Original title: focus Analysis | Why did Intel Corp sell NAND flash business? Source: 36Kr Holdings

There has been another nearly $10 billion acquisition in the semiconductor sector.

SK Hynix officially announced that it will buy Intel Corp's NAND flash and storage business, including Intel Corp's NAND SSD business, NAND components and wafer business, and its NAND flash memory manufacturing plant in Dalian, China, for US $9 billion. Intel Corp will retain its unique Intel Corp ®arrogant TM business, and the acquisition is expected to be completed in March 2025.

SK Hynix official News

Before that, there was news that Intel Corp planned to sell his memory chip unit to SK SK Hynix Inc. For about $10 billion. Affected by the news, Intel Corp shares rose 0.78% to $54.58 at the close of trading on the 19th, rising 2% to $56.23 at one point in intraday trading. Hynix shares fell 0.29% to $13.93, and also rose 2% to $14.25.

It is not the first time that Intel Corp has "slimmed down" in recent years. In 2019, Intel Corp sold his mobile phone modem business to Apple Inc for $1 billion, and in February this year, it was announced that Intel Corp planned to sell his home connection chip division to MaxLinear. The news that SK Hynix plans to acquire Intel Corp's NAND assets also came out last year.

As a leading leader in the world semiconductor industry, why did Intel Corp sell the "old capital" business of storage this time?

Continuous losses of NAND business

According to DRAMeXchange data, by the second quarter of 2020, Intel Corp ranked sixth in the world with an 11% market share, while SK Hynix is the fifth largest NAND supplier in the world with a market share of 12%.

NAND, also known as NAND Flash, is a kind of non-volatile storage particles. To put it simply, this kind of memory can keep data stably after a power outage, and is usually used to make hard drives and other products.

For a long time, this market has been almost monopolized by six major storage companies: Samsung, KIOXIA, Western Digital, SK Hynix and Intel Corp. Once the deal is completed, if you simply add up the market share of Intel Corp and SK Hynix, according to 2020Q2, the market share of SK Hynix will exceed 20% to Samsung, becoming the second largest supplier to NAND, and the entire NAND market landscape will be rewritten.

Source: TrendForce

For Intel Corp, the NAND business is not the main business. According to its 2019 annual report, NAND's non-volatile memory Solutions Division (NSG) accounts for only 6% of total revenue for the year.

Data show that Intel Corp's NAND business generated about $2.8 billion in revenue and about $600m in operating profit for NSG in the first half of this year as of June 27, 2020. Throughout the first half of the year, Intel Corp achieved a total income of $39.5 billion, accounting for only about 7 per cent.

In fact, Intel Corp's NSG division has been losing money for many years and didn't make a profit until the second quarter of 2020. According to the financial report, the business lost $540 million in 2016, $260 million in 2017 and $5 million in 2018. It lost $1.2 billion in operating profit in 2019 and did not make a profit until this year.

NSG revenue source: intel 2019 report

As we all know, memory accounts for the largest proportion of integrated circuits, accounting for about 1x3. Among them, DRAM and NAND are the most important subdivision products, accounting for about 95%. According to DRAMeXchange, the 2019NAND Flash market is $46 billion, accounting for 42% of the entire storage market.

The memory industry has the characteristic of periodic fluctuation. From the perspective of historical performance, the memory industry is always in an alternating cycle of ups and downs, and its industrial cycle is stronger than that of the electronic components market as a whole, which is mainly due to the alternation of supply and demand and the dislocation between supply and demand. Since 2015, the demand for mobile terminals such as PC and smartphones has increased sharply, which has stimulated the market demand for NAND. In addition, the NAND process began to shift from 2D to 3D in 2017, but it was not as smooth as expected, affecting production, and prices rose sharply. At the same time, it also stimulated supply-side manufacturers to expand production.

Intel Corp announced the second phase of the Dalian plant construction project in 2015, mainly for the production of NAND flash memory. In 2018, Samsung Electronics announced that it plans to spend $7 billion over the next three years to expand about 67% of the NAND flash memory capacity at the Xi'an plant. Flash memory manufacturers such as Toshiba and Micron are also expanding capacity at the same time, and Changjiang Storage's domestic NAND flash memory will also begin mass production in 2018.

