The flash memory module price war has begun, and Chinese mainland manufacturers are preparing for both

Since the second half of 2023, the global NAND Flash (flash memory) and module market has begun to enter a recovery track, which has continued until now. However, in this process, the market still has ups and downs, especially in the first quarter of 2024, which is the traditional off-season, in the consumer electronics market, the price war between NAND Flash and modules is still continuing, relatively speaking, the market demand for enterprises has been very strong, and the market competition is not as fierce as the consumer electronics market, and there are many fewer companies that can provide enterprise-level NAND Flash modules, and their lives are still good.

Here's a look at the market trends for NAND Flash and modules since July 2023.

In July 2023, NAND Flash prices bottomed out and began to rebound. At that time, NAND Flash manufacturers (Samsung, SK hynix, etc.) were making every effort to stop the price decline and recover by expanding the scale of production cuts.

In September 2023, downstream manufacturers began to replenish inventory, SSD module shipments continued to rebound, and NAND Flash prices began to rise.

In November 2023, NAND Flash ushered in a situation of both volume and price. The total shipments of SSD control chips continued to rise, among them, the total shipments of PCIe SSD control chips increased by nearly 40% year-on-year, setting a new record for the same period in history, and the total shipments of the overall number of storage bits of NAND Flash increased by about 80% year-on-year.

In January~April 2024, the demand for NAND Flash for AI servers will increase, and almost every capacity specification will be out of stock, and quotations will continue to rise. In the past two months, there has been frequent news of price increases, for example, Western Digital has issued a price increase notification letter to customers, and expects that the cumulative price increase of NAND Flash chips in the next few quarters may be 55% higher than the current quotation; Samsung has raised the price of NAND Flash by 10%~20%, and has decided to raise the price by another 20% in the second quarter.

Compared with AI servers, the demand for NAND Flash for mobile applications is smaller, and PCs are even smaller.

Starting from the fourth quarter of 2023, the NAND Flash inventory of PC and smartphone customers continues to rise, and the average price of corresponding products such as Client SSD, eMMC, and UFS has rebounded from the low point by more than 60% in the past six months or so, however, the market demand in the first quarter of this year has not been able to keep up with the growth of supply, which has weakened the momentum of price increases. Started selling NAND Flash Wafers at a price lower than the contract price. TrendForce believes that as NAND Flash suppliers still plan to increase capacity utilization in the second half of the year, it will be difficult for the quarterly contract price of consumer NAND Flash products to rise, and the overall quarterly contract price performance of NAND Flash will be weaker than that of enterprise SSDs.

01

Flash memory module market landscape

In addition to the original manufacturers for the bulk product market (Samsung, SK hynix, etc.), there are many third-party module manufacturers, in addition, there are some IC design companies that make control chips have also joined the ranks of module suppliers.

Flash memory modules can be divided into three categories: solid-state drives (SSDs), which are used in large-capacity storage scenarios; Embedded storage, which is used in low-power scenarios of electronic mobile terminals; Mobile storage, such as USB flash drives and mobile disks, is used in portable storage scenarios.

The flash memory module consists of NAND Flash, a main control chip, and DRAM chips (mainly found in mid-to-high-end SSDs).

The main control chip is used to allocate the load of data in each flash memory particle, undertake the overall data relay, connect the flash memory chip and the external SATA interface. In addition, the master chip is also responsible for a series of functional algorithms such as error correction, loss balancing, bad block mapping, read/write caching, garbage collection, and encryption.

DRAM chips present in mid- to high-end SSDs that improve input/output performance and endurance are used to temporarily save data read from flash memory, data to be written to flash memory, or address mapping tables. In order to save costs, low-end and mid-range SSDs are not equipped with DRAM particles and use HMB (Host Memory Buffer) technology and host shared memory.

In the NAND Flash market, storage OEMs (Samsung, SK hynix, etc.) mainly focus on enterprise-level or data center-level SSDs and embedded storage products of their own brands (accounting for more than 85% of the NAND Flash market), and these NAND Flash chip manufacturers are gradually withdrawing from the mobile storage (memory card, UFD, etc.) market (accounting for about 10% of the NAND Flash market). Module manufacturers are mainly oriented to the mobile storage market, and gradually penetrate into the SSD and embedded storage fields by improving the competitiveness of their own products.

