One of these days- or years, suspect we’ll officially hear more. Until then it looks like it’s going to be a connecting-the-dots game.

In this latest non-chapter, Apple acquired Anobit, an Israeli controller company with SanDisk/ M-Systems connections, and named SanDisk one of its 156 major suppliers.

For those interested in conspiracy theories, a good argument can be made that SanDisk is  building capacity dedicated to Apple.

Anobit

Anobit billed itself as a NAND-based solutions provider, but basically it was a specialized controller company providing the signal processing technology required for NAND chips.

The company was smart, private and Israeli.

They were on my shortlist as a SanDisk acquisition target. SanDisk acquired Pliant instead.

An Israeli friend has told me, that he was told by a SanDisk guy, that SanDisk passed on Anobit because Anobit didn’t have anything to contribute.

Anobit’s expertise is in signal processing algorithms to improve the performance of flash-memory chips. Which at the end of the day is what SanDisk is all about as well.

Purportedly Anobit has more than 60 patent applications. Apple will be happy to have those in their IP vault. Most likely to be used for defensive purposes if required.

One of the more interesting Anobit subplots is Samsung. Samsung liked Anobit too. Enough to send big business its way. Anobit had a big contract with Samsung.

Samsung had turned to Anobit to deliver performance for its TLC, or 3-bit NAND.

From all I’ve been able to gather, even with Anobit’s help, Samsung wasn’t been able to deliver viable commercial TLC in volume. The problem apparently was the lack of integration of chip level expertise with signal processing.

To the best of my knowledge, SanDisk is the only player to have pulled that one off.

Anobit’s CTO was Avraham Meir. Prior to joining Anobit, Mr. Meir was VP Corporate Engineering at SanDisk, and prior to that CTO at M-Systems- acquired by SanDisk in 2006.

One has to wonder how many SanDisk company secrets moved from SanDisk to Anobit with Mr. Meir, an internationally recognized authority in NAND Flash technology.

Does Apple now own the secret ingredients behind SanDisk’s TLC success?

Personally, I don’t think so. That special sauce ingredient can likely be traced back through M-Systems’ X4 to the original Stratosphere technology. This is the same technology that Samsung tried to get ahold of in 2008.

First through outright acquisition of SanDisk. And when that failed, through claims of license rights through prior agreements with M-Systems. No luck there either.

In the arbitration hearings, Samsung put a value on X4- “billions of dollars.”

It appears that Samsung’s backup plan was to use Anobit.

If Anobit was particularly special, there should have been a bidding war including Samsung. If anything, Anobit’s price slipped.

Initial reports in early December, estimated Apple’s purchase price of Anobit at around $500 million. By late December it was down to $300 – $400 million. An Israeli friend was told by local VCs that the final price was under $300 million.

So why did Apple buy Anobit?

It looks like it was all about preserving the status quo. Apparently Apple has been using Anobit controllers for a while now for X2 MLC NAND and liked what they had.

One of the beauties of Anobit was that their controllers work nicely with NAND chips from all the major Apple suppliers: Samsung, Toshiba, SanDisk, Micron, Intel and Hynix.

SanDisk

Yep, as of 13 January 2012, SanDisk is now officially a major Apple supplier.

SanDisk showed up on Apple’s official 156 company list which “represent 97% of its materials and manufacturing spending.”

This is a bit curious, given that the only teardown of an Apple product which revealed a SanDisk chip that I am aware of, was an iPod Nano.

The likely explanation is that SanDisk chips have found their way into other Apple product lines along the way and these SanDisk chips have been missed along the way by the teardown shops.

After all, SanDisk NAND and Toshiba NAND are interchangeable and Toshiba NAND has been uncovered in many teardowns.

Given the current tension between Apple and Samsung, it’s not particularly surprising that Apple and SanDisk would be working together.

Moving forward, Anobit’s SanDisk connections could prove more complementary than competitive.

Anobit’s familiarity with SanDisk’s approach just might make SanDisk NAND all the more strategically desirable to Apple.

Along these lines, two items from September 2011 bear watching.

First Baird analyst Tristan Gerra reported that “SanDisk is building capacity dedicated to Apple”

Then a Confidential Treatment order was filed by SanDisk with the SEC.

Such a CT order allows a company, in this case SanDisk, to meet SEC filing requirements while keeping the relevant info secret.

If a material agreement had been reached between SanDisk and Apple, a CT order wouldn’t be unexpected, given Apple’s obsession with secrecy.

Conceptually in many respects, 3D NAND is closer to a post-NAND technology than it is to NAND as we know it today. The slide below from a 2009 Toshiba presentation tells the tale.

From the left, floating gate NAND rolls along to where the path splits with ever smaller NAND geometries  above and 3D NAND and other post-NAND technologies below. Other post-NAND include PCRAM, ReRAM, MRAM, etc.

What’s interesting is that 3D NAND is on the post-NAND branch and not on the NAND branch. Apparently this is because for 3D NAND the NAND string is perpendicular to the Silicon Substrate and other post-NAND technologies will depend on a similar three dimensionality.

Another slide from this same Toshiba presentation makes the point a different way.

In the center is the BiCS 3D Technology. Other technologies, including NAND and ReRam surround BiCS as potential extensions of BiCS 3D technology.

The point here is that BiCS technology can be applied to various memories to produce low cost data storage devices. When applied to NAND, the result is 3D BiCS-style NAND. When applied to ReRAM, the result will be 3D BiCS-style ReRAM and so forth.

BiCS is short for Bit-Cost Scalable technology. It is a 3D design strategy and as such allows greater capacity per footprint, which in turn results in lower bit cost. BiCS uses “a multi-stacked memory array with a few constant critical lithography steps regardless of number of stacked layers to keep a continuous reduction of bit cost. In this technology, whole stack of electrode plate is punched through and plugged by another electrode material.”

Another Toshiba slide from this same presentation graphs the relation between capacity and bit cost. As one would expect, the more layers, the lower the cost. With BiCS, more layers and hence lower costs per bit can be achieved.

BiCS Flash appears to have the potential of a 10 Tbit/ chip.

At the bottom of the slide, Toshiba innocently wonders whether the market would be interested in such “huge” capacity?

Given cloud data center demands today, I doubt anyone is worrying about that one today- If the cost is right.

Toshiba has it right. Future trends will primarily be driven by cost per bit. The technology that will provide the most bits at the lowest cost will succeed.

Cost reduction is the most important issue.

For anyone interested in this Toshiba presentation, here is the link.

3D Resistive Random-Access Memory (RRAM)

RRAM and SanDisk/Toshiba’s 3D R/W technology deserves it’s own post, which hopefully I’ll get to in the not so distant future.

