Annual Flash Update -- The Pandemic's Impact

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00:01 Jim Handy: Hello, I'm Jim Handy, industry analyst and general director of Objective Analysis, a semiconductor market research and consulting firm. You may also know me as the Memory Guy or the SSD Guy, which are the names of two blogs that I write. I'm here to give you my annual update on the flash memory market, session C4 for the 2020 Flash Memory Summit. For those of you who don't know us, I will offer a brief introduction. Objective Analysis is a semiconductor market research and consulting firm with analysts that provide real depth. Each of us has years of experience in semiconductors; we provide standard and custom analysis of semiconductors and related markets.

00:43 JH: One point that we are particularly proud of is our forecast accuracy. I won't leave this table up for long during the presentation, but a copy can be viewed on our website at objective-analysis.com or on the downloadable slides. Today, I will talk about four things: the COVID-19 pandemic, what it has done and where we believe it is headed; China's memory business and the impact of trade sanctions; emerging memories, MRAM, ReRAM, FRAM, PCM, et cetera; and 3D XPoint or Optane, which is Intel's brand of PCM.

Let's get the difficult part out of the way first and look at COVID. It's amazing to me that the COVID-19 pandemic has not yet triggered a financial collapse. All kinds of would-be chip consumers are out of work, for example, in hospitality, hotel and restaurant workers. In the entertainment industry, live performers and theater workers; in transportation, airline workers, rail and hired cars like taxis and Uber. Government tax revenues are down as a result. It's simply a miracle that the chip business has suffered as small of an impact as it has so far.

02:02 JH: Work from home, in-home education and streaming games and movies have greatly boosted consumption in internet data centers, and that has offset the reduced demand from the consumer sector. The big surprise is that the chip market has fared better than most during this global tragedy. It would be reasonable to expect for chip sales to drop with increasing unemployment and with reduced GMPs, but the market has remained relatively stable. The dynamic behind this doesn't seem to point to any impending backlash either. The internet build-out will not turn into a glut as it did in late 2000, and there is pent-up consumer demand that should resurface once the world regains normalcy, but we still expect to see a downturn. So, let's talk about that.

02:52 JH: Economic collapses caused a demand drop; these occur far more rarely than most chip CEOs would lead you to believe. Most chip cycles stem from overinvestment instead -- the circles represent the demand lapses that have occurred since 1976. Whether an oversupply comes from a demand drop or excessive capacity, it always causes prices -- the red line here -- to drop to cost -- which is represented by the black line. This is what will happen if there is a global economic collapse. How big will that price drop be?

Today, my company, Objective Analysis, estimates the DRAM gross margins are 45%. This means that DRAM prices will fall by about 45% within two quarters of an economic collapse. NAND flash, on the other hand, is currently selling at prices closer to cost -- the price collapse will be far smaller for NAND flash. We've been seeing pretty stable prices since the NAND price collapse in 2018 and DRAM's price collapse in 2019, both of which appear on the left side of this chart. This is a chart based on the lowest weekly spot prices recorded by inSpectrum Memory Expert. Let's take a look at the recent part of this data, the right-hand third of this chart. This chart zooms in on 2020. I added callouts to key events in the pandemic, although spot prices have varied by about 20% from the highest to the lowest points in this chart, they haven't demonstrated the wild gyrations that spot prices are notorious for.

04:31 JH: Why has this market remained so stable? It's because an interesting dynamic has kicked in; although consumers have slashed their spending, they are locking down at home and are consuming everything over the internet. Smartphone sales have dropped, but since everyone is working, playing, studying and socializing over the internet, there has been a big build out of data center capacity, this has handily offset the demand drop. Similarly, although desktop PC sales have dropped, the work-from-home push has driven companies to purchase portable computers for their employees.

05:07 JH: So, desktop PC sales are down, but an uptake in notebook PCs has offset the decline. I write about COVID-19 and its impact at three important blogs, download the slides if you want a copy of these URLs. Just as COVID has changed each of your lives, it has changed my blogging. This is a drawing of the COVID-19 virus as it looks under an electron microscope. Since I need to write blog posts about it, I needed to get a different kind of keyboard, one that looks like the virus itself. This has allowed me to do a better job of reporting and forecasting its effects.

