We began reporting on the first signs of the looming NAND shortage all the way back in May, and have touched on the domino effect in many articles over the ensuing months as it unfolded. Now the shortage is in full swing: DRAMeXchange reported that the average price of MLC SSDs rose this quarter between 6%-10%, while TLC SSDs also rose 6%-9%. We also reached out to Trendfocus, whose projections indicate even higher price hikes at both the retail and OEM level.

To make matters worse, although HDDs unexpectedly had the biggest quarter-over-quarter recovery in seven years, according to Trendfocus, now the HDD industry is beginning to exhibit the early signs of "tightened" supply--which means there could be shortages and higher prices in that segment as well.

An increase in smartphone capacity, SSDs in laptops, and a terrible transition to 3D NAND led to SSDs prices that are unquestionably on the rise, and if HDDs also rise at the same time, it could lead to the perfect storm of higher storage prices. It appears the end of low-priced storage is nigh, and we don't expect things to improve until late next year. Let's start with the SSDs.

The Rise Of SSDs Leads To Rising Prices - HDD Performance Goes Backward

In many ways, SSDs are a victim of their own success. The continued price drops have made them more competitive with HDDs, so now every market segment is clamoring for NAND. Simultaneously, the market is in the midst of under-supply.

The demand spike began in the smartphone segment. Many popular new phones, such as the iPhone 7 (and a slew of new products from Chinese phone manufacturers), now have double the storage of previous models. Oddly enough, Samsung's Note 7 recall also complicated matters; it effectively removed at least a hundred million gigabytes of NAND from the market, many of which Samsung replaced--and then removed again. This might've been an annoyance during normal market conditions, but Samsung is already dealing with shortages, so it is particularly painful.

SSD demand, in general, is increasing rapidly, but notebook adoption is a particular bright spot. DRAMeXchange indicated that more than 30% of notebooks will ship with an SSD this year and that it will rise to above 50% "sometime within the 2017~2018 period.” Talk about fuzzy math. Others are a bit more exact and say that SSD penetration in notebooks will reach 52% next year, though only 13% of desktop PCs will sell with an SSD.

It's easy to see why SSDs are winning in notebooks, and the HDD vendors are making matters worse by shipping 2.5" SMR HDDs for the "performance" laptop market. The short version: SMR is the slowest thing ever to happen to HDDs (and they were slow already). SMR HDDs are cheaper to produce than the speedier normal PMR HDDs, but the OEMs likely won't pass down those savings to the end user, and SMR is absolutely abysmal for running an operating system.

The move to SMR will only compound the glaring SSD versus HDD performance issues, as most users would (literally) be better served by booting from a USB stick than an SMR HDD. Also, some HDD vendors aren't even labeling these drives as the slower SMR technology in marketing material or even the manual, so proceed with caution.

SSDs have also taken off in the enterprise, and now almost every major vendor offers platforms based upon Samsung 3D TLC NAND SSDs. Samsung is by far the leader in the consumer SSD world, but the explosion of enterprise SSD demand forced the company to shift some of its output from consumer SSDs to the enterprise. Samsung intends to triple its enterprise SSD output in the next two years, and satisfying the server OEMs is probably more important (and the profit margins are definitely higher), but it is exacerbating the NAND shortage in the retail market. Samsung's consumer SSD pricing continues to rise at retailers, and configuring a server with an SSD at many OEMs can increase lead times beyond 30-60 days, while the same HDD configuration is available immediately.

I guess it goes without saying, but all of the major server OEMs have all of their SSD eggs in the same Samsung 3D TLC basket. Fun times await if the shortage gets worse.

HDDs Might Join In The Shortage Fun

The HDD vendors took an absolute drubbing in the stock market earlier this year due to continued steep sales declines. As a result, the companies tightened the production belt and cut down on facilities, capabilities, and inventory. Then, just as we were popping the champagne on the demise of the 15K HDD, the other high-capacity HDD segments had a somewhat astounding rebound last month. HDDs increased 15% quarter over quarter, which is the biggest jump in the last seven years, and most analysts predict that the trend will continue this quarter, as well.

