Competition for iPod flash chips hotting up

A South Korean worker operates his mobile phone next to a Samsung mobile phone advertisement in downtown Seoul yesterday. Samsung Electronics Co and Hynix Semiconductor Inc confirmed that they have entered into long-term agreements with Apple to supply NAND flash memory chips used in Apple's iPod Nano. PHOTO: AP

Shares Samsung Electronics Co and Toshiba Corp fell on concern a new venture by Intel Corp and Micron Technology Inc to make chips for iPod music players and digital cameras will increase price competition.

Samsung, the world's largest maker of NAND flash memory chips, fell 5 percent, while third-ranked Hynix Semiconductor Inc dropped 8.3 percent in Seoul. Toshiba, the No. 2, slid 8.8 percent, the biggest decline in 14 years in Tokyo.

The venture is targeting the fastest-growing segment of the US$17.3 billion market for flash memory, which stores music and video files in handheld gadgets. Apple, which already granted the companies a contract for iPod chips, may encourage competition to seek lower prices from suppliers.

"This tipped the scale in a seller's market in favor of buyers and could have a negative impact on Samsung and Toshiba's pricing power," said Nick Ouyang (歐陽渭棠), who manages the equivalent of US$225 million at JF Asset Management's JF Eastern Technology Fund in Taipei.

Intel, whose microprocessors run more than 80 percent of the world's personal computers, is teaming up with Micron, the fifth-biggest maker of NAND chips, to accelerate its push into consumer electronics chips.

The companies will contribute US$1.2 billion each initially to the venture. NAND is cheaper to make than the NOR chips currently produced by Intel. NOR allows phones to read data more quickly than NAND, but is slower at writing large music and picture files.

Samsung other memory chipmakers are counting on rising NAND demand to drive earnings growth as sales of computer chips known as dynamic random access memory (DRAM) are forecast to shrink for a second year next year. The market for NAND flash will rise 23.5 percent next year, compared with 6.1 percent for NOR, the Semiconductor Industry Association said last week.

"There are no winners among chipmakers, only the consumers win," said Yoshiharu Izumi, an analyst at JP Morgan Asia in Tokyo.

Suwon, South Korea-based Samsung had 50.2 percent of the NAND market in the third quarter, Toshiba of Japan had 22.8 percent. Micron was fifth, with 3.4 percent and sales rose fivefold in the period, according to ISuppli Corp.

Shares Intel rose 0.04 percent to US$25.26 in US after-hours trading, while Micron gained 0.1 percent to US$14.20.

Competitor SanDisk Corp, which works with Toshiba, dropped 17 percent to US$46.84 on the NASDAQ stock market.

Toshiba, which makes 80 percent of its operating profit from its chip business, mainly from NAND flash, "is standing on one leg," said Yoshihiro Shimada, an analyst at Macquarie Securities Ltd in Tokyo.

The venture will be 51 percent owned by Boise, Idaho-based Micron, and 49 percent owned by Intel. They will fund the IM Flash Technologies LLC venture with cash, notes and assets and will each contribute an additional US$1.4 billion over the next three years.

Initial is expected in early 2006, at Micron plants in Boise; Manassas, Virginia, and Lehi, Utah. Intel and Micron each entered into separate long-term agreements to supply Apple with a significant portion of each of their share of IM's output. Apple will prepay US$250 million each to Intel and Micron.

Apple to buy chips for its iPod players from the new company as part of US$1.25 billion in purchases announced yesterday.