SanDisk Looks Long

Despite a glut in flash memory chips, it plans to expand capacity.
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Flash-memory chips may be piling up in warehouses and on store shelves, but

SanDisk

(SNDK)

and

Toshiba

are taking steps to bring even more flash to market.

The two companies, which run a flash manufacturing joint venture, announced on Wednesday plans to build a new factory to produce the chips. The new facility, to be located in Yokkaichi, Japan, will be operational by mid-2007 and is expected to help the companies meet demand for flash chips in 2008 and beyond.

Investors applauded the move, sending shares of SanDisk up $3.02, or 5.3%, to $59.93 in midday trading.

The news comes as many industry watchers are

raising concerns of a glut of flash chips, which has resulted in prices plunging by 60% so far this year. Flash memory is a popular means of storing data on consumer electronic devices like MP3 players, digital cameras and cell phones.

But while the short-term outlook may be dim, the new fabrication facility announcement underscores the long-term potential that many companies see in flash memory.

Although the current oversupply is more severe than expected, it is still in sync with the seasonal slowdown of the consumer-based flash market, says Nam Hyung Kim, principal analyst at industry research firm iSuppli, who expects sales to pick up in the second half of the year.

"The

NAND flash market is still one of the most profitable businesses in the semiconductor sector," says Kim. "Even though prices went down, NAND suppliers still make money."

The market's long-term growth prospects are very strong, says Kim, noting that the compound annual growth between 2005 and 2010 is estimated at 20%.

SanDisk CEO Eli Harari said in a statement that the new facility will have a highly competitive cost structure, and give SanDisk a formidable supply base to increase product revenue in new markets in the second half of the decade.

"This demonstrates our optimism in the continuing growth in demand for our products in consumer electronics and handsets in the years ahead, as well as our confidence in the continuing future competitiveness of the Toshiba-SanDisk partnership," said Harari in a statement.

Construction on the new 300-mm wafer fabrication facility, which the companies had hinted at in recent months, will begin in August. Toshiba will fund construction of the building, while both Toshiba and SanDisk will pay for the manufacturing equipment.

The new facility will be similar in size to the Fab 3 facility in Japan, which the two companies started running last summer. In February, SanDisk announced it was boosting capacity at Fab 3 to 70,000 wafers a month from 48,750 wafers a month by March 2007. SanDisk put the incremental cost of 50% of this capacity expansion at $500 million over a 12-month period.