05:47 JH: What do you need to do about COVID-19? One important requirement is for you to stay flexible -- demand may shift from one market to another, as it already did from smartphones to the data center. You must watch the market carefully to be able to respond to changes with lightning speed. You will also need to plan with great caution, remembering that there is a high likelihood of global financial collapse before the pandemic is over. And the final and most important thing is that you must wear a mask. This is not so much to protect you, as it is to protect others. If everyone in the U.S. had worn masks every time they left home back in March, the spread of the disease would have simply stopped.

06:33 JH: So, now that COVID's out of the way, let's touch on some of those other subjects. Let's talk about China. This chart shows each region's consumption of semiconductors according to the World Semiconductor Trade Statistics, or WSTS, from 1976 until last August. Let's pay attention to China, the red part in the upper right. Until 2015, WSTS bundled China into its Asia-Pacific geography. Had China been reported separately, that chart would have looked something like this. China's chip imports are close to its entire consumption of semiconductors, which is around $140 billion a year. Semiconductors are the country single biggest import, even greater than oil -- China is at the mercy of other countries for this key part of its economy. How can China gain control of this? The country has put together a strategic plan to deal with semiconductors and other key dependencies called "Made in China 2025." This plan takes advantage of China's enormous cash surplus to achieve self-reliance in chips. Through a government-coordinated effort, China is investing in capacity and talent to develop a home-grown technology that hopefully will avoid IP issues.

08:00 JH: The U.S.'s response to this has been to include the semiconductor market into its overall trade war with China. This trade war has three aspects that are troubling.

First, economists believe that today's approach is focused more on nationalism than it is on achieving a mutually beneficial outcome.

Second, by attempting to draw a line around things that are from the U.S. or things that are from China, this approach ignores the fact that many businesses, especially in semiconductors, are global with development and production moving from country to country. It also ignores the fact that an act against the Chinese company can undermine U.S.-based firms more than it can benefit them.

Third, trade wars, although well intended, never seem to provide the desired results or anything even close. A good example in the current scenario is the fact that Chinese chip consumers built up inventories when the rhetoric escalates and then find themselves with excess inventory when things cool down. This results in buying patterns that cause artificial shortages and oversupplies. Meanwhile, companies with multinational operations move production from one region to another to dodge restrictions.

09:18 JH: The details of China's memory strategy are provided in great depth in an Objective Analysis report that I'll give you a link to shortly. Shifting gears, let's look into another really hot market, emerging memories.

There's been a lot of focus on emerging memories lately, foundries -- including TSMC, Samsung, GlobalFoundries and Intel -- have developed CMOS logic processes that offer embedded MRAM or resistive RAM as an alternative to embedded NOR flash, which can't scale past 28 nanometers. This has caused the emerging memory market to begin to take off, and there are multiple presentations at this year's Flash Memory Summit that can give you top-level information about all of these. For a deeper dive, I will recommend an in-depth report written by Tom Coughlin and myself -- I'll give you a link to that report soon as well.

Last, let's have a brief look at 3D XPoint memory or Intel's Optane. Optane is a strange beast. It's a sole source technology that needs to be priced to compete against commodity DRAM.

10:28 JH: The computing community loves it because it stores data blindingly fast compared to an SSD, but since software doesn't know how to tap into this advantage, it has required some pretty significant architectural changes to be implemented. That first point is a pesky one, though; Intel needs to sell Optane at a price that's lower than DRAM or it won't make sense to the buyer. Since it's a new technology, though, it costs more than DRAM to manufacture. As a result, Intel has lost money on Optane ever since its introduction.

How much money? This is a chart of the operating margins of companies that make NAND flash from 2016 through the second quarter of this year. The black WDC columns show Western Digital's flash margin, and the blue Intel column show the margins for Intel's Non-volatile Memory Solutions Group, or NSG, which until the SK Hynix acquisition a couple of weeks ago produced only NAND flash, SSDs and Optane SSDs. Note that everyone else was profiting in 2017 and 2018 while NSG was losing money. This gives us a rough idea of how profitable NSG would have been had it not had to make Optane products. By Objective Analysis estimates, Intel lost $2 billion on Optane in 2017, another $2 billion in 2018 and $1.5 billion in 2019.

12:02 JH: This is money that Intel hopes to recover through increased sales of higher margin server processors that use Optane DIMMs. If you want a better understanding of this, we have a report that tells you about everything you need to know about the technology. This slide shows the reports that I have mentioned so far, covering emerging memories, China and 3D XPoint or Optane. You can do a Google search on them or download my slides to get these hot links. With that, I am able to take questions from the live audience. Thank you for your attention.