Golden age of NAND flash ending as makers pile in

By Kiyoshi Takenaka and Rhee So-eui

Honk Kong (Reuters) - Hot-selling flash memory chips are likely to fuel growth in the microchip industry in coming years, but their lofty profit margins are set to deflate as extra supplies pour in from new entrants such as Intel Corp.

(INTC.O: Quote, Profile, Research, Stock Buzz).

With competition stoked by newcomers, some producers of NAND-type flash memory such as STMicroelectronics (STM.PA: Quote, Profile, Research, Stock Buzz) and Infineon Technologies (IFXGn.DE: Quote, Profile, Research, Stock Buzz) may find themselves being forced out of the market, analysts say.

NAND flash memory can retain data when power is turned off and is used in portable consumer electronics such as Apple Computer Inc.'s (AAPL.O: Quote, Profile, Research, Stock Buzz) iPod music players and digital cameras.

"Historically, anyone who got into NAND flash did well because the market was incredibly strong," Gartner senior analyst Joseph Unsworth said.

"I think the outlook is strong, but it's not going to be favorable for everybody. You have all these new entrants piling in. It's very difficult to succeed in this market now."

Lured by strong growth prospects, some industry heavyweights are now entering the market and crashing the party, casting a shadow over profitability of the NAND flash memory business, which has enjoyed profit margins of some 40 percent.

Intel and Micron Technology Inc. (MU.N: Quote, Profile, Research, Stock Buzz) announced in November they would form a NAND flash joint venture, combining Micron's production capacity with Intel's financial resources and multi-level cell technology, which packs twice as memory capacity on one chip as conventional single-level cell technology.

"Any commodity product that carries high profit margins invite new entry and business expansion by existing players. That would resolve tight supplies and cut margins," Macquarie Securities analyst Yoshihiro Shimada said.

"When margins slide in an environment like this, they fall right past what is considered as an appropriate level and sink deeper before any recovery."

Driven by strong sales of portable consumer gadgets, the NAND-type flash memory market grew 65 percent to $10.9 billion in 2005, according to research firm iSuppli.

Soaring demand for NAND flash -- an ideal storage device for portable electronics since it can retain data without power -- helped No.1 NAND maker Samsung Electronics Co. Ltd. (005930.KS: Quote, Profile, Research, Stock Buzz) post a 40 percent jump in net profit in October-December.

ISuppli expects the NAND market to expand 140 percent to $26.1 billion by 2009, far outshining an expected 11 percent growth in dynamic random access memory (DRAM) chips.

GATE CRASHERS

Such forecasts have drawn some Asian chip makers including China's Semiconductor Manufacturing International Corp. (0981.HK: Quote, Profile, Research, Stock Buzz) and Taiwan's ProMOS Technologies Inc (5387.TWO: Quote, Profile, Research, Stock Buzz) to the increasingly crowded market.  Continued...