Summary
SanDisk has done very well with its captive chip supply to work a business model that is, for the most part, vertically integrated. As the company has grown, they are now looking at improvements on this model that will further enhance both their cost structure and their flexibility. The new model should help SanDisk keep their advantageous cost structure while providing more flexibility than prior agreements have done.
Analysis
During SanDisk’s 2/25/08 Analyst Meeting a lot of time was devoted to explaining what the new Toshiba/SanDisk MOU was really all about. SanDisk touted that Toshiba was interested in this model from Toshiba’s high esteem for SanDisk’s technology, and SanDisk equally esteemed Toshiba’s value as a manufacturer and a partner. <br/>
In past JVs, however, Toshiba and SanDisk shared tooling costs and wafer production 50/50. With this new venture, Toshiba is paying for 75% of the tooling, and SanDisk gets only 25% of the wafers with an option on the other 25%. <br/>
The real crux of the deal is that this $7-8 billion fab will be devoted to nothing but NAND flash production. The question is whether or not SanDisk believes that they can find homes for a full 50% of the output of this behemoth after spending $3-6 billion to bring up the prior mega-fabs – Fab 3 and Fab 4. <br/>
In this deal SanDisk gets 25% of the total wafers of this fab at cost, and has the option to purchase (at cost plus) a portion of another 25% of the plant’s output. At a later date, should the company find an advantage to this move, SanDisk can reimburse Toshiba for 25% of the capital outlay, and gain rights to a full 50% of the fab’s output at cost, rather than at cost plus. Presumably, anything that SanDisk purchases from Toshiba’s 50% would be done at market prices. <br/>
The investment plays upon the uncertainty that the NAND flash market will continue to grow at its current phenomenal rate. Every year consumption of NAND gigabytes has doubled – something never before seen in the history of semiconductors. SanDisk is hedging their bets. If the market slows, then the company needs only take what it can use. Should consumption continue to grow at its current rate then SanDisk can purchase product at a cost-plus rate which will most likely be lower than market prices. If growth is very high, then SanDisk can buy out the other 25% of the fab and lower this portion back to cost, rather than cost plus. <br/>
In the future we should expect to see more SanDisk deals of this nature. The company continues to make good decisions that are likely to pose difficulties for Samsung, Hynix, Intel, and Micron, the four other key players in the NAND flash market.<br/>
Investors who would like a better understanding of the market may want to read Understanding the NAND Market, a report that clairifies the business model for NAND and the factors required to succeed in this trying market.