Globally, memory module manufacturers include: Kingston, Seagate and SMART in the United States, ADATA, Transcend, PLEXTOR and Innodisk in Taiwan, Longsys, Langke, Baiwei, Dawei Chuangxin, Quanxing, Shichuang Electronics, Jiahe Jinwei and Yiheng Chuangyuan in Chinese mainland.

As an important part of the flash memory module, the main control chip plays a key role, and related manufacturers include: Marvell in the United States, Huirong Technology and Phison Electronics in Taiwan, Longsys, Montage Technology, Demingli, Deyi Microelectronics, Lianyun Technology and Guoke Micro in Chinese mainland.

02

Chinese mainland flash memory module manufacturers still need to work hard

Above, the development and changes of the NAND Flash and flash memory module market in the past six months, as well as global manufacturers, have made a brief combing, let's take a look at the competitiveness of relevant manufacturers in Chinese mainland in such a market background, and what aspects need to be strengthened.

On May 10, Phison Electronics, a major manufacturer of flash memory module control chips, said that a number of Chinese mainland flash memory module and control chip manufacturers began to sell low-priced inventory products, causing market concern.

On May 13, Phison Electronics once again said that mainland manufacturers began to sell low-price inventory, mainly because of the low added value of mainland enterprises' products, and the first quarter was the traditional off-season, and downstream system manufacturers had abundant inventory. With the arrival of the traditional peak season in the second half of the year, the PC and mobile phone markets are gradually picking up, and the low-price inventory of mainland manufacturers is gradually decreasing, coupled with the strong growth of the data center market from the original storage factory, it will continue to increase the price of enterprise-level flash memory modules and related chips.

Regarding the current market situation, ADATA said that the company's inventory DRAM and NAND Flash chip ratio is 6:4, and the time and cost of procurement are also different, coupled with the improvement of consumer electronics specifications, ADATA is optimistic about the market. It is understood that the company also has a large inventory, amounting to more than NT$20 billion.

The above information reflects the development of flash memory modules and related chip companies in Chinese mainland and Taiwan, China, relatively speaking, Taiwan-related enterprises started earlier, and their technology accumulation and market influence are better. Taking Phison Electronics as an example, the company originally only made the main control chip required for flash memory modules, and later, it became a manufacturer of both design modules and main control chips, and its business model connected the upper and middle reaches of the NAND Flash memory memory industry, based on the self-developed main control chips, and integrated them into flash memory module products to serve the upstream and downstream customers in the industry.

Compared with module manufacturers (Longsys, ADATA, etc.) and main control chip manufacturers (Huirong Technology, Dot Sequence Technology, etc.), manufacturers that combine these two businesses (Phison Electronics, Demingli, etc.) have the following advantages while ensuring capital and R&D strength:

1. The module business can be used to increase the revenue level, so as to provide more capital reserves for chip research and development, which can effectively reduce the R&D and operating expense rate while completing the technology iteration.

Second, the cost of module products can be reduced and the gross profit margin can be improved through self-developed technology addition. In addition, as memory OEMs focus on memory chip design and process improvement, many OEMs no longer develop their own main control chips, and module manufacturers with master control chip R&D capabilities have the opportunity to establish a deeper cooperative relationship with OEMs to further stabilize the acquisition of upstream NAND Flash wafers. Taking Demingli as an example, the company's gross profit margin (17.19%) in 2022 is much higher than that of module manufacturers such as Longsys and ADATA.

The reason why Phison Electronics publicly stated that it is not afraid of price reductions by Chinese mainland manufacturers is because the company has grasped the IC design and sales links with the highest profit margin, and the profitability is high, and at the same time, the company also carries out module design, and the finished product assembly is completed by outsourcing manufacturers. Because of the control of the most profitable link, its gross profit margin can be maintained at about 30%. In terms of gross profit margin, related enterprises in Chinese mainland are generally low.

03

Competitive strategies of Chinese mainland manufacturers

In the global memory value chain pyramid, there are many module manufacturers at the bottom, and the product homogeneity is prominent, and the market competition is also the most fierce. In this market segment, how can Chinese mainland manufacturers fight their way out of the Red Sea?

