One Billion New Consumers

A golden era in consumer products is dawning. Over the next decade about a billion new consumers will likely join the world’s middle class. Such economic growth in so short a time frame would be the biggest consumer boom ever known.

These new consumers will want digital products such as SanDisk sells and SanDisk appears to be planning to sell them all they want.

For the most part these new consumers won’t live in the United States. Rather, they will come from countries like China, India, Russia, South America and such, the new rapidly emerging economies.

Competition for these consumers is going to be brutal as the global market place becomes very very complex. Today’s established business models will be stress-tested and those which fail will have to change or fall by the wayside. Its going to take phenomenal innovation and on-the-fly adaptation to leverage current success into future earnings. Last, but not least, winners are going to need an advantage, an “unfair” advantage, as SanDisk CEO Eli Harari likes to humorously put it.

What is SanDisk’s “unfair” advantage? NAND flash.

One could make a strong argument than NAND flash has become the disruptive technology powering the digital revolution in portable devices. SanDisk not only controls its own supply, but much of the key IP. One heck of an advantage and SanDisk knows it.

SanDisk is planning to leverage this advantage right up the food chain and in the process transform itself from just a very strong semiconductor-based company, into a very broad-based global consumer electronics company.

A good example of how this advantage can work successfully is the SanDisk Sansa MP3 player, which has ridden the coattails of the iPod Nano’s success to a solid #2 US market share today for flash-based MP3 players.

The digital revolution came to portable audio in 1998, when the first non-mechanical MP3 players were introduced. Storage capacities on these early models were minimal. By the end of 1999 capacities improved when hard disk drive (HDD) based MP3 players were introduced. The HDD-based MP3 player remained dominant until Apple introduced its flash-based iPod Nano in 2005. SanDisk soon followed with its redesigned Sansa flash-based MP3 player .

With the Apple Nano juggernaut running roughshod over the competition, SanDisk quietly slipped in behind, leap-frogging the competition and securing the number 2 market position behind the Nano.

SanDisk was able to move quickly not only because it already had the flash technology and supply, but also because it already had an established retail channel and a strong consumer brand. These are two generally unappreciated aspects of the SanDisk story.

Sandisk has become a corner stone in the memory category on the strengths of its memory card and USB drive business. In working with SanDisk, retailers have a proven single-source supplier for all memory products regardless of form or capacity. As a result, SanDisk has risen to the status of category captain and now works directly with retailers in planning strategies, promotions, and activities.

In 2006 57,000 SanDisk storefronts were added around the globe. Now there are over 200,000 worldwide. HP has around 115,000 storefronts and Apple sells its iPod through just 40,000.

The SanDisk brand is on the rise, not only in the USA, but around the world. According to SanDisk’s consulting firm, unaided brand awareness jumped from 12% in 2004 to 48% in 2006. The consulting firm said that such a jump was unprecedented in its experience.

The Sansa MP3 player redesign borrows heavily from the iPod Nano. I don’t believe Eli necessarily thinks this a bad thing. In 2006 while describing the Sandisk USB drive, a product that SanDisk copied from msystems, he said, “This is the USB flash drive, which we didn’t invent, but we are number one in the world. The lesson there is … its OK to be a good follower. You can be a follower and still be #1. You don’t have to invent everything. Other people have some pretty good ideas, you need to keep your eyes open.” A refreshing attitude. Better to sell a lot of product than to be too proud.

Probably the most important reason that SanDisk has not tried to expand geographically until now, is simply that it didn’t have enough of its own flash memory to warrant the big push. With the current ramp up of production SanDisk now feels that it can begin an aggressive overseas push.

Now that SanDisk has recognized the international opportunity in consumer retail and has the memory coming online to support an international product push, what’s going to be its international plan?

Same plan as in the USA: Add retail storefronts ASAP; build retail partnerships; build brand awareness; establish category captain status; invest in international sales and regional marketing; and build out the required logistics supply chain.

Consumer packaging is an indication that SanDisk is starting to internationalize its marketing. In 2004, SanDisk would export any product anywhere as long as the packaging could be in English. Now SanDisk is doing its packaging in 14 languages. After all, English goes only so far in the global consumer world.

One of the pleasant surprises of Q2 2007 was the unanticipated strength of SanDisk’s retail sales, where international markets made a strong contribution. This is an indication that SanDisk’s investments in its global consumer electronics strategy are beginning to pay dividends.

