More About Flash Ventures Between Western Digital and Toshiba

At the time where Toshiba is trying to sell is NAND flash chip business, we give here some details on the venture of the company with formerly SanDisk and now Western Digital to explain why this later estimates to be in  the best position to bid for the Toshiba manufacturing activity. This article is an abstract of a WD’s SEC filing.

The WD’s business ventures with Toshiba consist of three separate legal entities: Flash Partners Ltd., Flash Alliance Ltd. and Flash Forward Ltd and together with Flash Partners and Flash Alliance, referred to as Flash Ventures.

WD has a 49.9% ownership interest and Toshiba has a 50.1% ownership interest in each of these entities.

Through Flash Ventures, both firms collaborate in the development and manufacture of NAND flash memory products, which are manufactured by Toshiba at its wafer fabrication facilities located in Yokkaichi, Japan, using semiconductor manufacturing equipment individually owned or leased by each Flash Ventures entity. The entities within Flash Ventures purchase wafers from Toshiba at cost and then resell those wafers to the company and Toshiba at cost plus a markup.

WD relies substantially on this business ventures and strategic partnerships for the supply of NAND flash memory, which subjects us to risks and uncertainties that could harm its business, financial condition and operating results.

WD is dependent on these ventures with Toshiba to develop and manufacture NAND flash memory products and other strategic relationships with Toshiba for its NAND flash memory supply, and therefore its business, financial condition and operating results, and its ability to realize the anticipated benefits from its acquisition of SanDisk Corporation, will be dependent on the success of Flash Ventures and other strategic relationships with Toshiba.

A majority of WD’s NAND flash memory is supplied by Flash Ventures, which limits company’s ability to respond to demand and supply changes. A failure to accurately forecast demand could cause WD to over-invest or under-invest in technology transitions or the expansion of captive memory capacity in Flash Ventures.

Over-investment could result in excess supply, which could cause significant decreases in WD’s product prices, significant excess, obsolete or lower of cost or net realizable value inventory write-downs or under-utilization charges, and the potential impairment of its investments in Flash Ventures.

On the other hand, if WD or Toshiba under-invest in captive memory capacity or technology transitions, if WD grows capacity more slowly than the rest of the industry, if its technology transitions do not occur on the timeline that WD expect, if WD encounter unanticipated difficulties in implementing these transitions, or if it implements technology transitions more slowly than its competitors, it may not have enough captive supply of the right type of memory or at all to meet demand on a timely and cost effective basis and it may lose opportunities for revenue, gross margin and share as a result.

If WD’s NAND memory supply is limited, the company may make strategic decisions with respect to the allocation of its supply among its products and customers, and these strategic allocation decisions may result in less favorable gross margin in the short term or damage certain customer relationships.

Growth of our NAND flash memory bit supply at a slower rate than the overall industry for an extended period of time would result in lowering WD’s share which could limit its future opportunities and harm its financial results.

WD is also contractually obligated to pay for 50% of the fixed costs of Flash Ventures regardless of whether it purchases any wafers from Flash Ventures.

Furthermore, purchase orders placed with Flash Ventures and under the foundry arrangements with Toshiba for up to three months are binding and cannot be canceled. Therefore, once WD’s purchase decisions have been made, its production costs for flash memory are fixed, and it may be unable to reduce costs to match any subsequent declines in pricing or demand, which would harm its gross margin. WD’s limited ability to react to fluctuations in flash memory supply and demand makes its financial results particularly susceptible to variations from company’s forecasts and expectations.

In addition, WD partners with Toshiba on the development of NAND flash technology, including the next technology transitions of NAND flash, as well as other non-volatile memory technology.

These ventures and strategic partnerships are subject to various risks that could harm the value of WD’s investments, its revenue and costs, its future rate of spending, its technology plans and its future growth opportunities. Under the terms of WD’s venture agreements with Toshiba, which govern the operations of Flash Ventures, WD has limited power to unilaterally direct most of the activities that most impact Flash Ventures’ performance. Although the two firms have a long history of aligning on important manufacturing and technology development decisions, the integration of SanDisk into WD’s organization could complicate the process of reaching agreement with Toshiba in a timely and favorable manner. WD may not always agree with Toshiba on its joint R&D roadmap or expansions or conversions of production capacity. In addition, Toshiba’s financial position or shift in strategic priorities could adversely impact WD’s business.

Flash Ventures requires significant investments by both Toshiba and WD for technology transitions, including the transition to 3D NAND, and capacity expansions. In March 2016, Toshiba announced plans to construct a new wafer fab in Yokkaichi, Japan, to provide additional cleanroom space for expanded 3D NAND production. Although WD intends to extend the joint venture partnership with Toshiba to the new wafer fab, there is no certainty as to when, and on what terms, WD will participate with Toshiba in any investment in, or use of, the new wafer fab, if at all.

Failure to extend the joint venture partnership or failure to continue to secure and invest in additional cleanroom space to support the continued 3D NAND transition could adversely impact WD’s supply of captive NAND flash memory and financial results.

If Toshiba does not or WD does not provide sufficient resources or have adequate access to credit, investments in Flash Ventures could be delayed or reduced. In addition, in the event that lease financing for Flash Ventures are not available on favorable terms or at all, more cash would be required to fund these investments.