Spansion's Chapter 11 signals the erosion of the flash memory market

The company that was at one time the world's principal provider of NOR flash memory -- the more non-volatile variety -- had its own plans to go "asset light," to use a now familiar phrase, and to concentrate on licensing its intellectual property to companies with the muscle to do the heavy lifting. It sounds like a plan AMD just executed last month. As it turns out, Spansion had also been planning to license others to produce its designs.

Whether that remains the plan after a few months' time is now completely unknown. This morning, the company's Sunnyvale-based American arm announced it was filing for Chapter 11 bankruptcy protection, a month after its Japanese division applied for similar protection there.

Spansion had been the hopeful spinoff of AMD itself, having gone public in 2005 in a $835 million offering. It had been given one of AMD's crown jewels: Called MirrorBit, it's a technology that enables two bits to be stored by a single cell, rather than the usual one.

It had so much promise going for it, and it would skyrocket to 40% market share for NOR flash by last fall. But it could actually have been higher still, as the company fell behind on shipments of new incarnations of its products starting in the fall of 2006. Though it held a commanding lead in the statistics department, it didn't capture the trust of the device manufacturers who depended on it.

A partnership deal with Shanghai-based Semiconductor Manufacturing International Corp. helped Spansion become the world's third largest supplier of flash memory overall. But that association with an independent may also have triggered Spansion's more IP-centric strategy -- the same direction that Transmeta, another long-time associate of AMD, took prior to becoming completely acquired late last year by Novafora.

For "asset-light" companies that create more than they produce to become profitable, they have to win something, typically in court. Last November, Spansion mounted an aggressive defense of its IP, which included suing global flash leader Samsung for patent infringement. Spansion is asking the US International Trade Commission to bar the import of Samsung memory that uses multiple-bit-per-cell technology, in a demonstration that it could do the same for others down the road (Toshiba immediately springs to mind).

But it takes years to achieve victory in the courtroom, and in the meantime, the world's glut of NAND flash memory is putting competitive pressures even on NOR suppliers like Spansion. The company's other IP crown jewel is something called ORNAND, a NAND/NOR hybrid that offers many of NOR's benefits in a form factor that would normally be attractive to small component manufacturers, such as handset and automotve electronics. But it's not a normal market, and as Objective Analysis' Jim Handy writes, in this market, ORNAND isn't very handy for Spansion to have around.

"ORNAND could have done very well in a typical NAND market, one where NAND makers dropped their lower-density product in pursuit of sales of more profitable high-density devices," Handy wrote last month. "The trouble is, there's such a huge NAND glut today that all NAND makers are taking orders for low density parts that they would have otherwise abandoned. It's better to sell an unprofitable part than to leave their fabs idle."

So rather than sell the manufacturing facilities it still has to keep the company afloat, Handy suggests that Spansion consider "un-lightening" itself -- selling off some of its intellectual property that it can't really use in the current market anyway, clearly indicating ORNAND as one candidate. Handy's suggestion came as the company's restructuring had just begun, with the resignation of then-president and CEO Bertrand Cambou.

This was followed immediately by the appointment of John Kispert, formerly head of KLA-Tencor, a producer of metrology tools used in semiconductor fabrication. And very soon after that, the unraveling started taking place: the filing for restructuring in Japan the following week, an announced layoff of 3,000 two weeks later (35% of its workforce), and today's announcement of restructuring in the US.

With a leading supplier of memory now officially restructuring, it may only be a matter of time before other component suppliers in similar situations follow suit. Spansion's move follows last January's announcement by US-based former Infineon affiliate Qimonda that it had filed for insolvency.

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