Fab 5

March 21, 2010

Like it or not fab 5 is coming.

As Eli put it at Investor Day describing the need for new production capacity in the industry:

“You cannot grow from 10,000 petabytes [today’s industry capacity] to 60, or 70 or even 40,000 PB without new fabs. The question is not if, the question is when.”

For SanDisk and Toshiba this will mean a new fab 5.

Existing production space in fab 4 will be pretty much maxed out late 2010. Today SanDisk and Toshiba’s fab 3 + fab 4 deliver 35% of the world’s NAND output. To hold their own, fab 5 is a necessity for both SanDisk and Toshiba.

As is usually the case, the devil- and the promise- is in the details. This post is a first pass at what fab 5 means.

Mega-Fab

Fab 5 will be a mega-fab. It will be a beast. The slide below is from this year’s Investor Day.

Fab 5 will be expensive at $8 billion ± . For perspective that’s about $3 billion more than aircraft carrier.

At full capacity fab 5 will be able to produce 200,000 300 mm wafers/month.

It will need to support EUV and it will need to be able to adapt to post-NAND technologies.

From SanDisk’s perspective the post-NAND technology will be (hopefully) SanDisk’s 3D R/W which was discussed in my last post.

SanDisk expects that this transition to post-NAND will be more complex than the transition from SLC to MLC which took 3 years- 2002- 2005. Fab 5 will be expected to accommodate both NAND and post-NAND designs- at the same time- for an extended period.

Why a mega-fab and not something smaller?

According to Eli, its all about economies of scale. From Investors Day:

“Eli: You have to build a mega-fab because otherwise you are not going to make much difference. [laughs] First of all, but more importantly, you are not going to be competitive.

Small fabs don’t cut it. OK, its really a mega-fab or stay at home.

That’s the magnitude. But that by itself has an implication on when, because if you could do it in tiny little increments, or something [you can’t do it in small pieces]. Now I would say that those mega-fabs don’t necessarily ramp overnight. This is not like a 6 month exercise.

A mega-fab could easily take two to three years to ramp- and the investments would be spread accordingly.”

Industry Supply

The slide below from this year’s Investor Day is not only provocative, but instructive.

Heretofore, on seeing this slide, I have been focussed on the markets for flash and their hockey-stick ramp- year by year. This time around- the left hand scale: millions of gigabytes (GB)- jumped out at me.

1,000,000 GBs= 1 petabyte (PB) = 1000 terabytes (TB).

PB is often used in describing annual capacity of the flash industry. Today’s supply and demand is typically pegged at about 10 to 11,000 PB. Looking at the slide, sure enough- 10 to 11,000± PB for early 2010.

The graph, based on data from Gartner, shows supply and demand growing to 75,000± PB by 2013.

Wishful thinking.

To my mind, supply is going to come up far short.

Eli ran through the basic math in response to a question at Investor Day (included below). Today’s 10 to 11,000± PB will likely be able to grow to 30,000 PB in existing fabs primarily on the strength of shrinks to 1x.

It will take an additional 7+ new mega-fabs- fully ramped and running at full capacity to add another 45,000 PB by 2013.

My guess is that the equivalent of only three new mega-fabs will be up and running by that date. Fab 5 (meg-fab) for Sandisk/Toshiba. A mega-fab for Samsung. A regular fab (Singapore) for Intel/Micron. And an equivalent regular fab for Hynix.

I just don’t see how these four players will be able to fund, build, and fully ramp more by 2013.

Not in this uncertain economic environment. Not with the looming technological uncertainties. Not with both of the big guys- Samsung and Toshiba/SanDisk currently preaching caution.

And not with the cost, complexity and time required for each new fab.

Just for kicks I went back and looked at the timeline for Fab 4 (a mega-fab).  Fab 4 was announced mid 2006. Construction started that same year. The building was finished a year later, in early fall 2007. Mass production began at the end of 2007. By the end of 2008 production had ramped to about half of full capacity. By the end of 2010+, Fab 4 will be at full capacity.

