As reported by multiple Japanese media, including Kyodo News, Nikkei, and Asahi Shimbun on the 13th and 14th of this month, negotiations for the merger between NAND flash memory giants Kioxia and Western Digital have reportedly reached the final stages. There is a high likelihood that a merger agreement will be reached within this month, and the newly merged company is expected to be listed on the NASDAQ in the United States. Additionally, the board of the new company will be predominantly controlled by Kioxia.

The primary objective of this business merger is to prepare for the uncertain conditions in the storage market. By expanding their scale and positioning for future investment competition, they aim to fortify their competitive edge.

Specifics of the Agreement are Still under Review

According to the reports, Kioxia and Western Digital will establish a holding company, KIOXIA Holdings. Western Digital’s storage business and Kioxia will be incorporated under this holding company, focusing on the research and production of NAND Flash. It’s worth noting that Western Digital’s hard drive business will remain an independent entity and will not be part of this transaction.

In terms of the merger’s enterprise value-based breakdown, Kioxia will hold 63%, and Western Digital will hold 37%. However, after considering capital adjustments, the final investment ratio in the holding company will be 50.1% for Western Digital shareholders and 49.9% for Kioxia shareholders.

Toshiba, which currently holds around 40% of Kioxia, will also become a shareholder in the holding company. The President of Kioxia, Nobuo Hayasaka, will assume the role of President of the holding company. Furthermore, the majority of seats on the board will be under Kioxia’s control, granting Kioxia substantial operational authority.

Factors and Potential Roadblocks in Kioxia and Western Digital Merger

Previously, it was reported that the headquarters of the holding company would be located in Japan. However, in order to facilitate fundraising for equipment investments, they plan to be listed on the NASDAQ in the United States. Furthermore, there are future plans for a listing on the Tokyo Stock Exchange. When Kioxia and Western Digital merge, Japan’s three major banks, including Mitsubishi UFJ, and the Japan Policy Investment Bank are considering providing financing in the range of 1.5 to 1.9 trillion Japanese yen.

However, the reality of this merger presents challenges, as influential industry competitors may potentially interfere. The finalized agreement will be subject to antitrust reviews in various countries, and the outcome of scrutiny by Chinese antitrust authorities remains uncertain.

According to data from TrendForce, in the Q2 of 2023, in the NAND memory market, Samsung leads with a market share of 31.1%, while Kioxia holds 19.6% and Western Digital maintains a 14.7% market share. Following the merger of Kioxia and Western Digital, their combined market share may exceed 34.3%, positioning them as the dominant force in the NAND memory market.

Read more:

• Q2 NAND Flash Revenue Up 7.4%, Anticipated to Exceed 3% Growth in Q3, Says TrendForce

Due to factors such as high inflation, sluggish demand in the consumer electronics sector, and other influences, the memory market has experienced a downturn. Major manufacturers like Kioxia and Micron began reducing capacity in the fourth quarter of the previous year, and in 2023, Samsung announced its entry into the production reduction trend. However, as market demand continues to weaken, the memory market in 2023 has yet to show signs of recovery, with prices continuing to decline and manufacturers facing operational pressure.

In this context, some memory manufacturers are hoping to stabilize prices and rebalance market supply and demand by continuing to reduce production.

According to reports from Taiwan’s media The Commercial Times,” DRAM manufacturer Nanya Technology is following the footsteps of major players by adjusting production capacity, lowering utilization rates, flexibly adjusting product portfolios and capex, and dynamically adapting to customer demands and market changes to cope with the weak market conditions. It is expected that production capacity will be adjusted dynamically, with reductions of up to 20%.

Previously, TrendForce’s research showed that due to DRAM suppliers initiating production cuts one after another, overall DRAM supply bits have decreased quarter by quarter. Coupled with seasonal demand support, this has eased the pressure on supplier inventories. It is expected that the price decline in the third quarter for DRAM will converge to around 0-5%. However, due to the fact that supplier inventories remain high throughout the year, there is still significant pressure for DRAM prices to bottom out and rebound, with the actual stabilization and recovery likely to occur in 2024.

As for NAND Flash, recent surveys by TrendForce indicate that, in response to the continued weakening demand, Samsung has announced an increase in production cuts starting from September, with reductions mainly focused on processes below 128 layers. Other suppliers are expected to follow suit and expand production cuts in the fourth quarter to accelerate inventory reduction.

As NAND Flash manufacturers expand their production cut efforts, TrendForce estimates that NAND Flash prices in the fourth quarter are expected to remain stable or see a slight increase, with an estimated increase of approximately 0-5%. However, if the upward trend in NAND Flash prices is to continue into 2024, it will still rely on sustained production reductions, as well as the observation of whether Enterprise SSD purchase orders will see a significant resurgence.

