SAN FRANCISCO -- Micron ( MU) will stop making flash memory chips at one of its three factories dedicated to the product, as it seeks to mitigate the pain caused by a severe industry downturn. The Boise, Idaho chipmaker said Thursday that it will also layoff 15% of its global workforce over the next two years. The moves mark the most significant acknowledgement yet by Micron that the protracted downturn in the memory chip business, coupled with the financial crisis, is forcing the company to make drastic changes to its business operations. Micron said the move is expected to result in more than $175 million in operating margin benefit, while it will incur about $60 million in restructuring charges. Shares of Micron were up 12 cents, or 3%, to $3.99 in intra-day trading. The decision, which Micron executives said was finalized two days ago, was made through discussions with Intel ( INTC), which produces flash memory with Micron through a joint-venture called IM Flash Technologies. Micron said prices for NAND flash chips are now "significantly" below its manufacturing costs. "The selling price
of NAND flash chips now has dropped so far that we don't think the selling price will ever recover to a point where it makes sense to run this capacity," said Micron CEO Steve Appleton in an interview with TheStreet.com. Micron is essentially shuttering all output from equipment that produces NAND flash chips on 200mm silicon wafers -- which accounts for 15% of the company's total flash output. Micron will continue producing flash chips at a pair of factories with tools that process 300mm wafers, which produce more chips per wafer and are thus inherently more cost-efficient.
Flash memory is an increasingly popular component for storing data in a new breed of consumer electronics, such as digital cameras, cell phones and MP3 players. Micron and Intel jumped into the flash business in 2005 with a commitment that Apple ( AAPL)would buy hundreds of millions of dollars of the chips for its iPods. Since then, the flash market has entered into a prolonged downturn, as chipmakers pumped out chips far in excess of demand, sending prices into a sharp decline. The pressure is particularly acute for Micron, which also sells DRAM memory -- a business currently suffering from similar troubles. Last week the company reported a loss of $344 million, its seventh consecutive quarter of red ink. "What we're understanding from our customer base is that they're not very optimistic that this quarter is going to be very good. Most of them are forecasting a pretty weak first quarter, as well," said Appleton. In a note to investors, JP Morgan analyst Chris Danely said he expects a similar announcement from Intel, when the company reports its third-quarter financial results next week. According to Danely's estimates, Intel is losing about $50 million a quarter on its NAND flash operations, putting pressure on the company's profit margin. "We estimate that
Intel's NAND operations could drag corporate margins down by as much as 120 basis points in 3Q08 due to poor pricing and possible inventory write downs," he says. JP Morgan makes a market in Intel shares and has received compensation from Intel for non-investment banking services in the last 12 months.