Suffice it to say, that it sure sounds like today SanDisk/Toshiba’s 3D R/W is RRAM.

Yoram apparently said as much at this year’s Flash Memory Summit:

“Further in the future, chip makers including SanDisk are developing 3-D structures that use changes in resistance to create denser chips. But the so-called resistive RAM will require EUV tools, he [Yoram Cedar] said.”

SanDisk has been looking for a new manager for its “3D ReRAM” team since August.

The interrelationship between BiCS 3D NAND and 3D RRAM bears watching.

Toshiba and SanDisk have licensed or otherwise invested in each other’s 3D technologies and today are co-developing both.

In 2008 SanDisk licensed it’s 3D R/W technology to Toshiba.

Then in Q1 2011, SanDisk “made an incremental strategic technology investment with Toshiba that covers a variety of technologies including a three-dimensional NAND architecture, known as Bit Cost Scalable or BiCS, which Toshiba had been developing independently.”

RRAM IP

Many companies have been working on RRAM, for a long time. A very, very long time- which in some respects is a good thing.

Most importantly, the patents on the basic RRAM switching concepts apparently have expired.

The slide below is from a Deepak C. Sekar presentation. Deepak is Chief Scientist at MonolithIC 3D Inc. He also spent almost three years at SanDisk working on both NAND and 3D crosspoint memory.

Deepak makes three points about RRAM IP in the slide above:

Patents, if any, on the basic switching concepts have expired.

Good patents on more advanced concepts exist (eg) Pt-replacement approaches, array architectures, doping, etc.

IP scenario for RRAM a key advantage. Other resistive memories have gate-keepers (eg) Basic patents on PCM, CB-RAM, STT-MRAM fro Ovonyx, Axon Technologies, Grandis. 

I suspect SanDisk and Toshiba have a particularly nice hand of good patents on the more advanced RRAM concepts, specifically array architectures.

The slide below is from SanDisk’s 2010 Investor Day.

Eli makes the point that  SanDisk holds “Fundamental patents in 3D diode arrays (apply to most 3D approaches)”

I’m going to end with this slide from the IMEC consortium. Its a nice summary showing floating gate NAND, 3D Vertical NAND, and RRAM graphed against Cost/Bit and chip capacity.

Here is the article where the slide above was taken. Apparently Toshiba/SanDisk hasn’t signed up for the collaborative effort.

“IMEC is working collaboratively with major memory manufacturers including Elpida, Hynix, Micron and Samsung on both flash and follow-on memory roadmaps

Toshiba [Sandisk] is a notable absentee from the program.”

There could be many reasons why Toshiba/SanDisk wouldn’t be interested in working with IMEC.

One would be that Toshiba/SanDisk feel they have the inside track on the roadmap.

Whether it will or not remains to be seen. Challenges remain leading up to commercialization.

But the race is certainly on.

Equipment makers, such as Novellus, are saying that 3D NAND pilot lines will likely be up and running in 2013 and if all goes well volume production will commence a year later in 2014.

So what’s the rush?

2D NAND, is reaching the end of the line.

No other technologies are ready.

There are mega-markets there for the taking for the winners.

One particularly lucrative strategic market seems tailor made for 3D NAND: SSDs.

The slide below from this year’s SanDisk Analyst Day tells the story. The grey line is the cost of a 128 GB SSD. The red line is the cost of a 1 TB Hard Disk Drive (HDD). The two are considered to be rough equivalents when SSD advantages are factored in.

Today OEM SSD costs are still too high for mass SSD adoption, when compared to HDDs.  But SSD costs are dropping while HDD costs are holding steady.

Today HDDs hold a $50 cost advantage, but this will disappear sometime around 2014- just when 2D planar NAND cost reduction flat lines.

For those with commercially viable 3D NAND, the SSD cost reduction promises to continue down, while HDD costs hold level:

“Tim Archer, the Novellus chief operating officer, said the company has developed tools capable of  “making 3D NAND technology viable.” By vertically stacking NAND cells, memory vendors could get back on track with the needed reductions in the NAND cost per byte.

Armed with higher densities from vertically stacked bit cells, NAND memory vendors will be able to price solid-state disk (SSD) memory at a roughly 2:1 ratio with hard disk drive storage. “At 2:1, we will start to see a massive conversion to SSDs. 3D NAND will have a huge cost advantage,” Archer said.”

In 2014, even before “massive conversion to SSDs”, the SSD market looks like it will exceed $13 billion. Up from $5.8B in 2011. Gartner’s projections below:

Those with their own NAND, and 3D NAND in-house, will hold a huge cost advantage.

As discussed in the last post, this is likely a very short list.

If Toshiba’s P-BICS lives up to its promise, SanDisk will be a player.

That said, it’s going to take more that just low cost chips to prevail in all three segments of the SSD market. Products are where the rubber meets the road.

SanDisk appears to have tablets and other small form factor SSDs covered in-house. Enterprise SSDs appear to be covered thanks to the Pliant acquisition.

The only missing piece seems to be the consumer PC SSD segment.

While it’s entire possible that SanDisk will be able to tweak its existing SSD products or bring Pliant’s expertise into play, there is another option. SanDisk could simply buy its way into a leadership position.

SanDisk has the cash in hand for another acquisition.

Cash

At the end of Q2 2011, SanDisk had $5.28 billion of cash and short and long-term marketable securities.

SanDisk estimated that 2011 capital investment in fab and non-fab equipment would be $1.4 to $1.6 billion. At the end of Q2 the estimated cash requirement for these investments remained at $800 to $900 million for the year, of which SanDisk had spent $361 million in the first half.

So SanDisk only needs another $540 million or so for fab capital investment for the remainder of 2011.

And SanDisk’s business continues to pile up the cash.

Q2 2011 cash flow from operations = $269M
Q1 2011 cash flow from operations = $399M
Q4 2010 cash flow from operations = $359M
Q3 2010 cash flow from operations = $379M

In recent conference calls, analysts have taken to asking what SanDisk plans to do with it’s “excess cash”, which has “has been building quite steadily.”

Judy Bruner’s last response from the Q2 2011 conference call:

“As I’ve indicated before, we’re a very capital-intensive business, and we have a fair amount of capital expenditures ahead of us as we build Fab 5 over the next several years. So capital use for our capacity is the #1 use of that cash. And then in addition, we, from time to time, do make strategic investments in other areas and the Pliant acquisition is a good recent example of that. And there can be other kinds of technology investments, such as the technology investment that we made in the first quarter with our partner, Toshiba. So those are the primary intended uses of our cash, which is at a comfortable level. In terms of buybacks, we have done buybacks from time to time, and I don’t rule out that, that’s something that we could do in the future. We do not, at the present, have a buyback plan in place.”

So no buybacks, but further acquisitions are a distinct possibility.