(Photo credit: Micron)

According to TrendForce research, demand continues to weaken due to modestly high inventories maintained by buyers and sellers, coupled with the recent impact of the Russian-Ukrainian war and rising inflation on PCs, laptops, and smartphones. However, overall NAND Flash supply has been significantly downgraded in the wake of raw material contamination at Kioxia and WDC in early February, becoming the key factor in a 5~10%  NAND Flash price appreciation in 2Q22.

In terms of Client SSD, the Russian-Ukrainian war has compelled PC OEMs to adopt a conservative stocking strategy for orders in 2Q22, which may continue affecting orders during peak season in 2H22, and revising 2022 shipment targets downwards. This year, SSD output has officially stepped out from the shadow of the semiconductor shortage. As Kioxia’s production capacity gradually recovered to supply SSD products in May and production capacity continues to roughly meet customer demand, suppliers have adopted a more aggressive pricing strategy. Price growth in 2Q22 is forecast to moderate to 3~8% compared with original expectations.

In terms of Enterprise SSD, as procurement capacity and orders for servers and hyperscale data centers grow and lead times on Enterprise SSD products balloon due to material contamination at Kioxia and WDC, clients immediately turned to Samsung and Solidigm looking for supply. Since the supply of PCIe 4.0 products is limited, suppliers have adopted a tough price negotiation policy which will drive the price of enterprise SSD up by 5~10% in 2Q22.

In terms of eMMC, demand for consumer products such as TVs, Chromebooks, and tablets continue to weaken, limiting demand for low- and medium-capacity eMMC products to a marginal level. Although the primary supply of low-capacity 2D NAND output has yet to be affected by raw material contamination, the overall deal-making atmosphere of the market remains transformed by the contamination incident. In addition, the plan of suppliers to gradually reduce 2D production capacity has not changed. Therefore, suppliers are eager to maintain profits by increasing the price of relatively low capacity eMMC products. eMMC contract pricing in 2Q22 is forecast to rise by 3-8%.

In terms of UFS, the Russian-Ukrainian war, high inflation, and other factors have weakened demand for the most important UFS applications such as smart phones. Likewise affected by the contamination of raw materials, the total output of 3D NAND has been significantly reduced. For UFS products with larger capacity and higher layer counts, the downgrade in supply far outstrips movement on the demand side. UFS pricing in the 2Q22 is forecast to increase approximately 3~8%. In terms of NAND Flash wafers, although demand for products such as flash drives and memory cards is weak, these are low priority products in the supply chain. Since raw material contamination has seriously affected the supply of NAND Flash wafers. 3D NAND Prices are forecast to move upwards by 5%~10% in 2Q22.

A powerful magnitude 7.3 earthquake occurred off the coast of Fukushima, Japan on the evening of March 16th (CST). Most of northeastern Japan is a production center for global upstream semiconductor raw materials. According to TrendForce investigations, in the main quake zone, only Kioxia’s K1 Fab (located in Kitakami) will face the possibility of a further downgrade to 1Q22 production. Some of the remaining memory or semiconductor companies in the region are conducting machine inspections but the overall impact has been muted.

In terms of memory, the intensity of the earthquake at Kioxia’s K1 Fab reached magnitude 5. When the earthquake occurred, wafer input was partially damaged. At present, K1 Fab has been shut down for inspection. The 1Q22 production capacity of the K1 Fab had been downgraded following the recent contamination incident and accounts for approximately 8% of Kioxia’s 2022 production capacity. Operating under a cloud of possible aftershocks, Kioxia’s capacity utilization rate may be slow to recover in the next week, causing further downward revision of K1 Fab’s 1Q22 production. The remaining Kioxia factories are unaffected, as is Micron’s Hiroshima plant.

Looking at the market spot price, pricing has moved up since February due to the contamination of Kioxia’s raw materials. The Russian-Ukrainian war did not trigger significant upward or downward movements in spot price. After last night’s Fukushima earthquake, pricing remains stable. TrendForce asserts, overall spot demand remains weak and prices are not prone to drastic changes.

In terms of raw wafers, SUMCO’s Yonezawa Plant in Yamagata and Shin-Etsu’s Shirakawa Plant in Fukushima are both within the affected area, experiencing an earthquake intensity of magnitude 5. Due to the extremely high stability required in the crystal growth process, the industry has not yet announced the impact of the quake. TrendForce specifies, in addition to shutdown inspections, damage to machines and silicon wafer input is inevitable. However, in addition to redistributing production plans, buildings were reinforced after the 2011 Tohoku earthquake and tsunami in Japan, so overall damage may be minor.

