The price war of flash memory modules has begun, mainland Chinese manufacturers

2024-07-05

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 to the present. However, there have been ups and downs in this process, especially in the first quarter of 2024, which is a traditional off-season. In the consumer electronics market, the price war for NAND Flash and modules continues, relatively speaking, the demand in the enterprise market has been very strong, and the market competition is not as fierce as in the consumer electronics market. There are far fewer companies that can provide enterprise-grade NAND Flash modules, and their business is still going well.

Let's take a look at the market trend of NAND Flash and modules since July 2023.

In July 2023, NAND Flash prices hit rock bottom and began to rebound. At that time, NAND Flash manufacturers (such as Samsung, SK Hynix, etc.) successively made every effort to stop the price from falling and rebound by expanding the scale of production reduction.

In September 2023, downstream manufacturers began to replenish their inventory, and the shipment of SSD modules continued to rebound, and the price of NAND Flash began to rise.

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In November 2023, NAND Flash ushered in a situation where both volume and price increased. The total shipment of SSD control chips continued to rebound, among which, the total shipment 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 shipment of NAND Flash overall storage bits increased by about 80% year-on-year.

From January to April 2024, the demand for NAND Flash used in AI servers increased, and there was a shortage in almost every capacity specification, and the price continued to rise. In the past two months, there have been frequent price increase news, for example, Western Digital issued a price increase notice to customers, and expected that the cumulative price increase of NAND Flash chips in the next few quarters may be 55% higher than the current quote; Samsung has increased the price of NAND Flash by 10% to 20%, and decided to raise the price again by 20% in the second quarter.

Compared with AI servers, the increase in demand for NAND Flash in mobile phone applications is relatively small, and it is even smaller for PCs.

Starting from the fourth quarter of 2023, the inventory of NAND Flash for PC and smartphone customers continued to rise, and the average price of corresponding products such as Client SSD, eMMC, UFS has rebounded by more than 60% from the low point in about half a year. However, the market demand in the first quarter of this year did not keep up with the growth of supply, which weakened the momentum of price increases. Recently, some manufacturers have even started to reduce prices to grab orders, especially module manufacturers, in order to reduce inventory, they have started to sell NAND Flash Wafer at a price lower than the contract price. TrendForce believes that as NAND Flash suppliers still plan to increase the utilization rate of capacity in the second half of the year, the quarterly contract price of consumer-grade NAND Flash products will be difficult to rise, and the overall performance of the quarterly contract price of NAND Flash will be weaker than that of enterprise-level SSDs.Flash Memory Module Market Landscape

Globally, there are numerous companies that provide NAND Flash, control chips, and flash memory modules. In addition to the original manufacturers (such as Samsung and SK Hynix) targeting the bulk product market, there are also many third-party module manufacturers. Moreover, some IC design companies that produce control chips have also joined the ranks of module suppliers.

Flash memory modules can be divided into three major categories: Solid State Drives (SSDs), used in high-capacity storage scenarios; embedded storage, used in low-power scenarios for electronic mobile terminals; and mobile storage, such as USB drives and portable hard drives, used in portable storage scenarios.

Flash memory modules consist of NAND Flash, main control chips, and DRAM particles (mainly found in mid-to-high-end SSDs).

The main control chip is responsible for allocating data loads across various flash particles, undertaking overall data transfer, connecting flash memory chips, and external SATA interfaces. In addition, the main control chip is also responsible for a series of functional algorithms such as error correction, wear leveling, bad block mapping, read/write caching, garbage collection, and encryption.

DRAM particles found in mid-to-high-end SSDs can improve input/output performance and durability, used for temporarily storing data read from flash memory, data to be written into flash memory, or address mapping tables. To save costs, mid-to-low-end SSDs do not equip DRAM particles, instead, they adopt HMB (Host Memory Buffer, host memory buffer) technology and share memory with the host.

In the NAND Flash market, storage original manufacturers (such as Samsung and SK Hynix) mainly focus on their own brand's enterprise-level or data center-level SSDs and embedded storage products (accounting for more than 85% of the NAND Flash market). These major NAND Flash chip manufacturers are gradually withdrawing from the mobile storage market (such as memory cards, UFDs, etc.) (accounting for about 10% of the NAND Flash market). Module manufacturers mainly target the mobile storage market, and by enhancing their product competitiveness, they gradually penetrate into the SSD and embedded storage fields through differentiated competition.

