Impact of Covid-19 on NAND and SSD by Trendfocus

This is an Executive Brief by Trendfocus Inc.:

2020 – What a Year

We entered 2020 with such high hopes for a record year for storage!

We knew hyperscale demand had already kicked into high gear with a 16% increase in PCIe exabytes shipped in CQ4 ’19, and another 22% increase in CQ1 ’20.

Enterprise SATA SSDs also had double digit growth in both quarters, with CQ1 ’20 crossing over 30% Q/Q.

All indications were that this demand would be strong well into the third quarter of 2020. The entire industry was talking about how short we will fall on supply, especially through CQ3 ’20 to handle this massive demand being seen by hyperscale.

The PC market was also anticipated to have its normal 2 to 2.5% annual decline following a commercial PC refresh that lifted PC shipments in 2019. Even with this slight deterioration, we forecasted a slight uptick in PC shipments each quarter through 2020 to follow seasonality. With this anticipated ‘normal’ cycle, coupled with client SSDs continuing to gain in average capacity, Trendfocus forecasted client SSD EBs to increase 48% Y/Y totaling 129Es. Yes, the PC market continues to decline each year, but SSDs also continue to gain healthy share in this otherwise declining market. Anticipated attach rates for PCs are somewhere around 75-80% for 2020.

The mobile market was also poised to have another stellar year – reaching somewhere around 80EB shipped in 2H20, helped two-fold by the continued increase in average capacities per phone as well as 5G deployments in regions around the globe. 

If the hyperscale, PC, and mobile markets weren’t enough – enter the gaming market. For years and years now, major gaming system providers like Microsoft and Sony have helped the HDD industry by shipping anywhere between 25 and 30 million units per year. Now, this segment is transitioning to solid state storage. This transition, which is starting this year, is anticipated to contribute up to another 10EB of solid-state storage integrated into the Microsoft Xbox and Sony PlayStation consoles.

Everything looked more than fantastic for NAND and SSD vendors throughout the world. Everyone was very happy that pricing was once again going up each quarter, margins were improving, product launches and qualifications were ongoing with solid growth anticipated in both EBs and next gen technologies.

Then February hit.
The Covid-19 pandemic was upon us. Factories in China were shut down and travel restrictions were implemented. Additional factories in other countries were not running. Everyone was now working from home. Schools were shut down. The challenges everyone faced were massive. In all this chaos and uncertainty, companies did their best, and continue to do their best, to navigate through these uncharted waters. Very quickly, everyone was adapting to working from home. However, factories continued to experience challenges as manufacturing was halted in various countries. Employees could not be in these facilities for the overall safety of everyone involved. Certain vendors, depending on their locations, were affected more than others. As certain facilities were coming back online, it was at a much lower output rate. Entire shifts were cancelled for safety reasons, if not to ensure cleaning procedures were adhered to and drastically improved.  Even as certain factories were able to start outputting product, they still had transportation limitation issues. The challenges were serious and continuous.

Almost all will agree that all this has caused great uncertainty with what the short- and longer-term future will hold for the industry. But in this uncertainty, certain things are becoming a bit clearer. We do know that the PC market will be down more this year vs. the original 2-3% decline.

Trendfocus estimates put the decline around 10% for 2020. As WFH requirements have largely been met, many employees will work remotely through much of the rest of 2020. We can anticipate some companies making WFH a permanent situation where it is feasible and reduces cost. We are in a massive global experiment which is proving successful in many places so WFH policies could certainly continue indefinitely. How does this effect the PC market? The demand for 2020 may be front-half heavy with some cracks starting to appear suggesting 2H20 may not see even the muted seasonal trends currently forecasted. Relating this to storage, an even weaker PC market would drive a huge swing in client SSDs – a market that consumes roughly two-thirds of all SSD exabytes shipped during a given quarter. In addition to this, as companies look to save money wherever they can, capacities may not increase as aggressively as originally anticipated.

Exiting 2019, Trendfocus forecasted 258 million PCs would ship in 2020. Exiting CQ1 ’20, as the Covid-19 crisis continued to unfold, that forecast number eased to 238 million PCs. With uncertain economic conditions further threatening the lowered forecast, this continued slide in the PC market will obviously affect solid-state storage going into PCs. The original forecast called for 129EB of solid-state storage for PCs. Exiting CQ1 ’20 this estimate declined to 117EB, by 9.3%. Like the overall PC market, this number will most likely decline again as we approach 2H20 and great uncertainty remains.

