The Memory Market is not at Equilibrium yet.

WSTS has just released their semiconductor forecast for 2017 and 2018 suggesting that the memory market has peaked and will turn south from here. Our research on the demand and the supply side of the memory market points in a different direction.

The memory market has not yet reached an equilibrium and will continue to favour the producers of semiconductor memories. Although there has been invested significantly in increased supply, it will take time before the new capacity has a meaningful impact on the market. Hynix and Samsung started the investment cycle carefully followed by massive investments the last few quarters. Micron was out of the start block early but have now returned to a more conservative approach potentially expecting a turn in the market. Micron did add meaningful capacity by taking control of the Inotera, the manufacturing joint venture operated with Nanya but this does not add capacity to the market.

On the demand side, there have been two major surprises. Opposite to what should be expected of consumer products, the Smartphone and Tablet demand has remained solid irrespective of material price increases. The other has been the massive hunger of memory in the data Center, ignoring the price increases completely.

The move towards Big Data and Artificial Intelligence in the Cloud Data centre can be seen by Nvidia’s growing revenue. Nvidia cannot yet match Intel in the Data Center but seems to win most of the processor sockets for AI. Intel themselves believe 7% of the current processing capacity in the Data Center is associated with AI. Nvidia’s current share of processing revenue in the Data Center is slightly above that number. In other words, the current memory shortage could be a result of the 7% shift towards AI in the Data Center. It is safe to assume that this number will grow and have a significant impact on memory pricing.

The memory market could be entering uncharted territory.

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Semiconductor Memory Market shares Q2-2017

All memory companies had a great Q2. From a revenue perspective, both DRAM and NAND is continuing the significant growth rates as seen the last few quarters. NAND has recorded 4 quarter growth of 56.1% while DRAM has grown 79.4%. Quarter over quarter growth was 12.3% for NAND and 15.9% for DRAM. From a market share perspective a year ago, Micron managed to grab additional 3% DRAM marketshare while Hynix was flat and Samsung slightly down. In NAND, Samsung managed to win 5% marketshare while Toshiba lost close to 6%. Micron was flat while Hynix captured 2% and Intel lost 1.5%. Western Digital entered the market through the acquisition of SanDisk.

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The most important semiconductor in the Data Center

The data center is not a new invention, it originates from the mainframe older than the PC itself. Where the PC is dominated by consumer and B2B buying decisions the data center is a corporate support function designed to aid the value creation process of the company. As with all other support functions, the corporation will always try and optimise the cost in order to deliver a higher profit. In other words, data storage and computational capacity should be minimised to the level sufficient to support the business. This business perspective does not change by moving the enterprise data to the cloud, this is merely an outsourcing decision.

What has changed is the way that the new cloud companies treat data. For Amazon and Google and the likes, data is not “cost” – it is the new oil. The new internet giants store everything they can irrespective if they can use the data immediately. They will then mine this dark data for insights they can use to optimise their own business or sell to other companies. For these companies, data storage is not a support function but part of the value creation process itself. You will not see Amazon run out of cloud storage.

The increasing dominance of the cloud companies has also changed the supply and demand equilibrium in the memory market. A limited supply made pricing increase and dampened demand and ample supply did the opposite. Not only do the cloud companies need more storage to support their dark data, they also treat memory supply as a long term strategic need that will not be stopped by increased memory pricing. This is the main driver behind the current memory boom and it does not show signs of slowing yet.

The most important part in the Datacenter is now a DRAM.

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Mobile Share of NAND Revenue declining.

While the Mobile share of DRAM revenue has been declining for some quarters as a result of increasing memory pricing, the NAND share has continued to increase. There are two likely factors behind this discrepancy. The first one is that the pricing of DRAM has increased more than NAND pricing encouraging smartphone manufacturers to change the memory mix of their phones towards flash. The other factor is that the high-end phones (like iPhones)  have a higher content of NAND and with better margins, the phone manufacturers will accept higher pricing. The Q4 drop in the Mobile share of the NAND market shows that mobile consumption has reached an inflexion point. Most likely the Smartphone market is now in the early stages of significant decline.