Potential Acquisitions

SanDisk has the cash to shop in these turbulent days. An enviable position to be in.

The missing piece for SanDisk is the consumer SSD segment. The key is the controller.

On its own SanDisk hasn’t done much. Maybe SanDisk can use or re-work the Pliant controller for consumer SSDs.

It might be a lot easier though, to simply acquire a proven winner.

Anobit is one possible acquisition target. Anobit is Israeli, and Anobit’s CTO is Avraham Meir who had significant responsibilities at both SanDisk and msystems.

The problem with Anobit is their strong Samsung connection.

SandForce is another, maybe even more tempting target.

SandForce is probably better known among analysts and within the consumer SSD market that Anobit.

A SanDisk acquisition of SandForce would likely be well-received in the investment community.

Lazard’s description of SandForce, 07.14.11 SSD report:

“SandForce is a fabless semiconductor company that sells SSD processors, and more specifically the controllers. SandForce has a significant market share of SSD processors in the mainstream PC SSD and higher-end enterprise server and storage vendor markets. We view SandForce as well positioned in the space. It has controllers for both enterprise in players like SMOD [smart modular technologies] and Viking. In addition, LSI is using SandForce PCIe technology in its system. On the PC SSD, the company has largely teamed up with OCZ, Kingston, and Corsair…

SandForce SSD Processors use DuraClass technology with RAISE and patent and patent pending DuraWrite to drive ubiquitous deployment of volume flash memory into primary and I/O intensive data storage applications. SandForce DrivenTM SSDs optimize mission-critical application reliability, IT infrastructure ROI, green power preservation, and everyday computing user experiences. Founded in 2006, SandForce is funded by leading venture capital investors and first tier storage companies.

SandForce is one of the leading controller companies in the SSD space and has largely focused on the PC universe.”

There are very believable rumors that a new upcoming Intel SSD will use a SandForce controller.

There has even been talk that Intel might be interested in acquiring SandForce, but this is probably unlikely.

Initially Intel’s SSDs used Intel-designed controllers. Recently Intel has started using third party controllers (Marvell) in their better performing SSDs. Intel’s in-house controllers don’t seem to be keeping pace with the competition.

Intel either isn’t committing the resources to controller design or simply doesn’t have the vision. The writing on the wall. Intel has lost it’s SSD edge- in NAND and in SSD controllers.

With no built-in advantage in SSDs, it follows that Intel wouldn’t be all that interested in acquiring SandForce- which on its own wouldn’t put them over the top. If this is how it goes, there will be one less SandForce suitor with deep pockets.

****

SandForce is located in Milpitas CA, as is SanDisk. The latest SanDisk SSD uses a SandForce controller – the first time SanDisk has used a third party controller.

The controller world is going to change with the arrival of 3D NAND and then again with post-NAND technologies.

Controller companies such as SandForce must be getting edgy.

The worst case scenario for them would be to end up on the outside looking in.

It would be very surprising if SandForce and SanDisk haven’t been talking acquisition.

SandForce has a great reputation and if SanDisk could pull this one off, they would be sitting pretty for consumer SSDs. Synergies would likely be good with Pliant too.

We shall see.

But Judgement Day is Coming!

2014 looks like the year. Not so far off.

3D NAND looks like the technology ready to pick up where 2D NAND leaves off.

Post-NAND technologies like 3D resistive RAM, Ferroelectric RAM, MRAM, and Phase Change Memory (PCM) are not ready for prime time. This appears to leave the market with 3D NAND.

The thinking is that 3D NAND will be a replacement technology spanning between 2D planar NAND and whichever post-NAND technology emerges down the road. 3D NAND’s reign looks to be relatively short- lasting five to eight years.

3D NAND is true vertical NAND cell stacking not to be confused with chip stacking in a multi-chip package. In 3D NAND, NAND layers, not chips, are stacked in a single chip.

In many respects, 3D NAND is evolutionary, not revolutionary. The good news is continued cost reduction, smaller die sizes and more capacity. Also, installed NAND toolsets in the wafers fabs can, for the most part, be reused, thereby extending the useful life of fab equipment.

The bad news is that this 3D technology is still basically NAND with all its inherent limitations of data reliability and performance.

The wrinkle is that each of today’s NAND players has a different approach to 3D NAND.

Toshiba/SanDisk and Samsung are each developing variants of charge-trapped flash technology. Toshiba calls its 3D NAND: Pipe-shaped Bit-Cost Scalable or P-BICS.

Samsung dubs its 3D NAND: Terabit Cell Array Transistor or TCAT.

Hynix is pursuing a vertical floating-gate structure.

Micron hopes to transfer its DRAM expertise in deep trenches to 3D NAND.

In addition, Macronix is developing yet another 3D NAND charge-trapping technology based on its BE-SONOS technology.

This fragmentation is going to create winners, losers and chaos.

Winners

Its going to take deep pockets to hit the ground running. Samsung and Toshiba/SanDisk  have the resources, as well as the expertise and mind-share with equipment suppliers to make a go of it.

They’ve also both had R&D engineering teams hammering away at the problem for a while now. Toshiba since 2007. Samsung apparently since soon thereafter.

Both TCAT and P-BICS are similar charge-trapped flash technologies with similar structures. Samsung and Toshiba have been engaging in a war of words since at least 2009 on which approach is superior.

SanDisk is late to the 3D NAND party, but looks positioned to ride Toshiba’s P-BICS coattails.

In April of this year in the Q1 SanDisk conference call, Sanjay announced that SanDisk would be joining forces forces with Toshiba to co-develop P-BICS.

Sanjay’s comments:

“In the first quarter, we made an incremental strategic technology investment with Toshiba that covers a variety of technologies including a three-dimensional NAND architecture, known as Bit Cost Scalable or BiCS, which Toshiba had been developing independently. We believe that SanDisk and Toshiba joining forces to co-develop BiCS will allow us to further build on our past decade of successful development of multiple generations of NAND flash technologies.

BiCS, if successfully developed and commercialized, can leverage the installed NAND toolsets in the wafers fabs very well, thereby extending the useful life of fab equipment. We expect BiCS to enable further memory cost reductions beyond the future 1Y or subsequent scaled NAND, until 3D Read/Write memory, which remains our ultimate goal, is fully ramped into high volume production.”

SanDisk’s incremental strategic technology investment with Toshiba in Q1 2011 was $115 million.

My guess is that SanDisk held off this long before backing 3D NAND because it believed that its 3D Read/Write memory based on scalable crosspoint diode arrays would be ready.

EUV technology appears to be critical for this post-NAND technology, and EUV is late.

Tick Tock.

Losers

Time will tell whether Macronix, Hynix, and Micron have what it takes for 3D NAND, but its going to be tough, especially if Samsung and Toshiba/SanDisk don’t stumble.

