A fierce flash chip battle

Inside the windowless plant, built by the Japanese electronics maker Toshiba, tiny cranelike robots shuffle along automated production lines, moving stacks of silicon wafers the size of dinner plates. Masked technicians watch as rows of tall machines grind the wafers, etch circuits on their surfaces and cut them into tiny rectangular computer chips.

Inside, visitors are allowed to peek through windows at only a small part of the factory floor. Toshiba is anxious to guard the secrets beyond because it needs them to wage one of the most ferocious battles in today's electronics industry, for control of the fast-growing market for the advanced memory chips at the heart of portable music devices like the Apple iPod Nano.

The fight pits Toshiba and its partner, SanDisk of Sunnyvale, Calif., a maker of memory cards, against Samsung Electronics of South Korea. Both camps are spending billions to build new factory lines, hire engineers and develop more powerful chips in a bid to gain supremacy.

The chips, called NAND flash memory chips, differ from earlier computer memory chips in that data on them can be easily erased and replaced, and they can store data even after the power is turned off. That makes them like miniature hard-disk drives, only much more durable because they lack moving parts. The newest flash memory chips are the size of a fingernail and can store 2GB, the equivalent of every word and image printed in nine years of a newspaper.

While Toshiba invented the chips more than a decade ago, Samsung has seized the lead with bigger production volumes and lower prices. In the three months that ended in September, Samsung had a market share of 50.2 percent of the $2.97 billion in total global NAND sales, according to iSuppli, a market research firm based in El Segundo, Calif. Toshiba's share was 22.8 percent. SanDisk is not included in iSuppli's figures because it does not sell its chips, but instead uses them all in its own memory products.

But Toshiba is fighting back. It plans, with SanDisk, to spend some $2.5 billion to expand the Yokkaichi plant, which is owned by Toshiba but is used by both companies to make the NAND chips. The new production lines will allow the plant to produce 48,750 wafers a month by March 2007, five times the current output. Each wafer yields hundreds of chips, though Toshiba will not say exactly how many.

The other competitors
And competition is only getting more intense, as more than a half-dozen other chip makers try to muscle in. Hynix Semiconductor of South Korea has rapidly gained a 13.2 percent market share since starting production of NAND chips last year, according to iSuppli. Intel, the world's largest chip maker, said last month that it would team up with another American chip manufacturer, Micron Technology, and that each would spend $2.6 billion over the next three years to make NAND chips. Semiconductor Manufacturing International Corporation of Shanghai, China's largest chip maker, also says it plans to produce the chips next year.

"This is one of the hottest markets in the industry," said Joseph Unsworth, an analyst for Gartner, a market research company based in Stamford, Conn.

The fight has also moved into the courts, where Toshiba and SanDisk are trying to repel newcomers by defending their patents on many of NAND's basic technologies. On Wednesday, SanDisk filed the latest in a series of lawsuits against Swiss-based STMicroelectronics, which started making NAND chips last year. In September, Toshiba filed a complaint with the United States International Trade Commission alleging that Hynix had infringed on three NAND patents.

At stake is one of the fastest-selling electronics devices in recent years, though one that consumers may not have heard of because it sits inside other products.

The chips allow people to store hundreds of songs on pocket-size portable music players, like the Nano or the U10 from iRiver. Flash memory chips also make possible everything from digital cameras to flash drives and memory cards.

Meanwhile, the chips keep getting more powerful, even as manufacturers compete to shrink circuits etched on the silicon's surface, allowing chips to hold even more data. Chang-Gyu Hwang, chief executive of Samsung's chip business, caused some eyebrows to rise in skepticism in September when he predicted that the chips would soon hold enough data to make hard-disk drives obsolete, paving the way for lighter, thinner and tougher laptop computers.

NAND chips are "the backbone of the mobile electronics era," Hwang said.

Demand for NAND chips has exploded in recent years. Global sales rose to $10.7 billion this year, from $1.5 billion in 2000, according to Gartner, which forecasts that sales will almost double again in three years, to $18 billion.

Demand is so hot, in fact, that manufacturers say they cannot keep up. Toshiba says it has had to turn down new customers and estimates that manufacturers can meet only about 70 to 80 percent of global demand. Big buyers like Apple and its rival Sony, maker of the Walkman, are signing multiyear deals with chip makers to ensure supply. Shrinking supplies of chips have forced some smaller music-device makers in China to stop production, analysts say.

But scarcity has not driven up prices, as might be expected when demand surpasses supply. That is because companies have continued to slash prices in a cutthroat race for market share, say analysts. This year alone, critical prices will probably drop 56 percent, according to Gartner.

One of the most aggressive price-cutters has been Samsung, which this year beat Toshiba to become the main supplier of memory chips for the Apple Nano. While details of the deal are not public, Samsung's price was so low that the Fair Trade Commission in South Korea said last month it was investigating to see if Samsung, the second-largest chip maker after Intel, had used its size to unfairly squelch competition. Samsung says it has not broken any laws.

Samsung enjoys a commanding lead despite the fact that it still pays royalty fees to Toshiba for licensing NAND technology 10 years ago. Asked if it regretted selling the technology to Samsung, Toshiba said a second supplier was necessary at the time to kick-start the market for an unknown and untested product.

"The one that bought the technology is now the leader," admits Shozo Saito, a vice president at Toshiba who runs the memory chip division. "No matter how much we invest, it'll be hard to catch up."

To cement its advantage, Samsung said in September that it planned to spend $33 billion over the next seven years to expand production at its sprawling Hwaseong computer chip plant, though it will not say how much of that will be devoted to NAND chips. Samsung also said it would hire 5,000 more engineers to increase research and development of new chips. Not to be outdone, Toshiba said it planned to begin making a similar chip by the same time.

At Toshiba's Yokkaichi plant, there is a palpable determination to catch up with the larger Korean rival. Engineers work in shifts around the clock to speed up development and production of new chips.

Noriyoshi Tozawa, the plant's manager, said he kept workers on their toes with little reminders of darker times. One is an elevator that has been kept out of use since 2001; a sign on the doors says that it was turned off after a crash in computer chip prices almost forced the closure of the plant, which used to produce DRAM, another type of memory chip.

"You have to always be at the leading edge to stay alive in this industry," Tozawa. "We know what it's like to lose."