SK-Intel NAND deal points to wider shake-up of chip sector

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Nikkei Asia

October 23, 2020

The announcement on Oct. 20 that U.S. chipmaker Intel will sell its NAND flash memory business to South Korea’s SK Hynix for $9 billion appears to be a move toward greater consolidation in the industry.

It may also be remembered as the first step in Intel’s shift away from an integrated device manufacturing, or IDM, business model toward a fabless one.

Here are five things to know about the acquisition, which may embroil the world in a new tech Cold War.

Why did the companies agree to the deal?

NAND flash memory is used to store image and other data on devices such as smartphones and digital cameras, which require large amounts of long-lasting data storage capacity. SK and Intel had the fifth- and sixth-largest market shares, respectively, for NAND in 2019 and both saw those shares as too small to give them pricing power or sufficient profitability in the business.

SK has been eager to grab market share through acquisitions, while Intel told investors that it was considering selling off its NAND business, which had been chronically losing money. The combined market shares of SK and Intel in 2019 was 19.4%, larger than that of No. 2 player, Kioxia Holdings of Japan, with 19.0%.

With a larger slice of the market, SK’s NAND operations should be more profitable.

What is the impact of the deal on the NAND industry?

The NAND flash memory sector is consolidating, as it is difficult for manufacturers to make a decent profit with six players competing fiercely. Analysts believe that even the market leader, Samsung Electric, is not satisfied with the profitability of its NAND business.

By contrast, the market for DRAM memory chips, which are widely used in computers to store data temporarily, is dominated by three manufacturers — South Korea’s Samsung and SK, and Micron Technology of the U.S. All three generally make healthy profits from that segment.

Industry experts believe SK will continue to look for buying opportunities, even after acquiring Intel’s unit. It bought $3.74 billion of convertible bonds issued by Kioxia in 2017, and has said it will convert them into shares when Kioxia is publicly listed.

That would give SK a 14.96% stake in Kioxia. The combined 2019 market shares of Intel’s NAND unit, SK and Kioxia was 38.4%, larger than Samsung’s 35.9%.

Not only SK but Western Digital of the U.S. and Micron are also believed to be considering various consolidation options. SK’s latest move may spur them into action.

Will the NAND market become an oligopoly?

Kioxia has put its initial public offering plan on hold, citing rising uncertainty due to U.S.-China technology trade conflict. This precludes SK from acquiring an equity stake in Kioxia for the moment.

Western Digital has partnered with Kioxia in operating NAND plants in Japan. It is strongly opposed to SK taking a controlling stake in Kioxia. This is likely to be a major obstacle to SK’s ambition to acquire Kioxia.

In the meantime, China’s Tsinghua Unigroupdeveloped a rapidly growing NAND business at its subsidiary, Yangtse Memory Technologies, which is backed by the Chinese government. Given China’s national objective of becoming a semiconductor technology powerhouse, it is believed Yangtse will expand production regardless of profitability, which would make the battle for market share even fiercer.

What are the implications for the U.S.-China tech conflict?

Intel makes NAND chips at its fab plant in Dalian, China. The escalating U.S.-China tech conflict threatens U.S. companies’ ability to continue running chipmaking plants in China. Beijing is believed to favor handing over the Dalian plant to a South Korean company.

China says it hopes to have domestic manufacturers meet 70% of domestic demand for chips by 2025, but it remains far from that goal: In 2019 domestic suppliers fulfilled only 16% of demand.

The U.S. has banned China’s Huawei Technology from buying U.S.-made chips, chipmaking equipment and software. It has also barred the Chinese telecom equipment maker from buying chips made at non-U.S. facilities that use American equipment and software. China’s biggest chipmaker, Semiconductor Manufacturing International, or SMIC, faces similar restrictions.

Industry experts believe Washington’s policy has put China’s 70% self-sufficiency target by 2025 out of reach. The SK-Intel deal is a rare positive development in the semiconductor sector for China.

What is Intel trying to achieve?

Intel decided to offload the NAND manufacturing plant as it reevaluates the IDM model, under which a chipmaker designs and manufactures chips in house, and sells them under its own brand. More U.S. chipmakers have opted for the fabless model in recent years, leaving manufacturing to contractors. This approach has been profitable. Nvidia, fabless chipmaker, recently overtook Intel in terms of market capitalization, thanks to its strong profitability and rapid growth.

Advanced Micro Devices, Intel’s longtime rival in microprocessors, went fabless in 2009. That freed it from having to make big capital investments and gave it access to the most advanced chipmaking capabilities offered by manufacturing specialists, called foundries. Ever since, AMD has been gaining market share in the microprocessor market, which was once a de facto monopoly controlled by Intel.

Chipmakers face growing pressure from makers of end products, which are starting to produce their own semiconductors using the fabless model. Apple, for example, has decided to stop using Intel microprocessors in its Mac computers, replacing them with chips designed in house.

Both fabless chipmakers and end-product makers contract out chip manufacturing to foundries such as Taiwan Semiconductor Manufacturing, or TSMC, which are able to make massive capital investments in plant and equipment, and have big budgets for research and development.

As a result, AMD’s processors are made with the most advanced microarchitecture in the world at TSMC plants. Intel, on the other hand, has had difficulty in the past few years with the commercial launch of chips using the most advanced microarchitecture. Intel executives have told investors that the company is weighing whether to outsource some chip manufacturing to foundries.

Some industry experts even believe there is a possibility for Intel to turn completely fabless in the foreseeable future.

That would significantly reduce U.S. chipmaking capabilities, hampering Washington’s effort to maintain its edge over China in semiconductor technology. In order to keep Intel’s manufacturing capacity inside the country, some industry experts predict the government may start subsidizing the company’s R&D and capital expenditures.