According to a Financial Times report on October 24, 2022, as the U.S. Department of Commerce moves to restrict U.S. personnel from supporting semiconductor manufacturing “facilities” located in China to develop or produce chips without Department approval, Yangtze Memory Technologies Co., Ltd. (YMTC) has taken steps to avoid violating the ban and allowed a number of core employees with U.S. citizenship to resign.

YMTC is a domestic NAND flash memory chip manufacturer in China. In 2018, it only possessed the ability to produce 32-layer MLC 64Gb products. At that time, mainstream products offered by international manufacturers were 92-layer/96-layer TLC 256Gb/512Gb. Since then, YMTC has continued to catch up in terms of technology. By 2020, it had the capacity to mass-produce 128-layer TLC 512Gb products. The company’s new X3-9070 product, released in 3Q22, is estimated to have 232 stacked layers, equaling major international manufacturers if only in the amount of layers.

U.S. personnel played a key role in the process of YMTC’s continuous technological breakthroughs including Simon Yang, CEO since 2016. On the eve of the latest U.S. sanctions, Simon Yang resigned as CEO to become managing director. After the ban came into effect, a number of core personnel of U.S. nationality who assisted in the development of process technology resigned in succession. As sanctions continue to roil, technological development at YMTC may be delayed as a result.

Under the influence of the U.S. ban, YMTC not only faces brain drain, but will also experience difficulties expanding mass production of mainstream products and next-generation products. Since the U.S. Department of Commerce not only placed restrictions on equipment utilized to produce 128-layer (or more) NAND flash memory chips, but also maintains a “presumption of refusal” when reviewing the export of such equipment to China, YMTC may be unable to obtain sufficient equipment to produce next-generation 232-layer products or expand the production of mainstream 128-layer products.

As international NAND flash memory chip manufacturers continue to mass-produce products with more than 200 layers and move towards 300+ layers, if YMTC cannot manufacture products over 128 layers because the company continues to be limited by talent and equipment restrictions, the technological divide between YMTC and major international manufacturers will widen again and its recent efforts to keep up with technology will also come to nothing.

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According to TrendForce research, looking at NAND Flash wafers, the pricing of which more sensitively reflects the market, suppliers are increasingly motivated to cut prices in exchange for sales due to weak retail demand since March and a more conservative outlook for shipments of other end products. The price of NAND Flash wafers is expected to begin falling in May and the supply of NAND Flash will gradually overtake demand in 2H22. The price decline of NAND Flash wafers in 3Q22 may reach 5~10%.

At the same time, TrendForce indicates that February’s contamination incident at Kioxia was expected to tighten the market in 2Q22 and 3Q22. However, as a consequence of rising inflation and the war between Russia and Ukraine, market demand for consumer products in the traditional peak season of the second half of the year is trending conservative and the prices of client SSD, eMMC, and UFS in 3Q22 will be flat compared to 2Q22, breaking from the original expectation that prices may rise. In terms of enterprise SSDs, as demand for data centers remains strong, no significant correction in demand has yet been observed. However, as the overall NAND Flash market gradually moves into oversupply, prices will only grow slightly by approximately 0~5% in 3Q22.

Weakening demand in a period of unabated production expansion, NAND Flash may face oversupply in 2H22

From the perspective of demand, due to the war between Russia and Ukraine, rising inflation, and the pandemic in China, overall demand for consumer electronics is weak. Demand for Chromebooks dwindled rapidly at the beginning of 2022 as exogenous demand from the pandemic disappeared. In terms of conventional notebooks, the situation with commercial models and consumer models present a divergence. Demand for commercial notebooks is benefiting from a return to the office occurring in many countries, while the opposite is true for consumer notebooks. Therefore, overall demand for notebooks in 2022 will be lower compared to demand in 2021. In terms of smart phones, the production volume of Chinese brands has been suppressed due to China’s flailing against the pandemic and government lockdowns stemming from a continued insistence on a dynamic zero-COVID policy, resulting in continuous downward revisions of global smart phone production for 2022.