Today Samsung and Toshiba/SanDisk together account for about 75% of NAND production (by bits). Hynix and Micron/Intel together produce the remaining 25%.

Macronix isn’t even on the charts.

Samsung and Toshiba/SanDisk enjoy the economies of scale and R&D budgets that go with their market share.

If there’s a canary in this mine, that would be Micron’s NAND partner Intel.

While Micron has recently been talking up 3D NAND, there’s been nary a peep (that I’m aware of) from Intel.

This would be consistent with Intel’s retreat from the NAND business itself. Intel hasn’t contributed a dime towards the ramping joint Micron/Intel IMFS Singapore NAND fab in the last year or so. Micron on the other hand has had to pony up $1.565 billion.

This joint venture started off essentially 50/50. Today Micron’s ownership percentage is up to 86% (info from SEC filings).

A couple of years ago, Eli Harari summarized the challenges that the Micron/Intel (2D) NAND JVs faced- “It is tough to be number 4 in a rough neighborhood.”

It’s not going to get any easier with the arrival of 3D NAND and post-NAND technologies.

My guess is that Intel saw the writing on the wall, looked carefully at it’s options and contractual obligations, and has decided to tread water until a clean exit can be executed.

Clearly the world isn’t going to end as 2D NAND runs out of steam. The existing fabs even without 3D NAND are going to keep on chugging along throwing off a long tail of cash for years.

That said, the uncertainty of what’s coming next is going to loom. The whole NAND ecosystem is going to increasingly feel this pressure. Smaller players are particularly vulnerable. Especially, in an uncertain economy.

The Wall Street Journal noted last week that: “More than half of the U.S.-based companies making their domestic stock-market debuts this year are trading below their offer price, an ominous backdrop for any companies hoping to come public.”

Multi-billion dollar emerging markets are there for the taking. The technological roadmap is uncertain.  Sounds like a recipe for chaos.

With chaos comes opportunity- especially for those like SanDisk positioned to emerge as winners. I’m going to stop here, and in my next post look at what SanDisk’s next move might be to complement the Pliant acquisition.

When the going gets tough, the tough go shopping.

1x … 1y … 1z

End of the alphabet.

1x or 19nm will be in full swing next year in 2012.

1y, around 15nm, is scheduled for 2013.

1z, likely the last generation of NAND, could make its appearance 2014-ish.

What then?

It’s looking ever more likely that NAND will will go 3D, leveraging the existing infrastructure. But that’s another post.

This post is going to briefly review the end of the world as we know it- the last three generations of 2D NAND.

It’s worth noting that SanDisk and Toshiba have pulled in their endgame schedule.

Implying that they have figured something out. Both for their NAND technology roadmap and the thereafter.

This should be all good news. But they still have to execute.

1x, 1y, 1z

Last year SanDisk announced that 1x was was going to be a late 2012 story.

The graphic below- SanDisk’s NAND Roadmap- is from the SanDisk Investor Day 2010.

Transitions roll right along 43nm ⇒ 32nm ⇒ 24nm, then there is a year+ gap, from late 2011 to late 2012, before 1x and then nothing thereafter.

Compare the above to the graphic below from this year’s Financial Analyst Day in February. Both graphics run through 2013.

1x has been pulled in almost a year: from the second half of 2012 to late 2011. 1y which is nowhere to be seen in the 2010 graphic, now appears mid 2013.

If this weren’t enough, in May, Toshiba noted that mass production of 1x would start even earlier- this month in July.

Up until May the SanDisk/Toshiba party line had been that Fab 5 would start with “leading-edge 20-nanometer generation, with subsequent generations to follow.” Translation: 24 nanometer.

This appears to have changed according to Morgan Stanley in their Toshiba report of 25 May:

“TOSHIBA shows confidence in its competitiveness, with ~70% of the OP growth targeted in its new business targets for F3/11-3/14 coming from electronic devices, and the expectation of huge demand for NAND ahead. In this respect, we are positive on comments that 19nm mass production will start in July, ahead of competitors, and that process development for 1Ynm (the generation after 1xnm [i.e., 19nm]) and 1Znm (the generation after 1Ynm) is on track. (This is consistent with SanDisk’s comment that floating-gate NAND can be extended to at least 1Ynm, using existing immersion lithography.) Assuming continued growth for smartphone & tablet markets, we can expect a big jump for NAND margin in Semiconductors: NAND 19nm mass production timing was updated from ‘the Sep Q’ previously to July. Mass production starting at Yokkaichi Y5 in July and shipments starting in August.”

It sure sounds like Fab 5, Yokkaichi Y5, will be starting up in July with mass production at 1x, 19nm.

It makes eminent sense that Fab 5 start with 1x, and has for a while now.

It is also encouraging that Morgan Stanley reports that the process development for 1y and 1z are “on track,”  using “existing immersion lithography.”

It wasn’t that long ago that such scales were only considered feasible using extreme ultraviolet lithography, or EUV.

SanDisk/Toshiba appear to have figured out how to stretch the immersion lithography envelope all the way to the end of the alphabet. Likely through multiple patterning and various lithography techniques with a few other tricks thrown in.

These other tricks no doubt include adaptive flash management (AFM) and error correction capability (StrongECC).  Both AFM and StrongECC are proprietary and patent protected.

AFM and StrongECC are purportedly behind SanDisk’s success with three bit per cell memory (X3). To date, the competition doesn’t appear to have an answer.

As NAND moves below 20nm, performance and endurance will continue to deteriorate.

NAND producers could soon face some of the same challenges in scaling MLC as they face today in delivering viable X3.

This last dance could get interesting.

In any case, if SanDisk can deliver, the payoff will be in product gross margins.

Going from 32 nanometer to 24 nanometer has given SanDisk a chip cost reduction of 30% to 40%. Going from 24nm to 19nm should be a tad less, but nonetheless significant.

Something to look forward to in the first half of 2012, when 19nm yields are likely to become mature.

After careful consideration, SanDisk went for the low hanging fruit where there was bang for the buck. A commendable approach.

On 16 May, SanDisk announced its intention to acquire Pliant Technology. On 25 May the acquisition was completed.

The fit between the two companies looks good. The market opportunities are remarkable. Product synergies should abound.

For better or worse, we won’t get telling results until next year, when the first joint products arrive.

The Fit

SanDisk has the NAND, chip-level and system-level expertise. Pliant had the enterprise SSD expertise, the controller, and the enterprise customers.

Little if no overlap between the two.

SanDisk’s SSD scorecard to date is decidedly mixed. For the PC market SanDisk is late. Fortunately that market hasn’t really taken off yet.

