Japan/South Korea Trade Friction Causing to Wonder Whether Supplies of Critical Materials to Produce DRAM, NAND and Other Semiconductor Components Will Run Out – Trendfocus

This is an Executive Brief from Trendfocus, Inc.‘s Information Services.

Trade Tension Uncertainties Highlight Asia Meetings

Ahead of earnings season and our CQ2 ’19 quarterly and revised long-term forecasting cycle that will begin in August, the Trendfocus team traveled to Asia this past week to get a sense from storage device and system makers of the current market sentiment.

One topic that came up in a number of meetings was the various international trade tensions and their possible impact on storage demand, availability and pricing. Most clients wanted to know the worst-case scenarios for HDD/SSD sales restrictions to various Chinese companies as well as the possible impact of restrictions by Japan on shipments of key semiconductor materials to South Korea. The discussions were mainly an exercise in speculation; however, it appears clear that China purchases of enterprise IT equipment and components have slowed pending better clarity on the outcome of various U.S./China negotiations in the face of ongoing tariffs.

ODM builds of notebook PCs finished Q2 with a strong Y/Y increase which seems like a positive for PC demand; however, underlying this build strength was the action by companies to build-ahead to avoid an increase in U.S. tariffs that were set to take place in June. However, since the implementation of the tariff rise was postponed, PC companies are now trying to manage inventories downward and ODMs are seeing large reductions in notebook builds for July.

The Japan/South Korea trade friction is causing everyone to wonder whether supplies of critical materials to produce DRAM, NAND and other semiconductor components will run out prior to companies receiving the export licenses now required by Japan for shipments of three key semiconductor processing materials to South Korea – a process that could take up to 90 days. News articles have cited sources claiming as little as one month of inventory held by Korean companies; however, in a meeting which took place in Taiwan, one client was told by a customer that perhaps up to four months of materials inventory could be on hand at the Korean chip companies. Hopefully, brinksmanship on both sides will give way to productive negotiations to prevent what would be a devastating impact on nearly all tech companies around the world.

June’s power outage at the Yokkaichi, Japan NAND fab for Toshiba Memory (soon to be Kioxia) and Western Digital raised plenty of questions about the impact on supply of NAND and SSDs as well as on pricing. Although there have been no definitive price increases, there are still ongoing discussions regarding if and when some slight increases may occur – whether in the current quarter or in CQ4’19. There wasn’t that much immediate concern as supply still remains abundant. In real terms, our estimate for the supply disruption could be somewhere in the range of 13 to 15EB of supply in CQ4; however, so much NAND inventory exists across the supply base that the absence of those bits will only go partway towards pulling the supply of flash back in balance with demand. As for opportunistic price increases, the market may see some slight increases in certain segments, especially for vendors that sell into the channel/aftermarket, and more specifically the client SSD segments. There may be some attempts to increase pricing in other segments and for enterprise SSDs, but that is less clear at this point. It is important to note that even an impact of 13-15EB as a potential shortfall only equates to roughly 4% of the total NAND supply for 2019. As stated above, current inventory levels and continued relative softness in the market tell us that the impact, if any, may not be that severe.

As published in our CQ2 ’19 HDD preliminary shipment results back on July 9, nearline shipments in CQ2 outstripped our forecast and every sign still points to a continued rebound in cloud demand for high capacity HDD models through at least the rest of the year.

Microsoft’s earnings announcement on July 18 also pointed to accelerating CAPEX for its cloud business and while CAPEX has never been directly correlated to quarter-to-quarter nearline demand, increased spending for equipment invariably leads to more storage deployment through the CAPEX increase cycle.