Globally, storage module manufacturers include: U.S. companies Kingston, Seagate, and SMART, Taiwan's Adata, Transcend, PLEXTOR, Innodisk, Mainland China's Longsys, Langke, Biwin, DaWei, Chuanxin, Quanxing, Shi Creative Electronics, JHJW, and Yiheng Chuangyuan, etc.

As an important part of the flash memory module, the main control chip plays a key role, and related manufacturers include: U.S. company Marvell, Taiwan's Silicon Motion Technology, Phison Electronics, Mainland China's Longsys, Montage Technology, Demingli, Dey Microelectronics, LianYun Technology, and Guoke Micro, etc.

02Mainland China flash module manufacturers still need to work hard The above is a brief review of the development and changes in the NAND Flash and flash module markets in the past six months, as well as global manufacturers. Let's take a look at the competitiveness of relevant manufacturers in mainland China under such a market background, and what aspects need to be strengthened. On May 10, Phison Electronics, a major flash module control chip manufacturer, said that many mainland China flash module and control chip manufacturers began to sell low-priced inventory products, which aroused market attention. Taiwanese manufacturers are worried that manufacturers with high inventory may no longer enjoy the inventory price increase dividend, but instead become a burden. On May 13, Phison Electronics once again stated that mainland manufacturers began to sell low-priced inventory, mainly because the added value of mainland companies' products is low, and the first quarter is a traditional off-season, and downstream system manufacturers have sufficient inventory. Regarding such market conditions, Phison Electronics said that the company has other high-end products and does not need to follow up and sell off. With the arrival of the traditional peak season in the second half of the year, the PC and mobile phone markets are gradually recovering, and the low-priced inventory of mainland manufacturers is gradually decreasing. In addition, storage manufacturers benefit from the strong growth of the data center market, which will continue to increase the prices of enterprise-level flash memory modules and related chips. At that time, manufacturers with a large amount of low-priced inventory, represented by Phison Electronics, will be able to usher in good business opportunities. Regarding the current market conditions, ADATA said that the company's inventory of DRAM and NAND Flash chips is 6:4, and the time and cost of procurement are also different. In addition, the specifications of consumer electronics are improving, and ADATA is optimistic about the market. It is understood that the company also has a large amount of inventory, with an amount of more than NT$20 billion. The above information reflects the development of flash memory modules and related chip companies in mainland China and Taiwan. Relatively speaking, related companies in Taiwan started earlier, with better technical accumulation and market influence. Take Phison Electronics as an example. The company originally only made the main control chip required for flash memory modules. Later, it became a manufacturer that designs both modules and main control chips. The business model it adopts connects the upstream and midstream of the NAND Flash storage industry. Based on self-developed main control chips, it integrates them into flash memory module products to serve mid- and downstream customers in the industry. Compared with module manufacturers (Jiangbolong, ADATA, etc.) and main control chip manufacturers (Hua Rong Technology, Dot-Sequence Technology, etc.), manufacturers that combine these two businesses into one (Philian Electronics, Demingli, etc.) have the following advantages while ensuring funding and R&D strength: 1. The module business can be used to increase revenue levels, thereby providing more financial reserves for chip R&D, and can effectively reduce R&D and operating expense rates while completing technology iterations. 2. The cost of module products can be reduced and gross profit margins can be increased through self-developed technology additions. In addition, as storage manufacturers focus on storage chip design and improving process technology, many manufacturers no longer develop their own main control chips. Module manufacturers with main control chip R&D capabilities have the opportunity to establish a deeper cooperative relationship with the manufacturers and further stabilize the acquisition of upstream NAND Flash wafers. Taking Demingli as an example, the company's gross profit margin in 2022 (17.19%) is much higher than that of module manufacturers such as Jiangbolong and ADATA. The reason why Phison Electronics publicly stated that it is not afraid of price cuts by mainland Chinese manufacturers is that the company has the highest profit margin IC design and sales links in its hands, and has high profitability. At the same time, the company also designs modules, and the assembly of finished products is completed by outsourced manufacturers. Because it controls the highest profit margin link, its gross profit margin can be maintained at around 30%. In terms of gross profit margin, related companies in mainland China are generally lower.Competitive Strategies of Mainland Chinese Manufacturers

In the global memory value chain pyramid, there are many module manufacturers at the bottom, with product homogenization being prominent and market competition being the most intense. In this sub-market, how can mainland Chinese manufacturers break through the red ocean?