The good SSD news is the modular or small form factor SSD market, where SanDisk seems to be racking up the design wins.

The enterprise SSD market has been a big zero for SanDisk. SanDisk has expressed interest, but delivered nothing.

All that is history now.

The Pliant acquisition gives SanDisk instant enterprise SSD credibility. Pliant has customers, design wins, and rapidly increasing revenues.

Morgan Stanley believes that Pliant SSDs have been qualified at key storage OEMs including LSI, Teradata, Hewlett-Packard, and Dell.

In March of this year, LSI sold it’s Engenio storage business to NetApp. This likely means that the Pliant business moved as well, both to NetApp and NetApp-partner IBM.

Reportedly Pliant also sells to EMC. There was a whisper a while back that EMC was an investor in Pliant. Take that for what you may.

Morgan Stanley believes Pliant’s sales will have tripled at the end of this year to around $100 million when compared to 2010.

Pliant was facing a cash crunch. Although it had raised $57 million in funding, it needed more capital to fuel growth.

Pliant also faced challenges in securing dependable NAND supply.

According to Pliant, it first approached SanDisk about a strategic relationship regarding SanDisk’s NAND. Pliant also faced the ongoing challenge of having to support and qualify NAND sourced from different suppliers.

No problem now. The Pliant team will know exactly what’s coming down the pipeline and will be able to design accordingly. Guaranteed NAND supply is secured.

How important this inside track will be remains to be seen, but given the increasing design complexities as NAND moves to ever smaller geometries, and the uncertainties at play in securing NAND, this competitive advantage shouldn’t be underestimated.

Needham, in its 16 May report rightly pointed out that, “Sandisk’s acquisition of Pliant ushers in a new era of direct flash player participation in the SSD market.”

SanDisk’s acquisition of Pliant might be the first, but given the market opportunities, it won’t be the last.

Market Opportunities

In 2010, the enterprise SSD market was somewhere around $900 million. In 2015, it is expected to exceed $4 billion. That’s a 4-5x increase in 5 years.

And that’s not accounting for the related cloud-centric markets of thin form factor SSDs and Tablets, which are expected to grow every bit as quickly and emerge every bit as large.

Some think that the emergence of cloud computing will mean less NAND used in devices such as tablets and thin form factor SSDs. Gartner doesn’t seem to agree.

According to Gartner the PC SSD market is looking at a 3-4x increase in 5 years. Tablets are poised for even greater growth at 5x+ growth.

As the slide above indicates, in 2014, Gartner estimates the total for new markets for NAND flash -  Enterprise SSD, PC SSD, and Tablets – will total $13.3B vs $3.4B in 2010.

As SanDisk likes to put it, the enterprise is the first node on the cloud network. Here NAND is poised for explosive growth, because it enables server application acceleration and high performance input/output operations.

The last nodes on the cloud network are connected devices such as tablets, smartphones and laptops. In these devices NAND is poised for explosive growth, because it enables smaller dimensions, lighter weight, lower power and faster response.

For the last node, mobility trumps bulk storage. NAND trumps HDDs.

Thanks to the Pliant acquisition, SanDisk now has high performance enterprise SSDs shipping to customers and it has next-generation products under development.

Pliant’s Products

Pliant’s products target the high performance enterprise SSD market. Today’s products, include both 2.5” and 3.5” SSD form factors and use a Serial Attached SCSI (SAS) interface.

Products under development include PCIe Cards, a market pioneered by Fusion-io.

Here is a link to a most informative 2010 article on the evolving enterprise SSD based on Gartner’s Forecasts.

Pliant, as part of SanDisk, will no doubt continue development of both SAS and PCIe interfaces. The chart below graphically shows why.

Both interfaces are expected to grow into dominant positions in the Enterprise SSD market by 2013. From 2010-2013 SAS is expected to grow from 18% of the market (by units) to 37%. For those same years, PCIe is expected to grow from 12% to 41%.

The SAS interface is expected to grow nicely, at the expense of Fibre Channel (FC) drives, another legacy HDD solution.

The future looks likely to belong to faster interface standards that are not constrained by disk-centric assumptions that have been baked into standard HDD interfaces.

PCIe is a good example of such an unconstrained interface.

Although Pliant has developed both SLC and MLC SSDs, it made the strategic decision to move as quickly as possible to the growing trend of MLC within the enterprise, where MLC SSDs are gaining ground on SLC due to their affordability.

In 2011 MLC-based SSDs are expected to comprise 62% of the 1.2m drive shipments and at least maintain this level for the foreseeable future.

Pliant’s MLC expertise should be a nice complement to SanDisk’s MLC and TLC expertise.

One of the big attractions of Pliant was that it has designed and developed its own high performance SSD controller.

As SanDisk apparently hasn’t been able to develop a controller suitable for the enterprise, without the Pliant acquisition it would have had to use a third party controller- if it wanted to pursue the enterprise SSD market.

Without Pliant, SanDisk would have likely become just another SandForce-inside player.

Far better to control one’s own destiny, both from a cost perspective and as a means of differentiation within the SSD market.

A whole lot hinges on how good the Pliant-developed controller is, or can be, when matched with SanDisk NAND.

As Gregory Wong, an analyst with Forward Insights, put it, in discussing SanDisk’s acquisition of Pliant:

“The premise is that as NAND flash scales to smaller process nodes, advanced ECC, flash management, algorithms and in-depth knowledge of the inner workings of flash will provide a competitive advantage, particularly against independent, non-vertically integrated SSD companies.”

Today no Pliant products use SanDisk flash, but the two companies have been working to qualify SanDisk’s memory in Pliant’s products. According the Wall Street Journal, the first Pliant/SanDisk products should be introduced in the first half of 2012, given that qualification typically takes nine to twelve months.

It will be interesting to see whether Pliant’s high performance controller expertise also finds its way back down into SanDisk’s PC SSD product line.

No reason it shouldn’t.

In many respects the tailwinds are more complex, or at least don’t fit neatly into categories. The promise for 2011 and 2012 can be found in the underlying dynamics of  2010.

2010 was a rather spectacular year for SanDisk.

Booming markets and a strong supply/demand environment are a powerful combination. Sometimes SanDisk was a grinder of a locomotive. Sometimes jet propelled. Sometimes both.

Mobile emerged as a mega-market with multiple subsegments including most importantly smartphones and tablets.

NAND became a strategic component in the mobile internet ecosystem.

SanDisk rode this exploding demand to record revenue, record gross margin, record operating margin, record profits and record cash flow thanks in large part to its OEM wins.

SanDisk was able to optimize pricing and profitability thanks to its product mix, its range of channels and its broad set of customers.

This post, like the last, is primarily based on SanDisk’s CFO Judy Brunner’s presentation at this year’s analyst day in February. Judy spent quite a bit of time on the relationship between cost reduction, pricing and gross margins.