In terms of foundries, there are two 12-inch wafer fabs and two 8-inch wafer fabs in Japan, including UMC Fab12M (12-inch), Tower Uozu (12-inch), Tonami (8-inch), Arai (8 inches), located in Mie, Toyama, and Niigata prefectures, respectively, and separately experiencing quake magnitudes from 1 to 3. At present, these fabs are operating normally and any impact of the quake on the plants are largely insignificant. However, IDM manufacturer Renesas’ Naka plant is within the magnitude 5 zone and they have also shut down and reduced production to confirm the impact of the quake.

In 4Q21, NAND Flash bit shipments grew by only 3.3% QoQ, a significant decrease from the nearly 10% in 3Q21, according to TrendForce’s investigations. ASP fell by nearly 5% and the overall industry posted revenue of US$18.5 billion, a QoQ decrease of 2.1%. This was primarily due to a decline in the purchase demand of various products and a market shift to oversupply causing a drop in contract prices. In 4Q21, with the exception of enterprise SSD, the supply of which was limited by insufficient upstream components, the prices of other NAND Flash products such as eMMC, UFS, and client SSD, all fell.

TrendForce’s summary of NAND Flash market sales performance in 2021 is as follows: although there have been signs of weakening since 2H21, thanks to remote services and cloud demand driven by the pandemic, revenue performance still grew significantly compared to 2020. Revenue reached US$68.6 billion, up 21.1% YoY, the second-biggest increase since 2018.

NAND Flash revenue fell for most manufactures in 4Q21 due to PC OEM destocking

There were some changes to the top three NAND Flash revenue rankings in 4Q21 compared 3Q21, Samsung and Kioxia remained in the top two while third place was replaced by Western Digital (WDC). Although there was still demand coming from data centers, as PC OEMs continued to deplete client SSD inventories and demand from China’s smartphone market weakened, stocking momentum was affected by component mismatch issues, resulting in a decline of approximately 5% in Samsung Electronics’ bit shipments in 4Q21. After the market shifted to oversupply, ASP also fell by approximately 5%, leading to Samsung Electronics posting 4Q21 revenue of US$6.110 billion, a QoQ decrease of 6.1%.

Second ranked Kioxia continued seeing strong demand from data center clients in 4Q21 but this was offset by inventory adjustment and reduced purchasing on the part of PC OEMs. Bit shipments declined slightly by 1% and ASP remained flat even in the face of weakening market demand, which was better performance than that of other suppliers in the same period. Revenue in 4Q21 reached US$3.543 billion, a QoQ decrease of 2.6%.

WDC was another company that benefited from continued strong stocking demand from major US smartphone clients for new 5G flagship phones which offset the impact of weak client and enterprise SSD sales, for bit shipment growth of 13%. However, as the proportion of consumer goods grew, ASP declined by 6%. WDC’s NAND Flash division posted 4Q21 revenue of US$2.62 billion, a QoQ increase of 5.2%.

Benefiting from continued stocking from data center clients and US-based smartphone brands, SK hynix’s bit shipment growth remained above 10%, in line with original forecasts. However, ASP was affected by weaker mobile phone shipments in China and inventory adjustment at PC OEMs. Pricing fell by nearly 10% which offset overall growth momentum. Revenue posted by SK hynix’s NAND Flash division in 4Q21 increased by 2.8% to US$2.615 billion.

Micron was similarly affected by inventory adjustments undertaken on the part of PC OEMs and data center clients.  Although Micron’s 176-layer products continue to be adopted, shipments in 4Q21 were flat compared to 3Q21 and ASP fell approximately 5% as the growth rate of supply outpaced demand, leading to a decline of 4.7% in Micron’s 4Q21 NAND Flash revenue to US$1.878 billion.

Solidigm’s 4Q21 production capacity was still being affected by the impact of supply chains (such as PMIC supply) on enterprise SSD, resulting in a continued decline in bit shipments of nearly 5% in 4Q21. At the same time, while orders for laptops are still strong, Solidigm actively increased bits shipments of PC QLC SSDs in order to reduce production capacity, causing a drop in ASP and a 4Q21 NAND Flash revenue performance of only US$996 million, a 9.9% decline.

Looking forward to 1Q22, TrendForce states that with the advent of the demand off-season, demand for major applications will show a seasonal decline, exacerbating the phenomenon of oversupply and driving the contract price of products to fall further. Falling prices and shrinking volume is expected to further reduce the revenue level of the NAND Flash industry. Referencing information released by TrendForce on Feb. 10, it is worth noting that market expectant psychological factors in 2Q22 generated from the previous Kioxia and WDC raw material pollution incidents will change the supply and demand situation after February and certain products with additional orders and non-quarterly contract prices will immediately reflect a pricing increase. This will help reduce the decline in the output value of NAND Flash in 1Q22.