U.S.-Japanese Consortium Front Runner in the Bid for Toshiba’s Memory Business

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Toshiba on June 21 announced that it has chosen a consortium led by U.S.-based Bain Capital and investors backed by the Japanese government as the first-place bidder for the spin-off of the company’s memory business. The deal is set to be finalized on June 28 and completed by March of next year. According to DRAMeXchange, a division of TrendForce, this announcement in the short term could cause the NAND Flash market to start shifting from undersupply to equilibrium this fourth quarter. In the long run, the support and demand provided by the bidding party could help the spun-off memory business to become more competitive against Samsung in terms of NAND Flash production capacity and related technology.

Alan Chen, senior research manager of DRAMeXchange, pointed out that together Toshiba and Western Digital currently account for 34.7% of the global production capacity for NAND Flash. The production capacity share of this alliance trails closely behind Samsung’s leading capacity share of 36.6%. Collectively, Toshiba, Western Digital and Samsung now represent about 70% of total production.

By itself, Toshiba’s memory business made around US$1.97 billion in revenue in the first quarter of 2017. Toshiba was also third place in the NAND Flash revenue ranking for the first quarter with a market share of 16.5%, following the second-place Western Digital and the leader Samsung.

Though the overall NAND Flash production capacity of the Toshiba-Western Digital alliance is comparable to Samsung’s, Chen noted that Samsung has a much larger 3D-NAND production capacity. The Toshiba-Western Digital alliance in this second quarter has 10~15% of its total monthly NAND Flash capacity allocated to 3D-NAND manufacturing. Meanwhile, the percentage of Samsung’s monthly NAND Flash capacity related to 3D-NAND manufacturing has already surpassed 40%. Micron and Intel, which are strategic partners in the NAND Flash market, have also been striving to expand their 3D-NAND production since the second half of 2016. Their 3D-NAND capacity already represents around 40% of their combined monthly NAND Flash capacity.

“The Toshiba-Western Digital camp from the start of this year has been working to catch up to their competitors in 3D-NAND Flash production,” said Chen. “Nevertheless, Toshiba’s memory business has been unable to fully carry out its plan because of the uncertainties created by its parent company’s financial troubles.”

This announcement could influence NAND Flash market so that it may begin to shift from undersupply to equilibrium this fourth quarter

In the short term, the timing of the spin-off is going to influence the supply-demand situation in the fourth quarter of 2017. “Toshiba’s announcement indicates that the agreement will be finalized before the end of this June,” said Chen. “Therefore Toshiba and Western Digital will be able to closely adhere to their 3D-NAND production schedule.”

The Toshiba-Western Digital alliance originally planned to have 30~40% of their combined NAND Flash capacity devoted to 3D-NAND products by the fourth quarter of 2017. The announcement of the U.S.-Japanese consortium as the first-place bidder would ensure certainty and help Toshiba and Western Digital to stick to their timetable. Their contribution to NAND Flash supply may be significant enough to cause the market to start shifting back to equilibrium in the fourth quarter. The general price uptrend may also begin to moderate or taper off by then.

The spun-off memory business will fully control its own capital expenditure and achieve greater operational efficiency in the long run

After this deal, the spun-off entity will become a separate NAND Flash supplier that will be able to plan its own capital expenditure without worrying about the wider financial pressure and the unequal sharing of resources with other group companies. Having financial independence, the spun-off entity will also be able to concentrate more on investing in technologies and manufacturing capacity. This deal on the whole is expected to significantly raise operational efficiency and quicken the decision-making process for the memory business.

Members of the first-place bidding party include Innovation Network of Corporation of Japan (INCJ), Development Bank of Japan (DBJ), Bain Capital, and SK Hynix. Since this consortium has government-backed investors from Japan and major private investment firms from the U.S., their bid has elevated the acquisition of Toshiba’s memory business as a matter of national strategic interests.

If the consortium succeeds in acquiring Toshiba’s memory business, it would act mainly as a government-backed financial supporter. The consortium therefore would probably not make significant changes to the top-level management and basic operation of the memory business.

SK Hynix would not have direct influence over the operation of the spun-off entity as a member of the consortium. However, the South Korean memory maker would certainly have greater access to the financial information and business plans of the newly separated company. SK Hynix could also collaborate with Toshiba’s memory business in areas such as technology at a later time.

The presence of these new stakeholders will also contribute significantly to the R&D and production planning of the spun-off memory business. Depending on the follow-up progress, the spun-off entity could eventually reshape the competitive landscape of the NAND Flash market and become a major rival to Samsung.

Chen added that though the consortium has been announced as the first-place bidder, the transaction will not only have to be approved by the Japanese government but also pass anti-trust reviews by regulatory agencies of other countries.