Rightly so as this is the key dynamic driving the tailwinds.

Cost Reduction, Pricing, and Gross Margins

The top graph on the slide above shows cost reduction vs price reduction. The scale starts at zero and moves upward with negative numbers- a bit unusual.

The higher cost reduction, the better.

The lower the price reduction, the better.

The larger the gap between the two, the better for product gross margins.

Which are graphed correspondingly on the bottom half of the slide.

In 2010 SanDisk delivered 46% cost reduction on a per GB basis. As SanDisk has been saying for some time, the ability for the industry to reduce cost is slowing down. And that is reflected here.

From 2005 through 2009, SanDisk’s cost reduction was between 50 and 55% per GB every year. In 2010 it was 46%. Although lower, SanDisk believes that this was still industry leading cost reduction.

SanDisk believes that it is the industry leader in terms of actual cost.

The 46% cost reduction in 2010 reflected the very strong performance of its 32nm transition and the increasing usage of X3 within its products.

In terms of the price reduction, SanDisk reported 19% reduction in ASP/GB, in line with industry price reductions.

This is notable, because during 2010 SanDisk expanded the OEM mix of its business. SanDisk went from 50% OEM in 2009 to 62% OEM in 2010.

SanDisk’s OEM products carry a lower ASP/GB. Also within OEM SanDisk expanded the embedded portion of its business quite a bit.

And embedded products tend to carry higher average capacity.

Moving up the average capacity curve leads to a lower ASP per GB. So the fact that SanDisk was able to expand OEM, expand embedded and still deliver price decline- ASP/GB decline in line with the industry- says a lot about its ability to achieve a price premium in both retail and in OEM while optimizing its pricing across its broad set of customers and broad set of products.

The gap that SanDisk was able achieve in 2010, the gap between cost decline and price decline, 46% vs 19%, allowed SanDisk to deliver record product GMs- 43%, a full 30 points improvement from the underlying product GM achieved in 2009.

And then 2011 arrived.

2011 Headwinds

As described in the last post, SanDisk has hit headwinds in Yen exchange rates, non-captive mix and Fab 5 start-up costs. Added together these headwinds were expected to shave 7 to 9 points from 2011 product gross margins, before the March Tohoku earthquake and tsunami hit Japan.

This catastrophe resulted in Toshiba/SanDisk fab downtime, supply constraints and increased requirements for non-captive supply.

All additional downward pressures on product gross margins.

If this were the end of the story SanDisk would be in a world of hurt.

As it turns out the underlying strength of the business is pushing back. At analyst day SanDisk thought these tailwinds would add back a couple points of gross margin for 2011. The 7 to 9 points down from 2010 would end up only 5 to 8 points down.

At the Q1 conference call in April, these couple of points of recovery had grown to a half dozen. The total non-GAAP gross margin range for 2011 was raised to 41% to 44%.

Compared to the record 46% non-GAAP gross margin of 2010, 41% to 44% is quite respectable.

Given how things are going another bump up could be coming with Q2 results.

So what’s behind this optimism?

At the 2011 Analyst Day in February, Judy pointed to four potentially positive factors to watch for in 2011. Its probably a safe bet that at least two or more of these factors is doing better than expected.

24 nm, X3, Memory & Non-Memory Cost Reduction and Pricing

The key driver of cost reduction during 2011 will be SanDisk’s transition to 24 nanometer. In the Q1 conference call Sanjay Mehrotra, SanDisk’s President and CEO, noted that the 24 nanometer technology, utilizing both 2-bits per cell and 3-bits per cell architectures, continues to ramp well and is expected to account for the majority of SanDisk’s captive output in the second half of 2011.

Sanjay also noted that SanDisk doesn’t anticipate the recent events in Japan to cause any meaningful changes to the schedule of the ramp of 24 nanometer or the recently announced 19 nanometer technology.

In the Q1 conference call Judy wouldn’t give specific projections on a quarter-by-quarter basis, other than to say that the transition started in the fourth quarter of 2010 and is progressing across 2011.

The transition to 24 nanometer is not the only driver of memory cost reduction per GB. X3 mix also plays a part. SanDisk went from essentially zero X3 in 2008 to 50% X3 in 2009. In 2010 SanDisk achieved greater than 50% X3 usage.

For 2011, SanDisk has again projected  greater than 50% X3 usage. As OEM embedded is becoming ever more important, this is one to watch closely. SanDisk says that it is making very good progress in getting X3 adopted into embedded solutions, but won’t get more specific than that.

Non-memory cost includes things like transformation costs and non-memory materials. Non-memory cost reduction per GB was higher in 2009 than in 2010. SanDisk was able to reduce non-memory cost per unit about the same in both years- about 35% per unit in both years. But average capacity grew less in 2010 than it did in 2009.

Increased scale helps with both memory and non-memory in terms of reducing SanDisk’s cost per GB. SanDisk is expanding its Shanghai Assembly/ Test Facility.

Last, but not least is pricing. Suffice it to say that NAND pricing has been strong and looks like it will continue to be strong throughout 2011.

When all is said and done for 2011, it seems entirely possibly that tailwinds might cancel out the significant headwinds.

Another bump or two and gross margins will be back at 46%.

If this is how it goes, 2011 earnings will profit.

The big deal though will be 2012, when the headwinds look likely to lighten up.

2010 product gross margin was a record 43%. Taking into account the headwinds, and a minimal boost from costs and pricing, early 2011 guidance called for product gross margin in the 35% to 38% range. Adding in license and royalty brought SanDisk’s total gross margin forecast up to the 39% to 42% range.

This was before the March earthquake in Japan which resulted in Fab downtime, supply constraints and increased requirements for non-captive supply. All additional downward pressures on gross margins.

Rather remarkably, in the recent Q1 conference call (post earthquake) SanDisk raised yearly guidance for total gross margins to 41% to 44%.

This post will look at the headwinds. The next post, the tailwinds.

At this year’s analyst day in February, SanDisk’s CFO Judy Brunner spent quite a bit of time describing the three variables pressuring gross margins.

Paraphrasing her presentation:

Yen Exchange Rate

75% of SanDisk’s cost of sales is denominated in the Yen. In 2010 SanDisk had an average Yen to Dollar rate in its cost of sales of about 90 Yen to the dollar.

For 2011 SanDisk has engaged in a strategy to lock in about 50% of the wafer purchases that it expects to buy from the Toshiba/SanDisk JV across the year. SanDisk has done this with forward contracts.  SanDisk locked these in during the fourth quarter of 2010 at an average rate of about 82 Yen to the dollar.

SanDisk did this to limit volatility in managing its performance in 2011. The other 50% of wafer purchases will vary with the market in terms of market exchange rates.