In terms of supply, Samsung is focusing on substantial future growth in the enterprise SSD sector and continues to maintain its original capacity expansion plan, especially after its NAND production line was derailed due to the Xi’an lockdown at the end of last year. In order to stabilize future plant operations, the capacity of its P2L fab in South Korea continues to increase. Yangtze Memory Technologies (YMTC) will also expand its wafer input plan in 2H22. Since the 128L yield rate has reached the company’s goal and it had successfully broken into the tier 1 smartphone supply chain in 1H22, YMTC will also accelerate production at its second factory in Wuhan. Therefore, TrendForce indicates, since an overall weakness in demand will linger in 2022 yet certain manufacturers will maintain a pattern of expanding production, the NAND Flash market will face oversupply in 2H22. As mentioned above, the prices of various products will be flat or experience reduced growth in 3Q22.

According to TrendForce research, demand continues to weaken due to modestly high inventories maintained by buyers and sellers, coupled with the recent impact of the Russian-Ukrainian war and rising inflation on PCs, laptops, and smartphones. However, overall NAND Flash supply has been significantly downgraded in the wake of raw material contamination at Kioxia and WDC in early February, becoming the key factor in a 5~10%  NAND Flash price appreciation in 2Q22.

In terms of Client SSD, the Russian-Ukrainian war has compelled PC OEMs to adopt a conservative stocking strategy for orders in 2Q22, which may continue affecting orders during peak season in 2H22, and revising 2022 shipment targets downwards. This year, SSD output has officially stepped out from the shadow of the semiconductor shortage. As Kioxia’s production capacity gradually recovered to supply SSD products in May and production capacity continues to roughly meet customer demand, suppliers have adopted a more aggressive pricing strategy. Price growth in 2Q22 is forecast to moderate to 3~8% compared with original expectations.

In terms of Enterprise SSD, as procurement capacity and orders for servers and hyperscale data centers grow and lead times on Enterprise SSD products balloon due to material contamination at Kioxia and WDC, clients immediately turned to Samsung and Solidigm looking for supply. Since the supply of PCIe 4.0 products is limited, suppliers have adopted a tough price negotiation policy which will drive the price of enterprise SSD up by 5~10% in 2Q22.

In terms of eMMC, demand for consumer products such as TVs, Chromebooks, and tablets continue to weaken, limiting demand for low- and medium-capacity eMMC products to a marginal level. Although the primary supply of low-capacity 2D NAND output has yet to be affected by raw material contamination, the overall deal-making atmosphere of the market remains transformed by the contamination incident. In addition, the plan of suppliers to gradually reduce 2D production capacity has not changed. Therefore, suppliers are eager to maintain profits by increasing the price of relatively low capacity eMMC products. eMMC contract pricing in 2Q22 is forecast to rise by 3-8%.

In terms of UFS, the Russian-Ukrainian war, high inflation, and other factors have weakened demand for the most important UFS applications such as smart phones. Likewise affected by the contamination of raw materials, the total output of 3D NAND has been significantly reduced. For UFS products with larger capacity and higher layer counts, the downgrade in supply far outstrips movement on the demand side. UFS pricing in the 2Q22 is forecast to increase approximately 3~8%. In terms of NAND Flash wafers, although demand for products such as flash drives and memory cards is weak, these are low priority products in the supply chain. Since raw material contamination has seriously affected the supply of NAND Flash wafers. 3D NAND Prices are forecast to move upwards by 5%~10% in 2Q22.

Despite the forecasted 18.6% YoY growth in total DRAM bit supply next year, the global DRAM market is still expected to shift from a shortage situation to an oversupply, according to TrendForce’s latest investigations. This shift can primarily be attributed to the fact that, not only are most buyers now carrying a relatively high level of DRAM inventory, but DRAM bit demand is also expected to increase by only 17.1% YoY in 2022. On the price front, the oversupply situation will result in a drop in DRAM ASP in 2022 but not a major decline in annual DRAM revenue, thanks to the oligopolistic nature of the DRAM industry. Annual DRAM revenue for 2022 is expected to reach US$91.54 billion, which represents a slight YoY increase of 0.3%.