Even companies who have the bulk of their business in channel sales for SSDs have experienced drastic drops in sales. One company we talked to experienced as little as 20% of its average monthly sales in the recent past for one specific month. Like the PC market and challenges with China manufacturing/assembly, it could not get the components needed for its products. Although there have been some signs of upward sales trends, expectations are still lowered, although a bit uncertain for the coming quarters.

Issues with the mobile market were seen very early in this crisis. Manufacturing output constraints in China coupled with reduced expendable income by consumers are definitely affecting the mobile market. Some estimates put the decline as high as 30% Y/Y. Taking this into account, but also accounting for some slight uptick due to 5G later this year, Trendfocus has reduced its outlook down from the original 157EB for the mobile market to 124EB currently, a decline of 21%. However, if the hope of 5G sparking some demand doesn’t materialize, this number will be even lower.

When it comes to hyperscale demand, the one bright spot of all the markets discussed, it is also starting to show signs of slowing sooner than anticipated. As stated earlier, enterprise PCIe is having a stellar year, mainly at the hands of hyperscale deployments. This segment will have another great quarter in CQ2 ’20. However, now that all this demand has mostly been met in the first two quarters of the year, with some demand rolling into CQ3 ’20, there are rumors that the slight uptick forecasted in CQ3 ’20 may be more of a slight downtick. We have yet to quantify to what extent this will be, but the point here is that it could be lower, not higher than our original forecast. Even so, due to the buying nature of the hyperscale market segment, this slowing of hyperscale demand was largely already forecasted, so we do not anticipate having to adjust our forecast much for this segment.

How does this effect pricing?
Pricing hit rock bottom a year ago. NAND and SSD vendors put the brakes on this downward spiral sometime around CQ3 ’19, depending on the product category and market segments served. Those that weren’t able to increase prices in CQ3 ’19 had certainly done so by CQ4 ’19. Due to strong continued demand in all segments, this price hike continued into 2H20. Many vendors saw double-digit%age increases multiple quarters in a row. In our most recently published reports, following the CQ1 ’20 reporting cycle, pricing for CQ3 ’20 was still anticipated to increase slightly on a sequential basis. Since that publication, the hopes and dreams of continued price increases has been squashed. With each passing week, communication of mid to high single-digit increases turned to mid-single digit, then low-to-mid single-digit increases. At some point in the recent past, some may have even still hoped for a very slight (low single-digit) increase in pricing. As of the publication of this document, it is largely believed that anyone who is able to get flat Q/Q pricing is in a win-win situation!

So, if CQ3 ’20 pricing is, at best, flat Q/Q, we can be pretty sure that the downward pricing we forecasted in CQ4 ’20 and CQ1 ’21 will now be even lower. For a few quarters the industry was trailing in overall NAND supply. Supply is now anticipated to be somewhat in balance in CQ3 ’20, followed by an oversupply trend starting in CQ4 ’20 (at the latest). This oversupply will only be more severe in CQ1 ’21 as seasonal impacts further amplify the imbalance. Remember, hyperscale demand will have been met by sometime in CQ3 ’20 while PC demand is down more than originally anticipated. The mobile market is definitely down this year, somewhere between 20-30% Y-Y. Noting all that, we will definitely see pricing come down. To what extent is still to be determined, but we can anticipate it will be at our below current CQ4 ’20 levels.

In summary, it is definitely a challenging time for the entire industry. Unfortunately, there is a domino effect that will cause additional hurdles later this year. Normal cycles are out the window. Depending on the NAND or SSD vendor and the markets they serve, lasting effects will be seen into 2021. Some vendors may be able to switch markets and offerings depending on where opportunities lie. Other vendors who are not as broad in the products they sell or markets served may feel a bit more strain as the year progresses. One thing is for sure though: supply will be increasing, pricing will be decreasing, and the amount of time this will last is still a question for the crystal ball. However, it will go into CQ1 ’21 at a minimum.