A final agreement between Kioxia and Western Digital for a potential merger seems close

[*] The total market is assessed at the NAND manufacturers’ level. It includes solid-state drives (SSDs), wafers, and packaged chips sold by these players (Samsung, Western Digital, SK hynix, Micron…).

After talks about a potential merger between Kioxia and Western Digital failed in 2021, Bloomberg reported the restarting of discussions in January 2023. Last week, and after months of talk, Bloomberg, citing sources familiar with the matter, claimed the two organizations will reach a final agreement by August. By that time, Western Digital will have reported its fourth quarter and full year results.

Western Digital and Kioxia are major players in the flash NAND manufacturing business, sharing common technology roadmaps and having a joint venture producing chips in Japan. According to Bloomberg, the main terms of the merger would consist of spinning-off the flash business of Western Digital and merging it with Kioxia, which in fact spun-off from Toshiba in 2018. Western Digital would own slightly above 50% of the shares of the new entity. However, the company would be run by Kioxia executives and headquartered in Japan.

At Yole Group, we have been following the details of this potential merger since 2021 in our “NAND Market Monitor”, when the rumors first started. Since then, we’ve been considering the potential scenario if this merger is effectively realized. There would be two dominant players (Samsung, and Kioxia + Western Digital merger) and two smaller competitors (SK hynix + Solidigm, and Micron), along with YMTC, a Chinese player. The new entity would compete with Samsung for market-share leadership in NAND technology. Based on our latest quarterly data, there would even be a head-to head scenario between Samsung and Kioxia + Western Digital, with each of them having 34% of the market revenue. However, since the new entity will lack DRAM, it would be vulnerable to competition in the multi-chip package (MCP) for mobile applications.

If the merger is confirmed, a big question mark for its successful realization will be the course of action taken by Chinese regulators for Mergers & Acquisitions. In October 2022, the U.S. Department of Commerce announced tighter export controls targeting the chip sector in China. This includes rules that require U.S. vendors to obtain a license to ship and support 128-layer and above NAND equipment to manufacturers that operate in China. Later, in December 2022, YMTC (the flagship Chinese NAND manufacturer) was included on the U.S. government’s Entity List, along with 35 other Chinese companies. As a member of this list, YMTC is now restricted from accessing software, commodities, and advanced technologies for >128-layer NAND development . Therefore, and after U.S. sanctions capped YMTC’s growth at 115 – 120K wafers per month, it would not be surprising if Chinese regulators try to delay or even stop the merger. Furthermore, the trade conflict between the U.S. and China affecting the semiconductor’s supply chain does not seem to alleviate. At the beginning of July, for instance, China announced export restrictions on gallium and germanium, of which China is responsible for 90% of worldwide production. In this context, the long-awaited merger between Kioxia and Western Digital could be affected by such geopolitical tensions between the two powers.

With high inventories still to be depleted, flash NAND market conditions continue to be extremely weak. Further consolidation would likely dampen market cyclicality as well as accelerate technology roadmaps execution since remaining players would be in better financial positions and therefore more capable of making the huge investments needed to stay competitive. For instance, the capital expenditures (capex) of Kioxia and Western Digital went from 21% in 2022 to 17% over the total NAND market capex, but could be increased, if the merger occurs.

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