With the intensification of market competition and the inherent bottleneck of business models, the mainstream business models of traditional storage module factories are facing difficulties in breaking through the ceiling of $2 billion in revenue, and need to innovate, transform and upgrade in multiple dimensions such as technology, products, supply chain integration, brand and business model.

Let's take a look at the strategy of Longsys, a leading enterprise in Chinese mainland.

It is reported that Huiyi Microelectronics, a Shanghai subsidiary of Longsys that specializes in the research and development of flash memory module main control chips, has developed two chips: eMMC5.1 control chip WM6000 and SD6.1 control chip WM5000. It is reported that the company's self-developed main control chip is not to reduce costs, but to achieve the differentiation of storage products through the main control chip, so as to enhance the ability to compete with the first echelon manufacturers. For example, Longsys purchases memory wafers from IDM manufacturers, and the final memory products developed are difficult to compete with IDM manufacturers in terms of price, and can only provide differentiated products and services that better meet the specific application needs of end customers through customized packaging and testing, or new function development and performance optimization on the main control chip.

Longsys has also launched several self-developed SLC NAND Flash chips with different capacities, all of which have been mass-produced with a maximum capacity of 8Gb, mainly serving automotive-grade and industrial-grade customers, forming synergies with existing product lines and enhancing the ability to provide customers with integrated storage solutions.

In addition, it is also necessary to improve its own packaging and testing manufacturing capabilities. Longsys has built its own high-end packaging testing and manufacturing center to realize the integration of R&D, packaging and testing in all aspects of chip design, software and hardware design, wafer processing, packaging and testing, and manufacturing, and enhance the vertical integration of memory technology.

In addition to Longsys, several other flash memory module manufacturers in Chinese mainland are also looking for ways to improve the technical content and gross profit level of their products, and are preparing for future development while reducing prices and promotions.

04

Move into higher gross margin markets

At present, the competition in the flash memory module market for mobile phones and PCs is too fierce, therefore, many manufacturers are actively moving towards flash memory products with higher gross profit margins under the condition of ensuring that the company's business is basically not problematic, especially in the enterprise application market, the popularity of AI will continue, and the number of manufacturers who can provide corresponding high-performance flash memory modules is still relatively small, and the business opportunities here are very attractive.

The popularity of QLC SSDs is a business opportunity.

While the incremental market for consumer electronics is lackluster, there are some growing application trends emerging in the storage segment. For example, Solidigm is actively expanding the application of QLC NAND Flash, and its latest 192-layer QLC NAND Flash has 2.5 times faster programming speed, 5 times higher random read performance, and 1.5 times lower read latency compared with the first generation QLC. With more OEMs launching the new generation of QLC NAND Flash, QLC SSDs will accelerate their penetration in the consumer PC market.

As North American CSPs (cloud service providers) expand orders for storage products, driving the demand for enterprise-class QLC SSDs, TrendForce estimates that in 2024, the shipment of enterprise-class QLC SSDs will reach 30EB, a four-fold increase from 2023.

TrendForce believes that there are two reasons for the increase in the usage of QLC SSDs in AI servers: first, the read speed of the product; Second, the TCO (total cost of ownership) is low. Since the AI inference server is mainly read-oriented, the number of data writes is not as frequent as that of the AI training server, and the read speed of QLC SSDs is better than that of HDDs, and the capacity has grown to 64TB.

At present, the mainstream capacity of HDD products used in general-purpose servers is 20~24TB, while a single QLC SSD (64TB) product saves power compared to HDDs, and in addition, QLC requires less space, which can greatly reduce TCO costs. AI training has become a heavy power-consuming application, and energy saving will become a priority factor for storage products, so large-capacity enterprise-class QLC SSDs are the ideal solution for AI customers.

In addition, NAND Flash is evolving towards higher density, lower unit cost, and higher I/O performance, which means that NAND Flash has higher requirements for the performance of the main control chip, and requires the main controller to better optimize, correct, and manage resource allocation of flash memory, and support faster transmission protocols and interface speeds, so as to fully exert the high performance of NAND Flash. This provides more room for the development of flash memory module main control chip manufacturers.