As Eli said last week:

“The second key factor [driving the flash industry] is rapidly growing global markets in the new consumer economy, which is fueling surging demand in consumer electronics and mobile markets. The US economy used to be the engine of growth for the rest of the world. Today, the world economies are charging ahead across many geographies, with Europe and Pac Rim countries expected to fuel global growth of consumer demand for the foreseeable future. SanDisk will be a benefactor of these global
economic trends, because we are becoming a trusted global consumer brand and because we continue to invest aggressively in global distribution of our products and in a global logistics supply chain.”

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4 Responses to One Billion New Consumers

  1. poofypuppy says:

    Savo,

    Thanks for the great post, as always. Your blog reminded me of SanDisk’s strong and global retail presence, which is easy for people to take for granted. Most of my interest has centered on SanDisk’s foothold in the growing SSD market, as this seems like a once-in-a-lifetime opportunity for SanDisk to become the next Seagate in data storage. With last week’s news of SanDisk SSD’s available in IBM blade servers, it excites me to think that SanDisk is on the verge of penetrating into corporate data centers (where the amount of invested $ is huge). The organization I work for will soon invest US $300K in a new SAN (Storage Area Network), which will have dozens of fast Fibre Channel disk drives. If SanDisk SSD’s can make their way into EMC and HP SANs in coming years, the revenues promise to be huge.

    SNDK’s stock price has really taken off in the last few weeks, it’s been pretty fun to watch. Would love to know what Dov and Eli think of that. Speaking of which, there is recent news about Dov Moran, Tower Semiconductor, and SanDisk…
    http://www.haaretz.com/hasen/spages/876163.html
    http://www.reuters.com/article/marketsNews/idUKL226221620070722

    What is your take on this? What would be behind such a move for SanDisk? Thanks in advance for your thoughts.

    Regards,
    poofypuppy

  2. savolainen says:

    Hey poofy,

    Agree with you about SSDs. It seems very obvious that they are going to be huge in the next 3 years. Sometimes I become numb to all the numbers, but the SSD factoid that gets me is the Gartner forecast that by 2010 SSDs will consume as much NAND as the entire NAND industry will produce this year. And it looks like Sandisk will have the best, most cost effective SSDs, thanks to FLSH.

    This last post on a billion new consumers is based primarily on info from Eli’s Stanford talk in 2006 and info from this year’s analyst’s day: primarily from Greg Rhines and Daniel Schreiber. There is also a lot of info on the “billion new consumers” floating around, as a quick google will show. This is pretty astounding stuff.

    Time will tell whether SanDisk will be able to adapt as required, but am cautiously optimistic. Eli clearly understands the challenges. The FLSH acquisition should help Sandisk move beyond its USA-centric culture and crank it up on the innovation front.

    The recent stock run has been fun. Hopefully there is more to come. Am expecting continued volatility along the way though. Don’t think either Eli or Dov worry too much about the day to day swings. Probably a good thing.

    Thanks for the Haaretz link. Hadn’t seen the article. As far as Sandisk’s interest in TSEM, have always assumed it was all about controllers. A trusted dependable controller source is probably worth SNDK investment. Don’t know anything about what issues there are with protecting proprietary controller design IP, but would think it is far easier in Israel than Taiwan. This could be a factor. Also with x3 and x4 in the pipeline would think there is additional expertise required for those specialized controllers. SNDK/TSEM might make for an interesting post at some point. It would be interesting to reassemble old notes and dig through SEC filings and see what emerges.

    Am quite curious about Dov’s new company Infone-tech. Suspect it might be working with wireless USB among other angles. Suspected Ronit was involved. Nice to see confirmation.

    Am considering putting up transcripts as reference material in a separate area of this blog. Am thinking of starting with last year’s FLSH analyst day transcript which I still find valuable.

    If that works out then I will add portions of this year’s Sandisk analyst day and so on.

    Savo

  3. wshoes says:

    Savo,

    Thanks for the latest essay and Poofy, thanks for asking a question that was on my mind re the strategic implications of the note re TSEM. Do either of you know how much time Dov devotes to TSEM, especially given the new venture that Savo alluded to? I admit to being intrigued about both of these items because I am now a TSEM investor (I know that it is highly speculative) in large part-say 50 percent because of Dov’s connection.

    I would appreciate the link to the transcripts that you are considering.

    ‘shoes

  4. Mrs. Cencomco says:

    Savo, Poffypuppy and wshoes: Thanks for the posts, guys. Just like old times.

    Savo, very special thanks for all your efforts. You apparently have a special talent for assimilating information, translating that into something more understandable for the rest of us. I think John shared this talent with you, and, of course, I miss that very much.

    Poofy, thanks for the link.

    Please, continue posting, as they are very much appreciated.

    Mrs. Cencomco

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