NAND Flash prices started seriously heading south in 4Q07, after a brief respite of rising and stable prices in 2Q-3Q07. The 'two quarters of price stability' last year, in turn, had followed a rapid price decline in 1Q07. But this year, the 1Q-2Q recovery was brief, April and May only, instead of the two full quarters of the 2007 bounce, which had restored prices fully to their YE 2006 levels. In 2008, NAND Flash prices have been mostly down and down...including 20% in June alone!

Some view this year's heavy and continuous price competition, which has driven the benchmark 8Gb devices from about $9.00 a year ago to $2.25 at the end of this past June, as being a result of weak demand. But shipment data, from WSTS, NAND Flash manufacturers who report their sequential and Y/Y GB sales and production growth in their quarterly financial calls, and a variety of other sources, indicates that suppliers have shipped about as many GB of NAND Flash in 1H08 as were shipped in all of 2007, indicating that the market is still growing at about +170% Y/Y growth rate, comparable to what we saw in 2007 (compared to 2006). Unfortunately, with the heavy price erosion, the NAND market in 2008 will be about the same size, in revenues, as it was in 2007: $15B, +/- 2B. However, one can see clearly the impact of pricing, if price declines ease much before year end 2008, the market COULD come in about $5B larger, or about $20B.

So when Samsung, Hynix, Micron, and SanDisk say they grew their NAND output by 30% from the quarter prior, that's a pretty impressive ramp, but it means they only picked up a small share of the industry's total output: 170% Y/Y is about 28% sequentially, Q/Q.

NAND suppliers have been hugely successful in adding output: So, if it's not weak demand, it must be strong supply, right? Yes, and therein lies the danger and difficulty in riding the NAND wave. This difficulty exists for the handful of players who are investing $3B per megafab, a few years in advance of its peak output; who see looming large (potential) NAND markets, such as SSDs; who recognize that to play in '10, you have to put the shovel in the ground today; who recognize that much of the demand in say, 2012, is truly speculative, based on some new applications and some natural price elasticity to expand shipments into existing markets of iPods, iPhones, USB drives, and DSC cards.

There is no credible way of determining what the average flash card GB will be is 2012, except by trend extrapolation. Who would ever guess that people want more photos in their personal computer than there are books in the Library of Congress, or 10,000 songs on their iPod, or more GB on their computer than were on a mainframe computer of NAND Flash makers are investing billions on a wing and a prayer, and so far, they have done OK. Losses, where they have occurred, are a pittance compared to those of DRAM makers. Once free-falling in price, the NAND market has usually recovered quickly (and periodically, so it has not been down-down-down)....as anything growing that fast will. Wait one quarter and the demand will automatically absorb 28% more output, or liquidate an apparent supply excess of the same magnitude. It takes minutes to drain the swamp when the current is so swift.

So, not infrequently, NAND makers swallow hard, check their cash flow, assess potential for their own cost reduction, say a prayer to the Gods of NAND Flash demand and put the shovel in the ground. They take on faith and some not inconsiderable hope, that NAND demand materializes as fast as supply does. So far, the NAND demand is pretty much OK, but there is always the potential for a major overshoot, for which demand (incremental or new demand) cannot materialize rapidly enough, and an overhang persists, driving prices into the pain zone. Capacity is growing so fast that market equilibrium and price stability may be way behind you before you realize that there are not enough applications (demand) to take away all the output.

Sources of GB production growth for 2008: For 2008, three-bits per cell will make only a small incremental contribution to bit growth; most will come from more wafers (square inches of silicon)...accounting for more than 60% of the GB growth, and from litho shrinks ...for the remaining 30-35% of GB growth. Cleverness of multi-bit cells, and improved lithography have their own cost, but it's the 'more wafers' that drive the NAND investment budget, making NAND CapEx investment in 2008 close to where DRAMs are, at more than $13B, though the DRAM market in larger in revenue terms by 50%. In the crazy semiconductor economics of 'building for the future', NAND makers' CapEx for 2008 far exceeds their NAND profits for this year, and rivals their expected total NAND revenues. For their sake, there better be large markets out there to absorb their planned boost of 150%+ in GB production. Compared to DRAMs in 2008, NAND investment has been largely unaffected by tough pricing and the threat of a supply overshoot. DRAM makers, on the other hand, have cut back significantly to try to restore market balance, and profitability.