Source: public data collation

According to the outlook put forward by DRAMeXchange, the supply of NAND Flash will increase by 42.9% in 2018, and the demand side will grow by 37.7%, gradually turning to balance. But it turns out that supply exceeds demand, and NAND prices began to fall in 2018, with NAND prices falling 15 per cent in 2018, according to Yole forecasts. Until 2019, the manufacturers adjusted their strategies, and the price of NAND began to stabilize and rise gradually in the third quarter. In 2020, affected by the epidemic and other public events, the demand for home work surged, the capacity of suppliers recovered slowly, and the price of NAND rose, benefiting manufacturers including Intel Corp and SK Hynix.

Large price fluctuations have also affected Intel Corp's profitability in the NAND business. Earlier, foreign media reported that affected by the significant drop in the price of flash chips, and the R & D and production of flash memory also needed a lot of funds, it was difficult to guarantee profits. Intel Corp has been considering withdrawing from this market for some time.

It is not easy for elephants to turn around, Intel Corp should focus on key business.

Intel Corp plans to use the funds obtained from this transaction to develop industry-leading products and strengthen its business focus with long-term growth potential, including artificial intelligence (AI), 5G network and intelligent, self-driving related edge devices, according to the official press release.

It is worth noting that the acquisition does not include the "Optane business" based on 3D Xpoint technology. From the perspective of public information, the NAND flash memory products produced by Intel Corp are mainly used for hard drives, USB drives, cameras and other devices.

The Aoteng business target is the data center market for new applications such as cloud computing, artificial intelligence, big data and so on. In April 2019, Intel Corp launched the SCM product (Storage Class Memory storage-level memory)-Aoteng data center-class persistent memory SCM.

Since its release, the product has been applied by many large factories, and there are also solutions developed by corresponding storage manufacturers, such as BABA, Tencent Cloud, Chao, China Telecom Corporation, EMC and other giants. In addition, many kinds of distributed storage, such as VMware vSAN, Qingyun NeonSAN, SMATX, open source Ceph and so on, have also designed a variety of representative solutions based on Aoteng.

Source network

Data center is undoubtedly one of Intel Corp's core business. In February 2019, Intel Corp's new CEO, Robert Swan, mentioned Intel Corp's transformation from PC-centric to data-centric.

Nowadays, Intel Corp will face more and more fierce competition in the data center (IDC) market. Earlier this month, the news of AMD's acquisition of Cyrus was also interpreted as an important step to further strengthen its competitiveness in the IDC market. And AMD has already released the data center processor of the 7nm process ahead of Intel Corp, while Intel Corp announced in the second quarter of this year that the processor of the 7nm process is six months later than its target release time, which makes the market full of concern.

Although the sale does not involve processors, but AMD is threatening, Intel Corp with other product types and processors to form a better match to serve the IDC market may also be a better choice. On the other hand, arrogance is not invincible. Intensil's traditional rivals in the storage industry, Samsung, Toshiba, Micron and SK Hynix, have also launched or will launch similar products. How to maintain an advantage in this market and gain a larger market share is also an issue that Intel Corp must consider.

For SK Hynix, it will also be a good deal. According to the SK Hynix annual report, the company's revenue reached 8.6 trillion won in the second quarter of 2020, up 33% from the same period last year and 20% from the previous year. Operating profit for the quarter reached 1.95 trillion won, up 205% from the same period last year and 143% from the previous year. Net profit was 1.26 trillion won, up 135% from the same period last year and 95% from the previous year. As of March 31, 2020, SK Hynix had cash and cash equivalents of 3.92 trillion won ($34 billion) and had sufficient cash reserves to complete the acquisition, according to its financial report.

From the perspective of SK's business structure, DRAM business revenue accounted for 73% in the second quarter, while NAND flash business accounted for only 24%. After injecting the power of Intel Corp, SK Hesley is expected to usher in a more balanced business structure.

On the other hand, the acquisition of Intel Corp's NAND business can also meet the needs of SK Hynix in increasing the commercial value and production capacity of high value-added products. The factory in Dalian, China, Intel Corp invested US $2.5 billion in construction in 2006 and 5.5 billion in 2015 to upgrade and expand production, mainly producing 96 layers of 3D NAND flash memory.

In 2019, major manufacturers have expanded 9X 3D NAND production capacity, but SK Hynix is slow to move. The acquisition of Intel Corp's Dalian plant can make up for its lack of production capacity in this area. It follows news that SK Hynix wanted to negotiate with Intel to buy the Dalian plant and 3D NAND business in July 2019 when it was hit by a supply cut crisis from Japan to South Korea.

However, some analysts point out that the integration of Intel Corp and SK Hynix NAND Flash is the focus that SK Hynix needs to pay attention to in the future. Because the two are different in the technical route, the product structure design and process parameters need to be adjusted, I am afraid we still need to go through a more painful running-in period.