M-Systems Needs Chips and SanDisk Has Them

I see one business scenario that could cause M-Systems Flash Disk Pioneers (Nasdaq: FLSH) chairman and CEO Dov Moran to hand over the keys to SanDisk Corporation (Nasdaq: SNDK) chairman and CEO Eli Harari for one price or another.

Moran and Harari see eye-to-eye on the future for the NAND market. There will be many more applications needing much higher storage capacity levels than is available today, from telephones through to iPods, computer games and laptops, which will mean huge demand for chips. Both men believe that NAND will rule for many more years to come.

While Harari has translated this vision into billion dollar commitments that he has taken on himself with the opening of yet more foundries in Japan together with Toshiba, I think that Moran is having sleepless nights for fear that he won’t have enough chips. Whenever I have spoken to him, he has repeatedly described M-Systems’ phenomenal growth in recent years with the sentence, “I’m driving a racing car.” The big problem with this car, however, is that it needs to fill up with gas occasionally, otherwise it will grind to a halt on the side of the highway. That gas is NAND chips, preferably manufactured with the cheaper MLC technology.

Moran usually pulls in for gas these days at Toshiba. When he tried at Samsung Electronics Co. Ltd., he was told, “sorry, we’re empty, Apple (AAPL) has taken the lot.” He has also been filling up with gas at Korean manufacturer Hynix Semiconductor , and he hopes that Intel/Micron will supply him in the near future. On the other hand, Moran may well see such large demand on the horizon, and a medium and perhaps even short-term shortage of chips that is so acute, that he may have no choice but to abandon his strategic agreements with various suppliers and simply join forces with a “fuel company”, i.e. a partnership with SanDisk and Toshiba.

Moran knows he will only be able to sleep relatively easy if he is part of the SanDisk/Toshiba empire. He won’t, however, be able to put his mind at rest entirely since even SanDisk has to rely on Samsung.

For its part, Samsung has not managed, for technical reasons, to produce enough MLC chips, and it has already caused Apple to delay launches. With a full merger or even a partial agreement behind them, SanDisk, Toshiba, and M-Systems will move full steam ahead with the implementation of x4 on the MLC product lines in Japan, and the three will have a tremendous advantage in the market over Samsung, which only manages to produce a quarter of its output using MLC.

The first to run after MLC with x4 technology will Apple’s Steve Jobs, who must certainly be angry with Samsung.

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.