Total time for Fab 4 from announcement to full ramp= 4.5 years+. Unless SanDisk/Toshiba want to be working on two fabs at once, I don’t see how we’ll see more than Fab 5 by 2013. Heck and it hasn’t even been announced yet.

Other players are in the same boat.

If only the equivalent of 3 new mega-fabs are built, and the shrinks to 1x go as planned, it seems to me that by 2013, industry capacity will be far below the 75,000± PB shown in the Gartner slide above. 50,000± PB (max) looks more like it.

What this will mean is anyone’s guess. Likely some markets won’t experience the growth they otherwise would be able to.

In any case, those controlling supply would seem to be in the driver’s seat- demand willing.

Here is Eli’s math from Investor Day:

“Q: OK very good. And how many new fabs would need to be built then to reach your estimated demand in the out years [2013]? At one point a few years back you were talking about 6 new fabs.

Eli: OK, and don’t hold me to it. To do that math.

Lets say that 1x generation product is between lets say 2.5 and 3 TB per wafer, approximately that- lets say 3 TB per wafer. You have to be really really good to get 3 TB per wafer, and probably use 2 to 3 bits per cell.

That means 30,000 PB in 2013, an incremental 30,000 PB would require another 10 million wafers which is 5 mega-fabs, assuming 1x @ pretty good yields @ 3 bits per cell.

This is the point I was making earlier- that the projected growth in demand requires very substantial new capacity.

The existing capacity is already generating 10,000 PBs- 11,000. So lets say it can go to 30,000 PB. If you want to build another 30,000 you need to have another 5 or so fabs- mega-fabs.

Q: On an average of $8B per fab?

Eli: Roughly.

Q: Roughly, plus maintenance capex. That’s a big investment- a big risk.

Eli: Yes. Somebody told me that a nuclear aircraft carrier cost about $5B. That gives you an idea how big $8 billion is, but as I said, it’s spread over a three year period- investment wise. In any kind of new capacity it would be very likely with Toshiba so our number would be less than that number.

Q: I hope so.

Eli: Me too. [laughter]”

Previous Fab 5 Investment Model

Fab 5 has been a glimmer in SanDisk/ Toshiba’s eye for years now- at least since 2006. In early 2008, financing details were discussed at SanDisk’s Investor Day.

At least back then, SanDisk looked to have a lot of flexibility. The slide below is from Investor Day 2008.

As far as capital investment, Toshiba was willing to assume 75% of the deal. SanDisk would only have to cough up 25%. Sweetening the deal, SanDisk had the option to convert to 50% / 50%.

Capacity was to have been divided 50%/ 50% whereby SanDisk would receive 25% of captive capacity and 25% cost-plus committed foundry. SanDisk had the option to convert committed foundry to captive or to non-committed foundry.

Where things stand now is anyone’s guess. No one is talking. Last month Toshiba even released a press release to the effect that no decisions have been made for Fab 5. Eli has been doing his part in playing down the possibility of Fab 5- which is what the analysts have wanted to hear.

All that said, fab 5 is not a matter of if, but when. And when is getting closer.

My guess is that fab 5 will be announced this year. The cost will be closer to $9 billion once the dust clears. The location will be in Iwate in western Japan. The ramp will be similar to fab 4.

The building itself will be dedicated in 2011 and sometime in 2012 capacity will have ramped to about half of full capacity. EUV equipment will continue to be an issue. 3D R/W will be up and running by 2013, but only in small volumes.

My guess is that the fab 5 investment model from 2008 is still relevant.

SanDisk will at least hold its current market share, and total industry capacity will be closer to 40,000 PB than Gartner’s 75,000 PB by 2013 with demand exceeding supply.

Lots of guesses. In any case, the next few years should be interesting with plenty of twists and turns.

SanDisk and Toshiba have a lot riding on fab 5 and 3D R/W.


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