traditional 1Q slow season coming close, the 2H December contract price is possible to go down again.

The DDR2 667 MHz 2GB contract price dropped almost 60% since the US$ 44 high in July. With the added manufacturing cost of US$ 3, the average chip cost also dropped nearly 63% in five months from US$ 2.56 to US$ 0.94, which has never happened in the past. Although it’s still 54% higher than the original chip price US$ 0.61, the price drop is still a heavy burden to the vendors which mainly focused on the OEM business. The main difference between contract and spot, it’s that contract market cares more about chip quality and stability of chip supply. There is no major difference of manufacturing process among vendors, and what counts is the testing time, which determined the quality. Currently the DDR2 1Gb eTT average testing time is about 150 seconds, and the original chips are about 550 seconds, which are four times difference of the time length, and the packaging and testing prices also have 30% differences. Now the DRAM vendors without output reductions mainly focused on the OEM customers, and the further chip price drop will seriously hurt these vendors. The vendors which took reduction actions earlier will hurt less but still serious. In order to bring the market back to healthy status, the industry must rapidly help itself.

Weak NAND Flash demand, SSD market is under expectation. The 2009 market is still under oversupply

The expanding of the U.S. subprime effect has directly or indirectly influenced the global economy. NAND Flash is also under the effect. The demand for consumer electronics declined and the traditional hot season demand has also been redefined. Meanwhile, global economic outlook for 2009 shows declined in advanced economies or less strong in developing/emerging economies. The seasonal growth has also declined.

4Q was the traditional hot season for NAND Flash related applications. However, the down stream vendors became conservative about pulling in inventory for the year end hot season since the end of October. Besides that the inventory still remained, the market view of down stream vendors became more conservative with two-week market visibility. Although the North American market benefited from the thanksgiving sales to bring up the consumer buying momentum, the ASP was lower than the past level, and it may edge out some Christmas buying. Except North America, Europe and Japan also revised the economic growth of 2009. Besides developed economic entities, emerging markets are also influenced by the weak global economy. Traditional Christmas and New Year Holiday sales hot season will be under expectation. From the estimation of demand pull in of Chinese New Year, the average quantity and ASP of NAND Flash related applications will be expected lower than the past.

From the aspect of the NAND Flash applications, in 4Q08 and 1H09, the shipment of mobile phone, memory card, MP3/PMP will be revised under the shrinking demand. The high expectation of the SSD demand on low cost PC will become slow due to the previous Microsoft announcement, which had loosen the limit of HDD capacity on low cost PC from 80GB to 160GB. Currently the price gap between SSD and HDD is still large. The price per GB of MLC SSD is about US$4 to US$5, which is far higher than US$0.5 of HDD. Therefore, the chance of SSD to enjoy rapid growth is very small in short term. Now the SSD is only adopted on very few high end NB PC with 64GB SSD, like Lenovo Think Pad X300 priced at US$3,200 or SONY VAIO Z27 priced at US$2,800. Due to price concern, the potential market seems limited.

Shipment for Low Cost PC in 2009 will double and is estimated to reach 22.7M. However, SSD will not benefit from this rapid growing market. ASUS’s 7’’Eee PC played important role in Low Cost PC market in 1H08. SSD shared over 70% of Low Cost PC market at the same time. Acer later replaced SSD with HDD in 2H08, and this has reshaped the market. Other PC makers, like DELL or HP have also adopted HDD as their storage device. SSD penetration rate in Low Cost PC market dropped from 70% in 1H08, 18% in 2H08 to roughly 10% The main reason is that most PC OEMs have doubts about the SSD in the standard NB PC market, whether in price, reliability, or durability of SSD, and under the trend of low price demand, HDD will still be the main stream storage device on NB PC in the next two to three years.

As the outlook of 2009, the NAND Flash market will still be oversupply due to weak demand of the whole market, reduction effect hasn’t appeared, and lack of killer application in the market. We estimate that the 4Q08 demand will be under expectation and slow season effect will last until 1Q09.

1H December Contract Price Review

NAND Flash contract price of 1H December dropped between 5% to 25% due to low market visibility toward 1Q traditionally slow season. After restocking peak season, most downstream makers have had less motivation to increase their inventory. Most would digest their inventory in hand around Christmas sales peak and might fill the vacancy later depending on market demand. Meanwhile, upstream suppliers have also faced pressure to lower the inventory at the end of the year. Dual effect of weak demand in slow season and pressure to lower the inventory has led sharp price drop. If the sales on Christmas and Chinese New Year are better than expected, the price should stabilize. So far, outlook for NAND Flash market in 1Q09 tends to be conservative. We expect weak price under slow season and oversupply condition.

High growth China NB market can not avoid the trend of low price

2008 Chian NB market scale is estimated to reach 8.5 M, and accounts for 6.5% of the global NB market, which is 130M include Netbook. Although the contribution of its scale to the global NB shipment is still limited, while China is still an emerging market and with the lower than 28% NB penetration rate, which is far lower than the global average 50%, it is expected that after the U.S. and Europe, China will be another major source of the NB growth. Therefore the branding NB vendors never ignore this market.

According to the survey result of “China NB”, done by DRAMeXchange and Avanti Research Partners, the top five consumer brand preference are Dell, Lenovo, HP, ThinkPad, and Asus. (*This survey defined ThinkPad as a brand, Figure-4) This result is close to the list of the top five NB shipment vendors in China, which are Lenovo, Dell, HP, Asus, and Acer. The major difference is Acer which is on the top five shipment list but not in the brand preference list.

The questionnaire surveyed twelve factors that influenced consumers’ purchase of NB. The number one factor was price, the second was CPU, and the brand concern fell behind as number seven. Since PC is a mature product and the performance/price ratio is the major concern of consumers. The WW number three NB vendor Acer, which often utilizes low price strategy, applies it again in the China market without hesitation. That’s the reason why it was not on the list of top five brand preference but still got consumers’ attention by high performance/price ratio.

From Figure-6, it’s not difficult to find the price allocation of the NB purchased by the consumers. Under the uncertainty of the recession, the low price products became more attractive. The products fell in the price range between RMB$ 4,000 to RMB$ 6,000 reached 51% of the market share. Comparatively, the portion of NB above RMB$ 6,000 decreased while the price increased. Although the China NB market may become one of the regions with rapid growth, the trend of low price is in sync with the rest of the world.