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DRAM consumption is being disrupted

The PC is still alive and it still needs to be stuffed with DRAM. Over the last few years, the DRAM market has been in balance as the decline in PC and the Enterprise data centre was balanced out with increasing sales of DRAM to mobile applications. A few quarters ago, the market was caught by surprise by the rapid and relentless rise of the Cloud data centre. A move to the cloud should in principle be memory neutral, but it is not. Where the enterprise treats memory as cost and wants to limit it, the cloud data centres are used by companies drilling for the new oil: Big Data. To drill you need parallel processing power (like Nvidia’s GPU’s) and massive amounts of memory, DRAM in particular. The memory companies are all investing in additional capacity but it will take time to come online. In the mean time, the wolves will have to fight over the limited supply and it looks like the Data Center wolf is the strongest as data centre decisions are based on long term capital investments and not consumer decisions.

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By far the most interesting Semiconductor Company

Samsung did not respond to the shortage in memory and the subsequent increase in memory pricing immediately. The company did not increase fixed capital investments above the replacement level in the first few quarters of 2016. This might have been a careful response to Galaxy self-ignition problems or a lack of belief in the duration of the memory boom. If the management team of Samsung doubted last year, they are on fire in 2017. Samsung requires a capital investment of approximately 4.2B$ a quarter to maintain the current activity level. In Q2 2017, they increased the investments to over 10B$. If sustained it would mean an increased capacity level of 152%. Not all of this investment is in semiconductors, but it is fair to assume it takes the lions share.

Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our own data and analysis of the top semiconductor companies and related markets. We create a factbook on each of the top 30 semiconductor companies at a fraction of the price your business intelligence team compile it.

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One small step for Intel, one giant leap for Samsung

The quarterly results of major semiconductor companies are in and Intel is no more the largest semiconductor company. Helped by the overheated memory market, Samsung has added more than 5B$ in quarterly revenue in just four quarters. This is more than 27% of all the 18.5B$ semiconductor revenue added from Q2-16 to Q2-17. Even in a favourable market, this is a tremendous gain not seen before in the industry. The revenue gain is larger than the revenue of Samsungs key competitor Micron.

Our research reveals that most of the gains in the memory markets are not founded in shipments of more products but in pricing that is spinning out of control. No significant memory capacity has come online over the next few quarters and although the memory companies have increased their capital investment significantly, it will take time before it has an impact. Memory pricing used to be driven by consumer decisions and price increases were met with lower demand that dampened the increases.

This memory boom cycle is different. Our research shows that the Data Center is now the dominant force in memory pricing. The demand is driven by capital investments of a few cloud companies that will buy what they need irrespective of price. This was also the only market that was able to buy more memory products – all other areas received lower shipments even though revenue increased. The Smartphone and PC markets are shutting down and it will impact companies that sell other semiconductor products to these end markets.

Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our own data and analysis of the top semiconductor companies and related markets.

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The Great Memory Crisis of 2017?

The last year has been turbulent in the Semiconductor industry. It is not the first time that the semiconductor market is in memory bubble mode.  It is however probably the first time that the memory bubble is not created by consumers. In the good old days (last year) consumers would buy a lot of stuff with memory making the price of memory increase. This in return would increase the price of the stuff with memory and consumers would buy less stuff with memory making pricing fall again. The industry has been used to these boom and bust memory markets and knows how and when to invest.

Uncharted territory

However, this market situation is different. The semiconductor industry is entering uncharted territory. It is the rise of the data center that is creating the new situation. Not the enterprise data center where storage capacity is treated as a cost and should be minimised but the cloud data center, where storage capacity is an asset. The memory market is not controlled by the consumer anymore even though the consumers buy most of the memory. The memory market is controlled by the Cloud companies that treat storage capacity as a capital investment needed to win the cloud wars. Pricing is not an issue as long as the other cloud companies pay the same. Memory manufacturing capacity will not increase significantly over the next period at the same time as the cloud will need more memory. Other applications have already started to suffer from the price increases. Smartphones and PC’s are in a decline that will continue. This will affect the business of semiconductor companies selling into these markets. Will we talk about this situation in the future like we talked about the oil crisis? The memory crisis of 2017?

 

Do you want opinions or data driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our own data and analysis of the top semiconductor companies and related markets.

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We have only one advice for a Harddisk Company

Buy a flash company as fast as possible. Western Digital’s smartest move in a long time was to buy Sandisk and introduce flash products to their solid customer base in PC, Server, Consumer and the datacenter. Not only is the traditional harddisk market under pressure – the markets served are also under pressure. PC’s and traditional server markets are not growing and in the cloud data center the need is changing. Traditionally data was trafficked into the data center, stored and trafficked out of the datacenter again when needed. 78% of the data traffic in the new AI and Cloud data centers are internal and require fast access to significant amounts of data favouring Solid State memory over harddisks.

The impact of Sandisk on Western Digitals results are selfexplanatory. What company do you need to buy?

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