China's ban on Micron roils domestic memory chip market

(By Caixin journalists Zhai Shaohui and Qin Min)

China's memory chip industry is in turmoil as US giant Micron Technology Inc., one of the world's largest suppliers of dynamic random access memory (DRAM) chips, faces a series of setbacks in China.

About half of Micron's revenue from China-based businesses is at risk because the company failed to pass a cybersecurity review by the Chinese government, the chipmaker said in a filing with the US Securities and Exchange Commission in June. China is Micron's third largest market, and revenue from customers based in mainland China and Hong Kong account for a quarter of its global revenue.

On 21 May, the Cyberspace Administration of China (CAC) ruled that Micron flunked the security review as the CAC found "relatively serious" cybersecurity risks in products the company sold in the country. The agency also warned operators key to China's information infrastructure against buying the company's goods.

Products for the consumer market may not be covered by the ban, and it was unclear which types of products were covered by the ban on critical information infrastructure, several industry participants told Caixin.

Chinese companies are expected to steer clear of Micron products as a precautionary measure, even though the critical information infrastructure ban mainly pertains to enterprise servers, particularly in the telecom and financial sectors, industry sources said.

"It is unlikely that any Chinese companies will take the risk of purchasing Micron products," said a senior semiconductor industry expert in Beijing. "In the long run, if Micron is unable to eliminate the concerns of Chinese regulators, it will essentially lose the entire China market."

The world's memory chip market has yet to recover from more than a year of price and demand declines due to the pandemic, Russia's war in Ukraine, the slowing global economy, and the weakening mobile and personal computer market. The price of memory chips has fallen by more than 70% since early 2022, while flash memory prices have even dropped below cost, according to Avril Wu, an analyst at market research firm TrendForce.

The chip market downturn has reached the point where major players such as Micron cannot afford to lose more money. "In the current market, even a 10% revenue reduction would have a huge impact on Micron," said Lei Junzhao, the former head of the Chinese American Semiconductor Professional Association.

Many companies are vying for a piece of the Chinese market as Micron retreats, according to Lei. South Korean memory-chip maker Samsung Electronics Co. Ltd. dominated the industry in the first quarter with 43.2% of the market and 34% of the NAND flash memory chip sector, data from TrendForce showed. Micron was second in the DRAM segment with 28.2%, and fifth in NAND devices with 10.3%.

NAND flash memory chips, used in hard disks, store data on electronic devices, such as photos on smartphones, allowing the data to persist even when the power is turned off. DRAMs are volatile memory devices that temporarily store information in transistors. The data disappears when the power is off.

Samsung and SK Hynix Inc. are expected to benefit most from China's ban on Micron, several industry participants told Caixin. Chinese memory chip producers Yangtze Memory Technologies Co. Ltd. and ChangXin Memory Technologies Co. Ltd. are catching up, but their products still lag behind those of Micron and the South Korean companies.

Samsung and Hynix compete directly with Micron in full-line memory products. In contrast, Yangtze specialises in NAND, while ChangXin makes only DRAM chips. They cannot create a product combination, such as melding NAND and DRAM chips in a single package for mobile phones, several memory industry participants told Caixin. Domestic chipmakers' capacity problems also limit their further expansion of the market, they said.

"There were possibilities for Yangtze to reach a level on par with the world's most advanced companies in the coming years," said Brady Wang, a semiconductor analyst with market research firm Counterpoint Research. "But the US sanctions created a major hurdle for the company's advancement."

In October 2022, the Biden administration introduced export restrictions that covered DRAM memory chips with a feature size smaller than 18 nanometers and NAND memory chips with 128 layers or more. This directly impacted the advanced manufacturing processes employed by Yangtze and ChangXin. Two months later, the US added Yangtze to the so-called Entity List, which further restricts procurement of American products and equipment.

The manufacturing ability of Yangtze is catching up to the world's most advanced players, according to Wang. While Samsung's NAND chip has reached as many as 236 layers, Yangtze can make up to 232 layers, according to Wang, who said the US sanctions could accelerate the growth of the Chinese semiconductor industry despite the challenges.

