The US is likely to impose high tariffs on all remaining Chinese imports, including all handsets manufactured or assembled in China. The tariffs, estimated to be as high as roughly US$325 billion, could delay the recovery of the NAND flash market.

In 2018, the global NAND flash market reached US$58 billion. Mobile phones account for 42.1% of the total market, the largest among all NAND flash applications. According to our research, Samsung, Apple, and Huawei captured more than 40% of the smartphone market in 2018, with a share of 19.5%, 13.7%, and 13.7%, respectively. Considering the average capacity of each OEM, Apple’s NAND bit consumption stood at 28.4%, much higher than Samsung at 15.4%, and Huawei's 10.8%.

Table 1: Average Storage Capacity by Vendors, 2018

Source: Counterpoint Research - Global Smartphone Memory Capacity Tracker, June 2019

More than 95% of Apple phones get assembled in China. The additional cost of the new tariffs will increase the unit price of Apple's smartphones in the US. As a result, to offset the increasing prices, Apple needs to reduce the bill of materials (BOM) cost. Samsung faces the same situation. However, to compete with other manufacturers in specifications and functions, it is still necessary to keep some features, such as AMOLED display, multi-camera, 3D Sensing authentication, high-performance Application Processor, and more. As a result, one of the options to reduce the price is to allow consumers to change the capacity of NAND storage freely.

Therefore, consumers in the US may choose a lower-capacity or an entry-level iPhone. Lower NAND capacity may cause some inconvenience but is still acceptable. At present, the capacity of iPhones around the world roughly ranges from 85GB to 183GB. The average capacity iPhone X, XR, and XS, in the US, is about 114.3GB, which is slightly lower than the average – 137GB in 1Q19. However, to reduce the impact of increasing tariffs, the growth of storage capacity of iPhones sold in the US is expected to be flat or even declining marginally.

Figure 1: Average Storage Capacity of iPhone X, XR, XS by Country

Source: Counterpoint Research, June 2019

During Q1 2019, the demand for NAND flash remained sluggish as server and smartphone demand has been weak. On the other hand, customers are still struggling to reduce their inventory from 2018. They are also preparing to evaluate the new 90-layer 3D NAND as well as QLC chips. The recovery of smartphones in H2 2019 is expected to generate demand, and the decreasing price will lead to capacity increases. If this happens, inventory could have returned to normal levels by the end of 2019.

However, the added cost of tariff will slow down the demand and offset the memory capacity increase due to decreasing prices. Therefore, the situation of oversupply is expected to continue till 2020 and recover by H1 2021. This may be not good news for NAND new makers – YMTC because decreasing prices will be negative to the sales of low-end products.