Assuming that SanDisk achieves about 82 Yen to the dollar for all of its wafers, including the half that isn’t locked in, the impact of the Yen to the dollar, of 82 instead of approximately 90 is about 4 points of gross margin downward in 2011 vs 2010.

Non-Captive Mix

The second factor is non-captive mix. SanDisk expects to expand its non-captive mix in 2011. This makes sense for a few reasons. One is that this still allows SanDisk to bring real dollars to the bottom line- to net income and to EPS- despite the fact that non-captive costs SanDisk more than does captive supply, and thus has lower gross margins.

It also allows SanDisk maintain share with important customers and channels.

And it allows SanDisk to manage its captive supply growth in a prudent way to minimize risk, and mitigate risk within its business.

In 2010 SanDisk only purchased non-captive supply in the second half of the year and primarily in Q4. SanDisk only had about a 2% non-captive supply mix for the full year.

In 2011 SanDisk is estimating that it will have a mix of up to 10% non-captive supply. And that the difference from 2% to 10% will have an impact of about 2 to 3 points of product gross margin percentage.

The non-captive supply will still deliver positive product gross margin dollars, but at a lower percent, because generally non-captive supply produces product gross margin in the single digits or the teens.

Fab 5 Start-up Costs

The third factor is Fab 5 start-up costs. Every new fab has initial start-up costs. Fab 5 is no exception.

These will impact SanDisk in 2011. SanDisk estimates that it will record about $50M in start-up costs in its R&D expense primarily in Q1 through Q3, with the heaviest period being in Q2.

Also, SanDisk estimates about $75 million in cost of sales- with the majority of that spending, or cost, being in the second half of the year. So if one takes just the amount that is going into cost of sales, approximately $75 million, that is approximately 1.5 points of gross margin.

At Analyst Day, these three factors, added together, were expected to pull down product gross margins 7 to 9 points in 2011 vs 2010.

Today the earthquake also needs to be added to the downward pressures.

The 2011 Tohoku Earthquake and Tsunami

On March 11, Japan suffered a major earthquake and a series of significant follow-on events. Fortunately for SanDisk its joint-venture wafer fabs in Yokkaichi were relatively unaffected as they are approximately 500 miles from the quake’s epicenter. The earthquake halted normal fab operations for less than a day. The fabs have not been subject to rolling power outages or blackouts.

SanDisk and Toshiba have been working with business partners in Japan to minimize the impact to NAND flash wafer production.

SanDisk has dodged a bullet.

If Fab 5 had been located in northeastern Japan, in Kitakami City in the Iwate Prefecture, as once contemplated, the situation would be far, far worse. As it is, there has still been collateral damage.

While there are no immediate constraints of key materials, SanDisk did suffer a modest loss of supply due to the downtime from power outages.

In addition, SanDisk expects some earthquake related delays in tool deliveries from certain suppliers in Japan that will reduce its expected 2011 mid-80% captive bit supply growth.

SanDisk quantified the direct damage at $25 million, or 2 points of product gross margin in Q1. This includes the cost of scrapped wafers, fixed costs associated with lost wafer output, and costs to bring the fabs back on-line.

In addition, for the second quarter, SanDisk’s captive memory supply has been reduced by the fab downtime in Q1, and SanDisk does not believe it can fully make up the shortfall with non-captive supply due to lead-time constraints and mix considerations.

Updates

Yen exchange rates, non-captive mix and Fab 5 start-up costs all look as challenging today as they did at SanDisk’s February Analyst Day.

The Yen is current trading at 80.62 to the dollar. How the exchange rate will play out for the rest of the year is anyone’s guess. Many believe that Japan will loosen monetary policy to help the country recover.

On the other side of the equation the Federal Reserve seems intent on printing ever more dollars in an attempt to resuscitate U.S. economic growth.

Fab 5 start-up costs haven’t changed.

Non-captive requirements have increased.

If this weren’t enough, SanDisk is currently supply constrained even with non-captive supply.

Headwinds haven’t let up, if anything they’ve picked up for 2011.

Faced with these challenges, on what basis could notoriously conservative SanDisk, confidently increase guidance?

While SanDisk’s not spelling it out, there are lots of hints as to what these tailwinds might be. That discussion will have to wait until next time.

Toshiba already had production facilities in Kitakami City, so this was likely the site under consideration.

At the end of the day, the decision was made to build Fab 5 in southern Japan, in Yokkaichi, adjacent to the existing fabs.

Good decision.

I shudder to think of the implications, if the decision had gone the other way.

This was a close call.

Kitakami is only 89 miles from devastated city of Sendai and the Fukushima Nuclear Plant. Sendai itself is only 80 miles west from the epicenter of last month’s massive Japanese earthquake.

If Toshiba and SanDisk had decided to build in Kitakami, today’s worries would likely run the gamut from building and equipment damage, through rolling power outages to potential radiation risks.

As it worked out, Toshiba and SanDisk decided to build next to their existing NAND fabs in Yokkaichi, about 500 miles south of Kitakami.

Whew.

We’ll know soon enough how the last quarter went at Yokkaichi.

FWIW I am inclined to believe that SanDisk will emerge relatively unscathed. Next weeks earnings report will likely be pretty much steady as she goes- along the lines of the MS 3 April report:

“Our checks suggest wafer scrap was likely lower or 1/3 of the $18M impact experienced from power outage last year.”

While there could be some issues obtaining raw wafers, my guess is the Yokkaichi fab complex will be able to patch together sufficient supply.

Since Yokkaichi is in southern Japan, power supplies should be OK. There is likely minimal risk of rolling blackouts. Electrical power from the south can’t be sent north because the southern half of Japan uses 100 volt, 60 hertz, while the north uses 100 volt, 50 hertz (cycles per second) electricity.

The two are incompatible.

In the graphic above, Yokkaichi is on the first bay south of Tokyo in the 60 hertz zone.

While no one is talking publicly about Fab 6 yet, one would hope that recent events have shaken up the status quo.

Fab 6

In 2008, Toshiba announced its plan to build Fab 6 in Kitakami City, whether SanDisk was on board or not. Reading between the lines, SanDisk was having second thoughts.

Good thinking.

Fab 6 is coming, on way or another. Fab 5 will likely reach full utilization in 2014/2015.

NAND demand driven by mobile, tablets, laptops and the enterprise will likely be overwhelming. Those such as SanDisk/Toshiba riding this wave with the expertise and IP to lean into the trend, will have to build or be left behind.

Working backwards, I’m guessing we’ll get the Fab 6 announcement round about 2013. Initial planning is likely underway already.

There are lots of angles which could contribute to decision making. The biggest would be progress on 3D R/W, the potential successor to NAND.

