Demand for flash memory--which is used to store data and programming algorithms in cell phones, digital cameras and MP3 music players--has surged, creating a spiral of consequences for the industry. With sales expected to climb from $4.5 billion to $10 billion this year, manufacturers such as Intel, AMD, Atmel and Fujitsu are expected to reap substantial profits.
At the same time, the surge in demand is creating a crimp on supply. Although manufacturers are rushing to expand flash factory capacity, shortages exist and are getting worse. In the end, appliance makers will likely have to delay products, water down configurations or even raise prices. Consumers also will likely see fewer cell phones, handhelds and MP3 players on shelves.
"Flash this year will be the limiting factor in how many (cellular) handsets will be produced," said Eric Rothdeutsch, an analyst at Merrill Lynch. "I imagine that the shortage will get a lot worse. We're going to be tight for all of 2001 at least."
Flash memory serves as a hard drive for consumer devices. Music, phone lists, applications, operating systems and other data are generally stored on flash chips. Unlike with computer memory, the data isn't erased when the device is turned off.
There are two basic kinds of flash memory, Rothdeutsch explained. Code storage flash, made by Intel, AMD and Atmel, stores programming algorithms and is largely found in cell phones. Data storage flash, which is made by SanDisk and Toshiba, stores data and comes in digital cameras and MP3 players.
Until last year, participation in the flash market was something of a frustrating enterprise. For years, the amount of flash emerging from factories, as measured by the total number of bits, has doubled annually, according to Dataquest analyst Jim Handy. A total of 1.3 billion MB of flash left factories in 1999, roughly twice the 690 million MB produced in 1998. Prices have declined at the same rate, however.
"The new effect of this is that revenue has been static," Handy said. Static revenues eviscerated profits as well. One semiconductor executive once told Handy that "in aggregate, the entire flash market has had zero profit."
That picture began to change in 1999. Flash demand continued to grow, but prices stayed flat and even started to rise by the end of the year. As a result, revenue went from $2.5 billion, where it had been since 1996, to $4.5 billion. Because manufacturers' fixed costs hadn't changed, the bottom line was substantially fattened.
"I would venture to guess that $2 billion of that increase was profit," Handy said.
The future looks even better. The market for flash is expected to expand to $10 billion this year, fueled by higher demand and escalating prices. "There is no question that prices are going up," Rothdeutsch said.
The math that makes semiconductors an attractive business will aid these companies as well, Handy noted. Many manufacturers, including Intel and AMD, have said they will begin to produce flash chips on the 0.18-micron manufacturing process. Migration to this manufacturing process will lead to smaller chips and hence more chips, and profits, per wafer. Concurrently, manufacturers will begin to pack more bits per chip, Handy said.
"Profits could massively over-account for any losses" in previous years, he added.
Intel also will use flash demand to boost sales of other products. Ron Smith, general manager of the company's wireless computing group, said recently that Intel is working on "integrated solutions" for cell phones that would combine most of the necessary silicon--flash memory, digital signal processors and microprocessors--into a single package.
Such an integrated solution would be less expensive but also would give Intel an opportunity to sell more StrongArm processor cores and an as-yet-to-be-released digital signal processing core.
"We will be producing four times the megabytes of flash that we produced in 1999," Smith said. "We are adding the equivalent of one factory a quarter."
AMD is equally bullish and is aggressively expanding manufacturing capacity and lining up multiyear contracts. AMD cooperates with Fujitsu on manufacturing.
"With the current industry shortage of product, assuring access to adequate supplies has become a strategic imperative for many of our customers," AMD chief executive Jerry Sanders said at the company's stockholder meeting. "As a result, we have entered into multiyear agreements with key customers, such as Alcatel, Cisco Systems and Samsung. We expect to announce additional multiyear agreements."
Still, despite plans to increase factory capacity, shortages are likely to get worse. How the shortage of code flash will affect the cell phone market remains to be seen. Because the price of cell phones is amortized over the life of the service contract, people may not see an increase in handset prices. Instead, companies may decide to lengthen the term of the contract or change the monthly fee, analysts said.
Consumers also might see a tight supply of cell phones, especially toward the end of the year. Another effect could be the slowing of the race to add features because memory won't exist to support those features.
Tight demand for data storage flash, by contrast, is already having a direct effect on the availability of products. Late last year, manufacturers of this type of flash, which include SanDisk and Toshiba, allocated their tight supplies to digital camera manufacturers in Europe.
"It is a tight market," he said.