Toshiba plans to cut flash memory chip production starting in January, citing the global economic slowdown. SanDisk, which operates manufacturing lines jointly with Toshiba, said it will follow suit.
Toshiba announced on Monday that its Yokkaichi Operations plant in Japan's Mie prefecture will cut NAND flash memory production by approximately 30 percent, effective from January 2009.
"Recession in the global economy and the slowdown in consumer spending are having a significant impact on demand for semiconductors," Toshiba said in a statement. "This is particularly notable in NAND flash memories, where decreased demand for applications such as memory cards and MP3 players has generated excess supply."
The Yokkaichi facility has four fabs. Fab 3 and Fab 4 produce NAND flash memories on 300-millimeter wafers, Fab 1 and Fab 2 on 200mm wafers, Toshiba said. "Prior to the January production adjustment, the 300mm wafer lines will suspend operation for 13 days, and the 200mm wafer lines for four days, during the year-end and new-year period," the company said.
Milpitas, Calif.-based SanDisk, meanwhile, said it will halt production at the same joint-venture manufacturing facilities in Yokkaichi. "Production in Fab 3 and Fab 4 will be temporarily halted from December 31 to January 12. Following this shutdown, joint-venture production will resume at approximately 70 percent of current capacity," the company said in a statement.
"The duration and extent of this reduction in fab output will depend upon market conditions," SanDisk said.
SanDisk also said it is continuing to work with Toshiba on definitive agreements to restructure the manufacturing joint ventures and expects to sign these agreements in the first quarter of 2009. An agreement that covers selling a portion of the capacity from the joint ventures to Toshiba was originally announced on October 20.
SanDisk will provide additional details when it holds its fourth-quarter 2008 earnings conference call.
In the wake of a big loss posted this week by SanDisk, layoffs appear to be in the offing.
On Monday, SanDisk said in prepared remarks that as part of its efforts to reduce operating expenses, "actions will be implemented in the current quarter" and will include "canceling or exiting a number of products and marketing activities, and will result in employee reduction in R&D, Sales & Marketing, G&A, and Operations."
And on Monday during SanDisk's third-quarter earnings conference call, CFO Judy Bruner spoke about more restructuring to come. In response to a question about operating expenditures, she said: "We're taking actions that we believe are quite aggressive and will cause us to make some pretty tough choices in the business." She later added: "We have not finalized yet our restructuring actions."
On Tuesday, Samsung published a letter withdrawing its $5.8 billion offer to buy SanDisk at $26 per share, citing the Milpitas, Calif.-based flash memory company's financial straits. (Although this doesn't necessarily mean that Samsung is abandoning its effort to buy SanDisk.)
Samsung, among other things, pointed to SanDisk's $250 million operating loss in the third quarter and the "considerable increase" in SanDisk's "risk profile."
But that wasn't all. In its letter, Samsung also mentioned "major job losses across your organization." (Full Samsung letter here.)
SanDisk shares were down 32 percent in trading at 12:20 p.m. PDT, to one of the lowest levels in years.
Will 2009 be the year that solid-state drives take off? Maybe not. The speedy drives are catching on, but wider acceptance will take time--and the bad economy isn't helping.
Costs are still high for these drives, which typically outdo--and in some cases blow away--hard disks in performance. "2010-2011...that's when we think the price points for the SSD market get attractive enough to really drive stronger growth," Sanjay Mehrotra, president and chief operating officer of SanDisk, said this week during SanDisk's third-quarter earnings conference call.
Samsung is the leading supplier of solid-state drives.
(Credit: Samsung)Indeed, there is still a wide price gap between hard-disk drives and solid-state drives. The difference, for example, between a 120GB hard-disk drive and 128GB solid-state drive--essentially the same capacity--on the new Apple MacBooks is $500. That's a deal-breaker for a lot of consumers. (On a Dell XPS M1530 notebook, the difference in price between a 250GB 5400rpm hard disk drive and a "Ultra Performance" 128GB solid-state drive is also $500.)
"On the mainstream notebook side we agree with SanDisk that the price points are too high and the added benefits received by customers from SSDs are just not worth the added expense," said Avi Cohen, managing partner at Avian Securities. "We expect the transition in notebooks to take a long time and will probably require Microsoft to change the OS in order to jumpstart this transition," Cohen said, citing the need for Microsoft to make Windows Vista and Windows 7 more SSD-friendly.
Eli Harari, chairman and CEO of SanDisk, believes that solid-state drives will have to wait a little longer yet for their breakthrough.
"It's still a very young market, and 2009 is not the year that it really takes off," he said during SanDisk's earnings call. In addition, solid-state drive demand will not be enough to siphon off the flash memory oversupply that is plaguing the flash memory industry, he said. "I don't believe...that 2009 inventory overhang is going to be solved through solid-state disks."
