AMD's Flash Dilemma Will Get Worse Before It Gets Better

AMD surprised last week by announcing problems in its flash unit. That surprise was startling enough that Wall Street analysts began calling for the company to divest itself of the flash unit. A big question is whether AMD can hold out in flash while it develops its Ornand flash technology.

"Intel has been extremely aggressive," said iSuppli's memory analyst Nam Hyung Kim in an interview. "It's basically a pricing issue. This is a market-share battle between Intel and AMD."

Kim, who is director and principal analyst--memory ICs/Storage Systems--at iSuppli, said he is currently developing market-share figures for the most recent quarter. He indicated they don't look "so hot" for AMD. The results will be released next week. "The battle will persist," he said.

AMD centers its flash business on its Spansion LLC subsidiary, which is 40-percent owned by its partner Fujitsu Limited. The flash subsidiary manufactures NOR flash memory, which is primarily used in wireless and cellular telephone applications. Spansion operates four flash fabs and four assembly sites around the world.

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When AMD announced a loss last week, JMP Securities called for AMD to "divest itself of this business through a spin-off or sale to a strategic buyer." The current Barron's also examined at the AMD flash situation in an article titled, "The Case for Breaking Up AMD." AMD's chief executive officer, Hector Ruiz, said the firm's flash performance was "freaking dismal" and indicated he is forcefully addressing the issue. He said he wouldn't rule out a divestiture of the unit, according to media reports.

In its market-research report for the third quarter of 2003, iSuppli noted that Intel had a "remarkable resurgence in 2004 by using aggressive marketing and pricing strategies." Intel jumped into second place, leapfrogging over AMD's Spansion and Toshiba. Because the flash business is a much smaller percentage of its business, Intel can afford to cut prices and exert pressure on AMD.

Kim observed that AMD has said it will modify its flash strategy. The analyst said pricing seems certain to continue its downward trajectory.

Ruiz said he expects Ornand flash to be a "disruptive technology," but its introduction timetable is still undetermined. Kim doesn't expect AMD/Spansion's Ornand technology to have much of an impact before 2006 or 2007.

In the meantime, Intel is developing its own advanced flash technologies, and it can be counted upon to keep AMD in its gun sights on flash.