On May 21 a government agency in China issued a ruling to prevent Micron Technology products from being used in systems that handle critical information. This is the outcome of an investigation that the Cyberspace Administration of China (CAC) opened in March, accusing the company of cybersecurity crimes.
This Memory Guy blog post examines the impact of this move and guesses at its outcome.
Timing is Bad for Micron
There’s a big DRAM and NAND flash oversupply right now, the two leading products from Micron and competitors Samsung and SK hynix. It appears that the Chinese government hopes to be able to use the oversupply to its advantage during the ongoing China/US trade war.
These kinds of actions usually hurt both sides. Right now Chinese companies who use DRAM and NAND flash are probably contacting their political representatives asking for them to reconsider, because this move would reduce the number of DRAM suppliers from three to two, giving those two a stronger negotiating position, and possibly creating a China-specific DRAM shortage. Moves like this are painful for both the action’s target company and to those who do business with that target.
In the same way, when the US government takes any action against China, it often causes difficulties for US companies. Nvidia suffered an important revenue decrease when US actions prevented it from shipping its highest-end chips into China, and Micron’s revenues were impacted when the US limited its sales to Huawei.
China’s Goal: Self-Sufficiency
The trade war largely stems from China’s observation several years ago that the value of its chip imports exceeded that of its petroleum imports. The government was concerned about the amount of control this gave to other countries over China’s economy. In response to this, and to other issues, in 2015 the country issued the Made In China 2025 initiative, which paved a path for self-sufficiency in certain mainstream chips and other leading technologies.
Firms and governments in the US and elsewhere have important concerns about intellectual property protection in China, and about the deep involvement of China’s government in business dealings. The US has taken a leading role in using its current strengths to try to instigate change in China, and this has not been well received. In fact, the harder the US pushes, the greater China’s determination that self-sufficiency is necessary.
Objective Analysis has published an in-depth report that examines the impact of this initiative on the memory market, the major portion of the initiative’s semiconductor focus. (China’s Memory Ambitions can be purchased for immediate download on the Objective Analysis website.)
Will Korea’s Chip Giants Benefit?
Micron’s only serious DRAM competitors are both in Korea: Samsung, and SK hynix. Both of these companies have large wafer fabrication plants in China: Samsung in Xi’an and SK hynix in Wuxi. Both companies have fostered good relationships with China’s government, and are now caught in the difficult position of having to maintain positive relationships with both sides of the US/China trade war.
Although China’s action could be very beneficial in the short term to both of these companies, they have shown that they value having Micron as a third competitor. For the past several years there has been no big effort for any of these three to aggressively take market share away from the others, and this position is unlikely to change now.
Putting the Genii Back in the Bottle
Today’s economy is very globalized. Current efforts to bring businesses back into various geographies will be enormously difficult to accomplish. Made In China 2025 and the US CHIPS and Science Act are two examples of such efforts.
The difficulty lies with the fact that important production facilities are located all over the world. Chips designed in any one of a number of countries, may be built in fabs in other countries out of materials that come from others. Once the chips are made, they are typically sent to one of a number of other countries for packaging, and then sent to others to be assembled into systems that are then consumed somewhere else. For a country to become self-sufficient in chips, it would need to bring all of these elements home. Made In China 2025 and the CHIPS and Science Act only address a portion of this complex supply chain. It will take any country decades to achieve complete self-sufficiency.
If history is any gauge of how this story will end, then it’s most likely that both governments will back down from their current positions. In the mean time I expect that there will several more counterattacks by the governments of both the US and China.
As for Micron’s fate, The Memory Guy will point back to 2017 when the company’s DIMMs and SSDs were disallowed from being sold in China. Since this earlier ban was not market-specific, it impacted a greater portion of the company’s revenues than today’s action, yet it quietly faded without either side revealing anything about what agreements were made. It would be fair to expect the same kind of outcome this time.