Unfortunately, the good HDD news is actually bad news. The HDD vendors already cut production to the bone, and many of the components come from third-party suppliers, who also cut production. Due to the previous losses and the unstable nature of the market, the vendors will not build new production lines to satisfy demand.

Instead, Trendfocus reported that the HDD and component companies are reallocating resources to account for demand in the high-capacity enterprise segment, which leads to less focus on other segments, such as consumer HDDs. The tightness in components and production could lead to reduced HDD supply, which would result in higher prices.

It's unclear if the recent SSD shortages and higher prices spurred the HDD resurgence last quarter, some of which did come in the notebook and PC segment, but the continued rise in SSD prices will certainly push more to purchase HDDs. This could become a vicious cycle if HDDs become scarce.

The 3D NAND Transition Is Slow, But Snowballing

Samsung led the market with 3D NAND way back in 2012, but the rest of the laggards have just begun shipping 3D NAND this year. Poor yields and production difficulties have plagued the transition to 3D NAND, which led to delays from all of the major vendors (sans Samsung). While the vendors were ramping up 3D NAND capacity, they neglected to increase 2D (planar) NAND production (they were relying upon 3D NAND output), so the production difficulties have dealt a devastating blow to the overall supply.

The beleaguered Samsung is already short on flash, so it sped up production of its $9.2 billion Pyeongtek fab three months early, and its Xian fab is also generating significant output. IMFT (Intel/Micron) are shipping 3D NAND in volume and expect to sell more 3D than 2D NAND by the end of the year. Intel also has the first run of its production wafers coming out of its new Dalian (China) fab, and the company noted at the recent Credit Suisse conference that it experienced excellent yields from its first production runs. Intel will dedicate the Dalian fab entirely to 3D NAND for the time being (3D XPoint to follow). Micron also recently finished a massive expansion at its Fab 10 in Singapore.

The reclusive SK hynix was already shipping 32-layer NAND, which we've tested, and is now onto 48-layer. It also has 72-layer NAND planned, though it isn't on the roadmap above.

Toshiba and WD, which cooperate in the joint Flash Forward initiative, are shipping some 48-layer NAND (Toshiba is enjoying a resurgence with its iPhone 7 48-layer NAND supply contract), but not much. WD, which now owns SanDisk, indicated that it would ship only 40% of its output as 3D BiCS NAND by the end of 2017, which means they are a full year behind the Intel/Micron 3D NAND crossover. The company began a $3.2 billion BiCS fab in Mie, Japan in 2017, and it's currently transitioning the Yokkaichi Operations in Mie Prefecture to 3D NAND.

The Yokkaichi Operation is the largest fab in the world. We won't see the NAND shortage recede until WD/Toshiba get BiCS 3D NAND production into full swing, but the company still has to qualify its 64-layer NAND with OEMs, which might drag out the process until mid-to-late next year.

The newcomer XMC fab operated by the Chinese state-controlled Tsinghua group (under the name Yangtze River Storage Technology) is expected to come online in 2018, but for now, those operations are a wildcard.

The Domino Effect

All of these things are great for the NAND vendors, who are raking in record revenues (DRAMeXchange reports a 19.6% increase), but for the consumer, the worst is likely yet to come.

As we reported nearly six months ago, many of the third-party SSD vendors were already building massive NAND stockpiles worth hundreds of millions of dollars to weather the coming storm. These stockpiles helped to smooth over the price increases, so we have only seen limited impact in the retail market--until now.

The shortage is lasting much longer than anyone predicted, and I think it will continue until the end of next year. The pre-emptive NAND stockpiles are likely either already exhausted, or close, which will magnify the price increases at retail as the new higher prices are handed down to the customer. As shortages progress, the vendors tend to ignore the smaller, less desirable customers at first, and there is word that the USB segment is already experiencing a sharper increase in NAND prices than the rest of the industry. (All of a sudden, USB-class NAND may suddenly be SSD worthy).

Of course, as with any shortage, there may be a massive glut after all of this demand is satisfied because there will be a bevy of new fabs that will keep pumping out NAND. It will likely be 2018 before that happens, if it even does.

Many analysts are predicting SSD prices to increase 20-25% over the next few months, so if you plan to buy an SSD or HDD, the time is now.