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Citing reasons including overcapacity, weaker than expected demand for NAND flash and an increase in inventory, SanDisk Corporation said it would be delaying its capacity expansion plans at Fab 4 and cutting capital expenditure by approximately $500 million in fiscal 2008 and in fiscal 2009. Eli Harari, SanDisk’s Chairman and Chief Executive Officer, also said that the company would hold back on investment plans for Fab 5 and return to purchasing up to 20 percent of its NAND flash requirements from outside sources.

In a conference call with financial analysts, Eli Harari said that, “We are implementing the following decisive actions to curtail our rate of supply growth until market conditions improve markedly: first, we will push out the start of the next major phase of Fab 4 wafer output increase to no sooner than April of 2009. This will moderate the growth in our captive capacity starting in early 2009; second, we will put on hold our investment decision for Fab-5 until market conditions improve; third, over the next one to three years, we plan to increase our non-captive purchases of Flash memory from currently close to zero to 15 percent to 20 percent. This will give us more flexibility to better manage our inventory.”

The planned CapEx reductions mean that SanDisk will spend approximately $2 billion in 2008 and $2.5 billion in 2009, with the possibility that further reductions in planned spending may be implemented. In 2Q08, SanDisk said that it had spent $97 million on Fab 4 and had guaranteed $282 million of incremental operating leases on purchased equipment for Fab 4.
However, the CapEx reductions will not affect the current capacity expansion at Fab 4, which is still expected to reach more than 110,000 wafer starts per month by the end of 2008. SanDisk now expects to spend approximately $150 million on equipment throughout the second half of 2008.

The CapEx reductions will also not affect the aggressive technology node migrations at either Fab 3 or Fab 4. Both fabs are currently migrating production from the 56nm node to 43nm, which is expected to reach close to 70 percent conversion by the end of 2008.

Coupled to the return to out-sourcing, which is expected to take between 1 to 3 years to implement, SanDisk expects the strategy to improve its cash flows during a continued overcapacity environment that has seen two years of approximately 60 percent falls in Average Selling Prices (ASPs) per annum. Harari noted in the conference call that he expected a similar situation to occur in 2008.

SanDisk’s CapEx projections from earlier in 2008 are below.