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Unfazed by China rivals, Toshiba Memory ready for market rebound

'Customer demand will come back,' says world's No. 2 NAND maker

Toshiba Memory's Yokkaichi works in central Japan: the Japanese chipmaker is bullish on the outlook for flash memory.

SHENZHEN/TAIPEI -- Toshiba Memory, the world's second-largest maker of NAND flash memory chips, is looking past rising Chinese competition to what it sees as the end of a supply glut that has squeezed profit margins to their lowest in a decade.

"It's not so easy for newcomers to catch up in the near term, like three years," Shigenori Yanagi, a Toshiba Memory executive, told the Nikkei Asian Review in an interview during the annual China Flash Market Summit in Shenzhen.

The Japan-based chipmaker, which was spun off from Toshiba last year, expects the oversupply that has weighed on NAND prices in the $406 billion market to ease this year. 

Exacerbated by trade war uncertainties and a worsening global economic outlook, the slump has led to cutbacks in capital spending throughout the industry -- but not by Chinese chipmakers.

Yangtze Memory Technologies, in particular, has invested $24 billion in a NAND project that is expected to enter production by the end of 2019. Apple, the world's biggest flash memory buyer, has visited Yangtze Memory to evaluate it as a potential supplier, the Nikkei Asian Review first reported last year. 

"I don't know what will happen four, five years later," Yanagi said. "I agree that Chinese companies would have advantages in the global market later. But Toshiba Memory will also invest to make sure we can compete in the long term."

NAND flash memory is a component in a wide range of electronic devices including PCs. data center servers, connected cars and smartphones. Leading producers include South Korean chipmakers Samsung Electronics and SK Hynix as well as U.S.-based Western Digital.

Toshiba Memory's Shigenori Yanagi, right, attends the 2019 China Flash Memory Summit in Shenzhen. (Photo by Cheng Ting-fang)

Toshiba Memory, which was sold off in an $18 billion deal in June to a consortium led by U.S. private equity firm Bain Capital, sees the market improving by the end of this year and expects the recovery to continue through 2020.

"The price erosion will stop," Toshikazu Takahashi, general manager of solid-state drive sales and marketing, told the Nikkei Asian Review. "The market will be much more balanced from this fourth quarter through next year.

"We can expect that customer demand will come back. Next year should be much better than this year, and the market situation would be much more balanced."

One reason is the China market, the world's fastest-growing memory chip market. Other factors include rising demand for chips used in next-generation 5G devices and data center servers, as well as the shift from hard disk drives to flash-memory-made solid-state drives for personal computers, Takahashi added.

Meanwhile, China has emerged as a NAND supplier in its own right.

Beijing has long aimed to build a competitive chip industry, as it forms a central plank of a national security strategy. As such, chip manufacturing also lies at the center of U.S.-China tensions over technology transfers.

"China really has the ambition to promote its memory chip industry, and the greatest threat from China [for existing market players] is Yangtze Memory Technologies," said Mark Li, an analyst at Bernstein Research. "In our view, [it] is the only company ... with a well understood intellectual property history and has the best chance of making an impact -- though is still years behind incumbents and has a long way to catch up."

Echoing comments made earlier this week by Huawei Technologies, the world's largest telecom gear maker, Toshiba's Yanagi said his company did not rule out the possibility of licensing its technologies and working with external partners, including Chinese ones. However, he said there were no concrete plans for now.

"It depends, and it's case by case," said Yanagi. "If technology is very critical to us, we may hesitate to license it to others ... but if technologies are similar, and if we can save time, expenses and investment, then we may [consider it]."   

Toshiba is not the only chipmaker feeling bullish about a coming market rebound.

Michael Zhu, vice president of Western Digital, said in a group interview that there are always "up and downs" in the industry.

"In 2008 and 2012, we all saw big memory chip corrections ... but each market downturn would later recover to generate new healthy growth because of the surging demand to store and process data," Zhu said.

Micron Technology CEO Sanjay Mehrotra also said in an earnings briefing Thursday that the profit margin for making flash memory chips, which is currently at the lowest levels in the past 10 years, should start increasing for the rest of the year.  

Sean Yang, an analyst at Shanghai-based research company CINNO, echoed that the industry could see a rebound soon given that flash memory prices have fallen as much as 80% from their 2017 peak.

"We will finally see flash memory pricing rebounding some 10% to 15% in the October-December period," he said.

Toshiba Memory will rename itself as Kioxia starting Oct. 1, when its parent company Toshiba will have completed the spinoff.

SK Hynix, Apple, Dell Technologies, Kingston Technology and Seagate Technology are part of the Bain-led consortium, while Toshiba will hold a roughly 40% stake. Toshiba Memory reportedly postponed its initial public offering to next year from this year due to the market downturn. 

The world semiconductor market is forecast to drop 13.3% to $406.6 billion this year, the biggest decline in a decade, dragged down by memory chip sales expected to plunge around 31% in 2019, according to World Semiconductor Trade Statistics, a renowned chip industry data provider. 

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