Based on an analysis of DRAM sufficiency ratio (which refers to the surplus of supply in comparison with demand) for each quarter in 2022, TrendForce forecasts a 15% YoY decrease in DRAM ASP for 2022, with prices undergoing the more noticeable declines during the first half of the year. Heading into 2H22, however, owing to the rise in DDR5 penetration rate, as well as the arrival of peak seasonal demand, the decline in DRAM ASP will likely narrow. TrendForce does not rule out the possibility that DRAM ASP may even hold flat or undergo an increase in 2H22.

Annual NAND Flash revenue is expected to experience yet another increase next year by 7.4% YoY while numerous suppliers compete in higher-layer NAND Flash market segment

Turning to the NAND Flash market, TrendForce forecasts a 31.8% increase in total bit supply for 2022 and a 30.8% increase in total bit demand. Hence, NAND Flash ASP will likely experience a downtrend next year as a result of the oversupply situation. In addition, due to the perfect competition in the NAND Flash market, the decline in NAND Flash ASP next year will be more noticeable than the decline in DRAM ASP. However, NAND Flash suppliers continues to make progress in the stacking of NAND Flash layers, so the growth in NAND Flash bit supply next year will therefore remain above 30%. TrendForce thus expects NAND Flash revenue to have more room for growth and reach US$74.19 billion in 2022, a 7.4% YoY increase.

TrendForce’s forecast based on an analysis of NAND Flash sufficiency ratios for each quarter in 2022 similarly points to an 18.0% YoY decline in NAND Flash ASP next year. Much like DRAM, NAND Flash prices will undergo the more noticeable declines during 1H22. Arrival of peak seasonal demand in 2H22 will potentially result in a narrowing of price drops and a potential for quarterly prices to hold flat.

On the whole, the revenue performance of the DRAM industry and that of the NAND Flash industry over the years show that the annual total DRAM revenue is growing at more stable pace. Again, this has to do with the oligopolistic structure of the DRAM market. Since the DRAM market has a different competitive landscape, the fluctuations in the overall DRAM ASP have been relatively modest over the long run. However, the development of the DRAM manufacturing technology is approaching a physical bottleneck as process nodes shrink below the 20nm level. This means that the bit growth derived from the deployment of a more advanced process is becoming more and more limited over the years. On the other hand, not only are NAND Flash suppliers relatively more unstable in their capacity expansion plans compared to the DRAM industry, but further improvements in NAND Flash layer-stacking technology also remains feasible. Hence, the fluctuations in the overall NAND Flash ASP have been relatively more volatile over the long run. On account of these factors, the DRAM industry generally has smaller YoY revenue growth rates compared with the NAND Flash industry, although the DRAM industry continues to surpass the NAND Flash industry in terms of profitability.

Profitability of suppliers may be constrained if total revenue fails to keep pace with continuously rising CAPEX

Regarding the CAPEX (capital expenditures) of DRAM suppliers, there has been a gradual increase in these suppliers’ CAPEX to sales ratio in recent years, for two reasons. First, the development of the DRAM manufacturing technology is approaching a physical bottleneck. Die improvements have become more and more limited after process nodes have shrunk below the 20nm level. Micron’s 1alpha nm process can offer an almost 30% increase in bits per wafer, but the 1Xnm-to-1Ynm migrations and the subsequent 1Ynm-to-1Znm migrations that the major suppliers have undertaken in the recent period have yielded increases of no more than 15% in bits per wafer. Looking at future technological developments, Samsung and SK hynix have already integrated EUV lithography into their most advanced process technologies. However, orders for EUV lithography tools have a much longer lead time, and the costs of these tools are also high. Hence, the three dominant suppliers have allocated a large chunk of capital expenditure in advance to place orders for EUV lithography tools ahead of time.

Secondly, the oligopolistic structure of the DRAM market has also helped establish a regime where there is a very low chance of a supplier’s ASP dipping under its fully-loaded cost despite the recurrence of the cyclical price downturn. Moreover, DRAM suppliers have accumulated a substantial amount of profit from their products. In view of the difficulties in die shrinking, suppliers ranging from the three dominant suppliers to others with less market share (such as Nanya Tech and Winbond) have developed tangible plans for capacity expansions. These plans have, in turn, become the other main driver behind the ongoing increase in the CAPEX to sales ratio.