Nor does Intel--which just started shipping its first high-capacity solid-state drives this fall--see the market really taking off for a couple of years in laptops.
"I believe within in two years when the economies of scale come into play and the prices hit the right point, it will not only be in the more expensive systems but go down to mainstream (laptops)," Mooley Eden, Intel's general manager of mobile platforms, said in Taipei on Tuesday. Intel is shipping 80GB drives now and will ship a 160GB solid-state drive later this quarter.
Seagate, the largest hard-disk drive supplier, plans to enter the market in 2009 but sees "price as an inhibitor right now," according to Rich Vignes, senior manager of market development at the Scotts Valley, Calif.-based company. He also says standards work needs to get completed to make enterprise customers comfortable and "overcome endurance fears."
Beyond that, enterprise customers are showing resistance to accelerated adoption of solid-state drives as the economy worsens. "Conditions across technology are awful," said Avian Securities' Cohen. "On the enterprise SSD side, where we thought it made the most sense for the transition to occur...we have seen a slowdown in momentum for this shift as CTOs and CFOs look to conserve cash and slow new adoption programs."
SanDisk said it is still "open" to a Samsung buyout offer and hinted at more restructuring to come, as the largest supplier of retail flash memory cards reported a third-quarter 2008 net loss of $155 million on Monday.
The loss was significantly worse than the net income of $85 million reported in the third quarter of 2007. SanDisk and other flash memory chip suppliers have been hit by a steep price decline in flash.
Operating loss, on a GAAP basis, was $250 million, compared to GAAP operating income of $109 million, in the third quarter of 2007.
The Milpitas, Calif.-based company said the average price per megabyte sold declined 63 percent on a year-over-year basis and 30 percent sequentially.
SanDisk also hinted at more restructuring. Despite announcing an agreement with Toshiba on Monday that will help SanDisk's bottom line, CFO Judy Bruner spoke about more restructuring to come. In response to a question about operating expenditures, she said: "We're taking actions that we believe are quite aggressive and will cause us to make some pretty tough choices in the business." And later added: "We have not finalized yet our restructuring actions."
Eli Harari, chairman and CEO, however, said that the Toshiba deal should help it survive further market declines. "What the (agreement) does, if it gets really ugly, we have the balance sheet to survive that kind of environment," Harari said. "This is a very, very important factor."
Regarding the buyout bid from Samsung disclosed in September, Harari reiterated that his company is "open to a transaction at the right price, (with) the right process, and the right protections for SanDisk's shareholders."
But he also restated that the offer of $26-per-share is far from adequate. "Samsung significantly undervalues (SanDisk) in light of the value of our IP (Intellectual Property) to Samsung. Samsung stands to gain enormous value from owning our patents and our know-how."
(Correction: the offer was $26 per share not $36 as originally stated.)
"Owning these patents and know-how is so critical for Samsung's future profitability," he said. Specifically, Harari said that Samsung needs technologies like X4--which will allow SanDisk to make higher density flash memory that uses four bits per cell. To date, most flash memory suppliers have offered chips with one or two bits per cell.
The company also spelled out its 2009 roadmap. By the end of this year two-thirds "of bit production" will be on a 43-nanometer manufacturing process, with 32nm planned for the second half of 2009. Shipment of chips with X4 technology is expected in first half of next year.
By the first quarter of next year, SanDisk will be shipping 32-gigabit NAND flash chips and in the second quarter, 64Gb chips. This would allow SanDisk to ship Secure Digital (SD) flash cards with capacities of 64 gigabytes and up. Currently, the largest-capacity SD card it offers is 32GB.
Toshiba is in talks to buy SanDisk's chipmaking facilities, according to Japan-based reports.
Currently, Toshiba and SanDisk jointly own flash memory manufacturing facilities in Mie Prefecture, Japan.
SanDisk is the largest supplier of retail flash drives in the U.S.
Toshiba has started negotiations to buy SanDisk's portion of the facilities, according to Nikkei. The newspaper said this is in response to Samsung's bid to buy SanDisk that was disclosed last month.
Toshiba and SanDisk have two joint ventures that manufacture NAND flash memory. SanDisk has a 49.9 percent interest in each of the ventures and also funds R&D related to the ventures.
Last month, SanDisk rejected a buyout offer from Samsung. The Milpitas, Calif.-based company has been caught in a brutal downward spiral of flash memory prices and is a laggard in the growing market for solid-state drives--where Samsung is currently the leader.
As SanDisk's profits have been squeezed, its stock has plunged more than $60 per share during the past two years.
All this makes for a vulnerable takeover target. SanDisk's chairman and CEO, Eli Harari, said last month that the $26-a-share bid from Samsung was "opportunistically timed at the trough of an industry-wide downturn."
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