If the Chinese government does not further expand the scope of restrictions on Micron, the procurement of critical information infrastructure directly affected by the ban would account for only about 5% of Micron's revenue in China, according to market research firm Isaiah Research. However, concerns over the ban may lead consumer electronics manufacturers to shy away from risk by ditching Micron products.

For downstream manufacturers in China, the effects of Micron products' absence are limited, according to an executive at a leading Chinese server company. "Given the high standardisation of memory and hard disk products, it's not difficult to replace them," he said. "There's little difference among products of major manufacturers."

Micron has limited investment in China. It has one manufacturing facility in China's Northwestern city of Xi'an, responsible for chip assembly and testing, for a total investment of US$1 billion, according to the company's 2022 financial report. The company shut down its DRAM design team in Shanghai last year. It was regarded as a precautionary measure to prevent technology leaks to competitors, several chip industry participants told Caixin at the time. Micron also moved its Asian NAND research and production centre to Singapore.

Following a round of job cuts earlier this year, only Micron's sales team and some of its support teams remain in China, a former Micron employee told Caixin.

Micron has been caught up in trade disputes between the US and China before. Huawei Technologies Co. Ltd. used to be the company's biggest client, accounting for nearly 20% of its revenue before 2019. Micron's sales in China were hit hard under the US sanctions on Huawei, an executive of an A-share-listed module manufacturer said. Micron's revenue from China was US$4.98 billion, accounting for 16.3% of total revenue in 2022. That compared with a high of 57% in 2018.

"Micron didn't proactively reduce its reliance on the China market," said Counterpoint's Wang. "Chip memory products are highly substitutable."

China is still one of the world's most important markets for memory chips. Much of the world's electronics and component systems come through factories in the world's second largest economy, making it difficult for Micron to give up China. In May, the company unveiled a plan to invest 4.3 billion RMB (US$600 million) over the next few years in its Chinese chip-packaging plant in Xi'an and appointed a new general manager in China as a sign of its commitment to the country.

If Micron fails to pass subsequent Chinese cybersecurity reviews, it will lose orders. "Some clients are highly likely just to switch to products of Samsung or SK Hynix by the end of the year or next," a Samsung sales agent said. The sentiment was echoed by another agent representing a Chinese server company.

Korean companies are likely to take over Micron's lost market share as it's difficult for Chinese companies to compete with them because of low manufacturing capacity and high costs, according to Counterpoint's Wang.

Chinese memory chipmakers were expanding with good momentum and were expected to establish a solid presence in the global market within five years, according to the same Samsung sales agent, but US sanctions have hindered their development, he said.

The two leading Chinese chipmakers, Yangtze and ChangXin, both founded in 2016, have been narrowing the gap with their global competitors. The Wuhan-based Yangtze was on track to challenge Samsung, SK Hynix and Micron with its flagship 232-layer NAND flash chip, while ChangXin's DRAM products were two or three generations behind the world's most advanced level. But their mass production was halted after the US introduced export controls in October 2022.

The two companies have been doubling down on efforts to work with Chinese suppliers. It's easier for Yangtze to adapt to domestic suppliers given its earlier efforts, whereas the complexity involved in producing DRAM products could pose challenges for ChangXin during the transition, the same senior semiconductor industry expert in Beijing said.

Besides equipment procurement, the bigger hit came from restrictions on hiring, which caught Yangtze and ChangXin off guard. "Engineers of US suppliers are not allowed to provide services to them directly or indirectly," said an executive at a downstream Chinese memory company, pointing out the impact on R&D and production line maintenance.

However, Chinese memory chip producers are benefiting from the huge China market, according to Counterpoint's Wang. "A large market allows constant technology improvement. It just takes time," he said. Wang said he expects that the Chinese memory market will remain dominated by Korean companies for some time.

To increase their market share in China, Chinese companies should focus on narrowing the gap with international competitors and leveraging government support, said the same executive of a publicly traded module manufacturer. "Domestic memory companies have their own local advantage in accessing government capital and policy support," the person said. "But they should avoid vicious competition with each other while actively exploring opportunities in the overseas markets."

This article was first published by Caixin Global as "In Depth: China's Ban on Micron Roils Domestic Memory Chip Market". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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