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SanDisk, Toshiba form new flash memory company

Aiming to capitalize on a worldwide shortage for the type of memory that fuels digital cameras and MP3 players, the companies announce an alliance to manufacture flash memory.

Aiming to capitalize on a worldwide shortage for the type of memory that fuels digital cameras and MP3 players, SanDisk and Toshiba today announced an alliance to manufacture flash memory.

The joint venture, called FlashVision, will likely help both companies mine profits in one of the faster growing subsegments of the semiconductor market. Sales of flash memory--which stores data and software code inside cell phones, digital cameras, MP3 players and other devices--has grown from $2.5 billion in 1998 to $4.5 billion last year and is expected to grow to a $10 billion market this year.

The sudden surge of demand has created a shortage that is expected to last at least through 2001. Some consumer electronics manufacturers have already been affected. Late last year, for instance, some flash manufacturers, including SanDisk, diverted available supplies to digital camera manufacturers.

As a result,"MP3 companies had to delay the introduction of products," said Eric Rothdeutsch, an analyst at Merrill Lynch. "This has continued. The limiting factor on MP3 will be flash."

Under the terms of the alliance, Toshiba and SanDisk will invest $700 million to renovate a fabrication facility being acquired from Dominion Semiconductor in Manassas, Va. FlashVision will not actually sell chips to electronics manufacturers. Instead, half of the output from the factory will go to Toshiba and the other half to SanDisk.

In turn, those companies will package the memory chips into flash memory cards, which can then be incorporated into cell phones or sold as external storage cards for digital cameras, MP3 players and other devices.

The plant will start producing chips in late 2001 and is expected to hit $1 billion in annual sales in 2002, according to the companies.

Both SanDisk and Toshiba largely concentrate on data storage flash, which is often used as a recording medium for digital music and photos. By contrast, Intel and AMD concentrate on code storage flash, which is used to store programs.

Although the underlying technology involved in the two types of flash is roughly the same, the two types of chip differ in important ways. Data storage flash typically is sold on a card with a memory controller and other technology. Data storage flash is also typically fairly dense. FlashVision is expected to produce chips that can store between 256 MB and 2 GB of data. Currently, the bulk of flash chips hold around 16 MB.

Data storage demand, currently growing, will get even stronger as manufacturers incorporate more functions onto electronic gadgets, said a SanDisk representative. A cell phone with an MP3 player built-in really can't function without data cards.

The new venture will also mark an important milestone for SanDisk. The company is currently a "fabless" semiconductor company, which means it designs and markets products but has to outsource the actual manufacturing to companies such as Taiwan's United Microelectronics.

Although outsourcing can cut costs, it can be risky in times of rising demands, as foundry companies are booked up. With FlashVision, SanDisk will be able to gain a certain measure of autonomy. Last year, SanDisk produced 5 million units. This year, it is on track to produce 15 million units.

Currently, nearly all of the flash manufacturers are making money, but the field will begin to narrow over the next six to 12 months, Rothdeutsch said before today's deal was announced. A determining factor will be fab ownership. "It will be the companies that own their own fab or that are adding fab capacity that will be the winners," said Rothdeutsch.