With the intensification of market competition and the inherent bottlenecks of business models, the mainstream business models of traditional storage module manufacturers are facing a ceiling of difficult breakthroughs in revenue exceeding 2 billion US dollars. Innovation and transformation upgrades are needed 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 company in mainland China.

It is reported that Huiyi Microelectronics, a Shanghai subsidiary of Longsys, which is specifically responsible for the development of flash module main control chips, has developed two chips: eMMC5.1 control chip WM6000 and SD6.1 control chip WM5000. It is said that the company's self-developed main control chips are not for reducing costs, but to achieve differentiation of storage products through the main control chips, in order to enhance the ability to compete with the first-tier manufacturers. For example, Longsys purchases memory wafers from IDM manufacturers, and the final developed memory products are difficult to compete with the IDM manufacturers in terms of price. They can only provide differentiated products and services that meet the specific application needs of end customers through customized packaging and testing, or by developing new functions and optimizing performance on the main control chips.

Longsys has also launched several self-developed SLC NAND Flash chips with different capacities, all of which have been mass-produced, with the largest capacity reaching 8Gb, mainly serving automotive-grade and industrial-grade customers, forming a synergistic effect with the existing product line, 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 and testing manufacturing center, achieving R&D and packaging and testing integration from chip design, software and hardware design, wafer processing, packaging and testing to production manufacturing, and enhancing the vertical integration strength of storage technology.

In addition to Longsys, several other flash module manufacturers in mainland China are also trying to improve the technological content and gross profit margin of their products, preparing for future development while promoting price reductions.Advancing into Markets with Higher Gross Margins

Currently, the competition in the flash memory module market for mobile phones and PCs is too fierce. Therefore, many manufacturers, while ensuring that the basic business of the company does not have problems, are actively moving towards flash memory products with higher gross margins, especially in the enterprise application market. The boom of AI is expected to continue, and the number of manufacturers that can provide corresponding high-performance flash memory modules is still relatively small, making the business opportunities here very attractive.

The popularization of QLC SSDs is a business opportunity.

Although the incremental market for consumer electronics is not very promising, some growing application trends have emerged in the storage segment. Storage manufacturers are promoting the iterative upgrade of QLC NAND Flash, further amplifying the reading advantages of QLC NAND, which is well-suited to read-intensive application scenarios. For example, Solidigm is actively expanding the application of QLC NAND Flash. Its latest 192-layer QLC NAND Flash has a programming speed that is 2.5 times faster, a random read performance that is 5 times better, and a read latency that is 1.5 times lower compared to the first generation of QLC. As more manufacturers launch the new generation of QLC NAND Flash, QLC SSDs will accelerate their penetration in the consumer PC market.

With the expansion of storage product orders by major North American CSPs (Cloud Service Providers), the demand for enterprise-level QLC SSDs is increasing. TrendForce estimates that in 2024, the shipment of enterprise-level QLC SSDs will reach 30EB for the whole year, a fourfold increase from 2023.

TrendForce believes that there are two reasons for the increased usage of QLC SSDs in AI servers: first, the product has fast read speeds; second, the TCO (Total Cost of Ownership) is low. Since AI inference servers mainly focus on reading, the frequency of data writing is not as high as that of AI training servers. Compared with HDDs, QLC SSDs have a better read speed, and the capacity has developed 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 electricity compared to HDDs. In addition, QLC requires less space, which can significantly reduce TCO costs. AI training has become a heavily power-consuming application, and energy-saving will become a top priority for storage products. Therefore, large-capacity enterprise-level QLC SSDs are the ideal solution sought by AI customers.

Furthermore, NAND Flash is evolving towards higher density, lower unit cost, and higher I/O performance. This development trend means that NAND Flash has higher requirements for the performance of the controller chip. It requires the controller to better optimize, correct errors, allocate resources, and support faster transmission protocols and interface speeds for the flash memory, thereby fully leveraging the high performance of NAND Flash. This provides more development opportunities for the research and development of flash memory module controller chips.

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