The CAPEX to sales ratio of NAND Flash suppliers have likewise risen substantially following the transition to 3D NAND technology in 2017. Notably, the average CAPEX to sales ratio fell within the 25-30% range prior to 2017, but it has since climbed to nearly 40% as of now. This growth can primarily be attributed to the fact that, as the number of 3D NAND layers increases, there is a corresponding increase in the lead times of NAND Flash products and in the degree of precision as well as difficulty involved in the etching process. While the mainstream layer count of NAND Flash products approaches 1YY layers, suppliers are currently planning to move forward with the development of products with 2XX layers, which place an ever-increasing demand on etch depth. The CAPEX of NAND Flash suppliers will continue to grow alongside increases in layer count and revenue.

TrendForce indicates that NAND Flash layer-stacking technology will continue to progress, meaning suppliers will continue to pursue the stacking of additional layers as a way to lower their manufacturing cost per GB. As such, the NAND Flash industry’s CAPEX will have additional potential for growth going forward, with a CAPEX to sales ratio of close to 40% or above. It should be noted, however, that if total NAND Flash revenue fails to keep pace with the growth in CAPEX in the next few years, NAND Flash suppliers’ CAPEX to sales ratio may potentially undergo an excessive increase, thereby constraining the profitability of suppliers.

For more information on reports and market data from TrendForce’s Department of Semiconductor Research, please click here, or email Ms. Latte Chung from the Sales Department at lattechung@trendforce.com

The latest analysis of the NAND Flash market from TrendForce finds that shipments have been below expectations for consumer electronics such as smartphones, Chromebooks, and TVs during this second half of the year. At the same time, demand remains sluggish for retail storage products including memory cards and USB drives. Data centers and enterprise servers represent the only applications that show relatively strong demand. With the inventory level of the demand side steadily rising, the procurement momentum of NAND Flash buyers will become more constrained going forward. The gradual weakening of demand is also relieving the shortage of NAND Flash controller ICs. Taking account of these factors, TrendForce forecasts that quotes for NAND Flash products will begin to fall in 4Q21, and NAND Flash contract prices will register QoQ declines of 0-5% for that period.

For 4Q21, Contract Prices of Client SSDs Will Drop by 3-8% QoQ, Whereas Contract Prices of Enterprise SSDs Will Rise Slightly by 0-5% QoQ

Countries in North America and Europe are gradually lifting COVID-19 restrictions as their vaccination rates rise. Consequently, schools and businesses in those countries have also reopened and resumed normal operation. Due to this development, the demand for Chromebooks, which are mainly purchased by academic institutions, has started to slide rapidly. The demand for consumer notebook (laptop) computers has slowed down as well. Among different types of notebook computers, only commercial models continue to experience growing demand. On the side of device manufacturers, the shortages of other types of non-memory ICs are disrupting the operations of ODMs. In particular, the prolonged nationwide lockdown in Malaysia has aggravated the undersupply situation for PMICs. This problem not only impacts the production of PCs and notebook computers but also affects the product assembly capacity of some SSD suppliers.

Additionally, NAND Flash suppliers are rapidly raising production capacity for NAND Flash products that are 128 or higher in layer count. As a result, supply is gradually outpacing demand for SSDs. TrendForce believes that suppliers will become increasingly proactive in pricing in order to raise the consumption of their production output by customers and thus prevent excess inventory. Hence, contract prices of client SSDs are forecasted to make a downward turn in 4Q21 and register QoQ declines of 3-8%.

Regarding enterprise SSDs, customers in the data center segment have raised the volumes of their orders for two quarters straight, and their inventories have been climbing steadily as well. Therefore, the demand for enterprise SSDs will start to weaken in 4Q21. The procurement of enterprise SSDs by server OEMs will continue to be sustained by server shipments to medium and small enterprises in 4Q21. However, the total server shipments for the same period will be impacted by the ongoing IC shortage. Server shipments are forecasted to drop by nearly 9% QoQ for 4Q21, and the demand bits related to enterprise SSDs will also fall by 7% QoQ for the same period.