All this said, I would hope that Toshiba realizes that Kitakami City is a risk not worth fighting for, as a location for Fab 6.

Might be time to bite the bullet and look outside Japan to Southeast Asia.

China?

Invariably SanDisk notes that it doesn’t provide numbers. That said, SanDisk does provide hints, which over time give the broad outlines of production numbers.

Time to give that one a shot.

Interesting angles too. Especially the sale of wafer capacity to Toshiba in early 2009, and why the numbers don’t seem to reconcile.

Before getting to those stories, the stage should be set.

2007 and 2008 Wafer Capacity

Wafer production in 2007 was primarily a Fab 3 story.

Almost a Mega-Fab, Fab 3 has a capacity of around 150 K 300mm wafers per month (150,000 wpm). Fab 3 reached maximum capacity early 2008 as indicated by the slide below from the SanDisk Analyst Day in February, 2008.

At that time, Fab 4 was projected to ramp to 110K wpm in 2H08, also noted on the slide above.

In the second half of 2008, the SanDisk/Toshiba joint venture had a capacity of 150K wpm from Fab 3 and 110K wpm from Fab 4 for a total capacity of around 260K wpm.

All this production was split 50/50 between SanDisk and Toshiba. Each had 130K wpm.

2009 Wafer Capacity Sale

In January 2009 SanDisk sold ~20% of its captive capacity to Toshiba as indicated in slide 192 below from Investor Day 2010.

The loss of 20% of SanDisk’s wafer translates to 26K wpm and a capacity drop to 104K wpm for SanDisk and a gain for Toshiba to around 156K wpm.

The captive capacity sale was valued at $890 million. SanDisk received about 1/3 in cash and 2/3 in reduced equipment lease obligations.

At the beginning of July 2009, Toshiba turned around and entered into a long term NAND supply agreement with Apple. Apple made a $500 million prepayment to Toshiba.

Not a bad deal all around.

Apple secured NAND supply- purportedly at least according to Reuters- “about a quarter of a year’s worth of Apple’s allowance for NAND…”

Knowing Apple, they got a sweetheart deal.

Cash-strapped Toshiba got the bucks back it had to shell out to SanDisk.

SanDisk was able to strengthen its balance sheet and reduce NAND memory production commitments.

If there was anyone left on the outside looking in, it was Samsung. SanDisk had escaped its clutches. Toshiba wasn’t crippled in lending its partner a hand in its time of need.

And to rub salt in the wounds, one of Samsung’s best and most promising customers, Apple, had a supply deal with Toshiba- the competition.

It’s important to remember that these were days of oversupply. My guess is that Apple, Toshiba and SanDisk were all betting that NAND oversupply wouldn’t last long.

If so, they were right.

2010 & 2011 SanDisk Wafer Capacity

By the end of 2009, NAND had swung into under-supply.

Toshiba and SanDisk had a low-cost ace-in-the-hole in Fab 4. The wafer capacity SanDisk sold to Toshiba and which in turn Toshiba dedicated to Apple, could be made up and then some, by finishing off Fab 4.

It’s worth noting that no capacity had been added- 2009 to mid 2010.

Mid 2010, the Fab 4 push to completion began. This additional 100K wpm capacity is to be split 50/50 between SanDisk and Toshiba, and will be complete by mid 2011.

At Analyst Day 2011, SanDisk noted that by this milestone, mid-2011,  its wafer capacity will be 2M wafers/year or 167 K wpm. See slide 32 below.

The numbers don’t add up: 104 + 50 ≠ 167.

There are many explanations for the missing 13K wpm.

Personally, I am partial to the possibility that somewhere along the line, SanDisk and Toshiba had a meeting of the minds and worked out an unannounced deal whereby SanDisk bought this capacity back.

In any case, mid-2011, when Fab 4 is complete we know it will have a capacity of 210± wpm. This number added to the 150 wpm from Fab 3, gives the SanDisk/Toshiba JV a capacity of 360± wpm.

If SanDisk claims 167 wpm, that leaves 193 wpm for Toshiba in 2011, before Fab 5 is accounted for.

Fab 5 SanDisk Wafer Capacity 2011 & 2012

SanDisk has been waffling between 5% and 10%, for what Fab 5 will contribute to 2011 capacity.

At Analyst Day 2011, it’s was back up to 10%, which translates to another 16K wpm for SanDisk (rounding down) in 2011, bringing its total capacity up to 183K wpm from Fab 3, Fab 4 and Fab 5.

When complete, Fab 5 will be about the same size as Fab 4, ~210K wmp.

SanDisk can claim half of that, which it appears ready and able to do.

At Analyst Day 2011, Judy said that Fab 5 Phase 1, about half of the total Fab 5 capacity, was expected to be complete at the end of 2012.

If this is how it goes, at the end of 2012, without any other capacity buy-backs, SanDisk will have a wafer capacity of ~217 wpm. Toshiba will have a capacity of ~243 wpm.

One of Sanjay’s big points at February’s Analyst Day 2011, was that almost one in two NAND bits produced in the world today, is being produced by the SanDisk and Toshiba joint venture.

At the end of the day, all this math and speculation just means that SanDisk is nicely positioned to maintain it’s market share- as the Post PC world arrives.

Make of that what you may.

**** Postscript ****

There are other ways to figure the wafer permutations of the past- or how SanDisk has reached its current baseline wafer capacity.

The numbers used for Fab 3 and Fab 4 are probably more fluid than public announcements might indicate. Fab 3’s capacity is purportedly 150K wpm and Fab 4 210 wpm.

If, for example, Fab 3 has been pushed up to 160K wpm and Fab 4 will be able to reach 220K wpm, the extra 20K wpm – split between SanDisk and Toshiba pretty much erases the need for the awkward scenario of the off-the-record buyback of capacity outlined above.

Whatever has happened in the past in this regard, is over and done with now. We have our baseline to work off for SanDisk, because SanDisk has announced that by mid-2011 its wafer capacity will be 167 wpm or 2 million wafers per year.

Split this up as you will, but both Fab 3 and Fab 4 will be fully utilized and their wafers out at full utilization have been announced and we know the broad outlines of Fab 5’s ramp.

Toshiba’s share might be a bit more than 193 wpm or a bit less. Figuring out the specifics of what that is, well, a problem for others.

2 million wafers a year is a whole lot of wafers to control. Lots of leverage in controlling  ~20% of the world’s NAND bit supply, which is what these numbers boil down for SanDisk’s market share.

It will be interesting to see what SanDisk comes up with. This should be quite the opportunity. No doubt SanDisk’s Chief Strategy Officer, Sumit Sadana, has been carefully weighing his options.

NAND is simply a commodity in times of oversupply, but in tighter times like these, it becomes a strategic material.