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Last updated: December 14, 2005 8:04 pm

Samsung takes top honours in Memory game

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“Flash Rush” looks set to become the next buzzword for the technology industry – if Hwang Chang-gyu, president of Samsung Electronics’ semiconductor business, has anything to do with it.

He first used the expression, a reference to the US gold rush of 1849, this year to stress the growing race in the consumer electronics industry to embrace Nand flash memory chips for data storage.

The memory chips are in short supply amid the growing popularity of portable devices such as digital cameras and MP3 players.

“Nand flash will eventually replace other storage media, especially those used in mobile products, creating a ‘flash rush’, as Nand continues to register an unprecedented surge in demand as the backbone of the mobile electronics era,” Mr Hwang said earlier this year.

The market for Nand is growing at an annual rate of 32 per cent, with market researcher iSuppli expecting worldwide sales to reach US$15.4bn next year from US$10.8bn this year. Samsung controls more than half of the fast-growing market, followed by Toshiba with 22.8 per cent and Hynix Semiconductor with 13.2 per cent.  

But Samsung’s dominance in the burgeoning segment was challenged last week, as Intel, the world’s largest chipmaker, announced its first foray into the market through a joint venture with Micron Technology. Intel had been focusing on the other type of flash memory called “Nor,” popular for mobile phones. But it was unable to ignore the lucrative Nand market after Apple signalled a shift to Nand in September with the roll-out of the flash-based iPod Nano in September.

Apple secured a deal with Samsung for flash memory for the Nano that its competitors complained created a shortage of the chips in the sector as a whole. According to iSuppli, the deal allowed Apple to buy as much as 40 per cent of Samsung’s Nand output in the second half of this year.

But Apple is also trying to diversify its sources of Nand chips. It announced a combined US$1.25bn in deals to secure flash memory from Samsung, Hynix, Toshiba and IM Flash Technologies, the new joint venture between Intel and Micron.

Such strong demand from Apple and other gadget makers has helped Samsung, Hynix and Toshiba report strong profit margins of 30-50 per cent from the flash memory business, with Samsung saying it was able to meet only 50 per cent of demand.

But investors are wondering how long the major producers will be able to enjoy such high margins.

“The flash memory market size will eventually surpass that of the D-ram market, helped by increasing applications,” says Chung Chang-won, an analyst at Daewoo Securities. “But margins are bound to trend lower amid increasing competition, with Intel entering the market.”

Most analysts expect the impact of any supply increase to be limited until 2007, enabling the major three players to continue to enjoy high margins for
the next two to three years. 

Simon Woo at Merrill Lynch says “it will take at least a year for the JV to start mass producing Nand chips”.

The growth in demand for Nand flash memory has beaten market forecasts for the past few years, as new applications emerge and prices continue to fall.

Samsung, which sees an average 40 per cent fall in Nand chip prices next year, wants to cut the price further to create new demand as new devices come on stream.

“Most of the electronics devices are going portable. And Nand will be the memory of their choice,” says Yu Chang-eyun at BNP Paribas Peregrine.

He says the Nand flash market may face temporary oversupply in coming years, but new demand will soon soak up increased supply. And he expects Samsung to maintain its dominant position for the next few years: “Samsung has the steepest cost curve. It is the price setter and all the other makers are just followers.”

For Samsung, it seems, the Flash Rush promises to remain a gold rush for some time to come.

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