Turning to the supply side of the enterprise SSD market, lead time has been prolonged for the enterprise SSD controller ICs from Intel because Intel’s main base for packaging and testing this kind of chip is located in Malaysia, which is now a COVID-19 hotspot. The situation is not expected to improve in 4Q21, so bit shipments of enterprise SSDs from Intel will shrink from 3Q21. Since Intel’s market share for enterprise SSDs is fairly large, the effect of the recent COVID-19 outbreaks in Malaysia on contract prices of enterprise SSDs will be significant. TrendForce currently forecasts that contract prices of enterprise SSDs will rise by 0-5% QoQ for 4Q21. The hike will be mainly caused by the lack of components on the supply side rather than an increase in demand.

5-10% Reduction Projected for eMMC Prices amidst Significant Drop of End Demand

The demand for major consumer products, such as TVs and tablets, has started to weaken after the conclusion of the traditional peak season of stocking, as well as the gradual withdrawal of subsidization policy from the US. The continuous elevation of the vaccination rate in European and American countries, followed by a progressive mitigation of lockdown measures in various countries and successive resumption of school operations, have yielded an apparent impact to the demand for notebooks and tablets related to education purposes, while the aggravated stocking from the buyers during 1H21 in fear of shortages in NAND Flash controller IC has increased the inventory level and further suppressed eMMC orders. Despite stable capacity for low density 2D MLC NAND, as well as confined supply of NAND Flash controller due to the full load capacity of 28/40nm processes from foundries, the prices have been deprived of support owing to the sizable depletion in end demand, where a prominent decrement of 5-10% is expected for relevant products during 4Q21 after the substantial increase in 2Q21.

0-5% Reduction Projected for UFS Prices amidst Enhanced Supply and Diminished Demand

TrendForce has downward revised the projections to the annual production of smartphones under the fluctuating COVID-19 pandemic status in Southeast Asia. In addition, the stocking demand for new iPhones and flagships of various brands will gradually decelerate upon entering 4Q21, while the peak season of stocking is soon to be transitioned to the imminent off season. Purchase dynamics of UFS are expected to further subside. Regarding supply, mobile clients are currently using similar layers in products to that of PC OEMs after the spontaneous incorporation of 1xxL by different brands during 1Q21, and the provision of products with higher layers is expected to amplify under PC products’ expansion of market satisfaction and the unmitigated component gaps of ODMs. UFS quotations are estimated to deteriorate by 0-5% in 4Q21 under enhanced supply and diminished demand.

NAND Flash Wafer Prices to Sustain the Largest Quarterly Decrease of 10-15% amidst Subsided Demand for Major Applications

The demand performance for retail end products has been sluggish since the beginning of 2021 aside from the temporal nourishment from the related demand for a storage-based cryptocurrency (Chia) between April and May. Memory cards and USB flash drives have been sluggish in sales since 2Q21 due to the successive exacerbation of the pandemic status in India and Southeast Asia, and the sales of retail SSD from channels have been impeded owing to the shortages of graphics cards, which obstructs the bundling with assembled computers. The fluctuation of cryptocurrency prices, for which the plummeting had slightly improved the shortages of graphics cards at one time, has triggered another recovery in the demand for mining, and further inhibits the sales volume of SSD. It is worth noting that the diverted tendency between end products and upstream components has manifested considerable pressure to module houses.

Pressure from the sales of NAND Flash wafer inventory is expected to gradually magnify for suppliers under the worse-than-expected demand for products such as notebooks, smartphones, and TVs. Few suppliers have signaled their willingness in active provision during 4Q21, though the continuously enlarging void of PMIC has instead entangled the shipment of finished enterprise SSD, which intensifies the sales pressure of NAND Flash wafer. Furthermore, YMTC, WDC, and Micron have initiated an active supply of 128, 112, and 176L product samples to module houses for testing and incorporation. The incorporation of higher layers will further refine shipment cost that will obtain additional room in price reduction for suppliers. 3D NAND wafer is expected to sustain the largest depletion among all product categories at 10-15% during 4Q21.

For more information on reports and market data from TrendForce’s Department of Semiconductor Research, please click here, or email Ms. Latte Chung from the Sales Department at lattechung@trendforce.com