Threat of Chinese overcapacity looms over memory chips
Summary
Vital technology component could be next industry to grapple with abundance from Asian country.
Investors are worried that a huge production increase from China could derail the recovery of the memory-chip market. That doesn’t yet seem like an immediate risk, but China could still be a wild card down the road.
After a strong rally that started last year, shares of memory-chip makers pulled back sharply midyear. South Korea’s SK Hynix and U.S.-based Micron Technology have gained back some ground recently, but they and Samsung Electronics are all down about 20% to 30% from their July highs.
The boom in artificial intelligence has driven strong demand for high-performance memory chips, especially for SK Hynix and Micron. Samsung, the market leader for the overall memory market, has lagged behind its rivals. It had to apologize for its poor performance after disclosing disappointing results this month.
But the industry’s latest concern is the aggressive expansion of capacity by Chinese memory makers. In particular, the increased capital investment in DRAM—memory chips used in processing—from a company called ChangXin Memory Technologies, or CXMT. DRAM capacity for Chinese manufacturers in terms of wafers, the thin slices of silicon that are used to make chips, jumped from 4% of global capacity in 2022 to 11% this year, according to industry tracker TrendForce. Morgan Stanley expects that China’s DRAM capacity could reach 16% of the global market by the end of next year.
The actual impact is much smaller for now, though. According to Bernstein, CXMT’s bit density, which measures actual storage per area, is only 55% of the bit density of its more advanced rivals. It also has lower production yield, meaning it doesn’t produce as many useful chips with a given capacity.
And at the moment, the supply has mostly affected so-called legacy chips, which are chips from prior generations. Prices of such lower-end chips have started to fall while those at the higher end are more resilient. That explains why shares of smaller memory-chip companies that focus on this segment have done worse. The share price of Taiwan’s Nanya Technology, for example, has dropped 43% this year. The big three competitors—Samsung, SK Hynix and Micron, which together have more than 80% of the market—have relatively less exposure to the lower-end market.
And export controls from the West might make it more challenging for Chinese manufacturers to move quickly to the next generation. Bernstein estimated the technology lag between CXMT and its global peers stands at roughly six to eight years. Though given worsening geopolitics between China and the West, Chinese companies, such as smartphone makers, have strong incentives to use domestic memory chips in their products if possible. And with Beijing throwing money at the cause, they might be able to make faster progress than expected. China is a big market for memory-chip manufacturers: It accounts for about 20% to 25% of the total DRAM demand globally, according to JPMorgan.
If Chinese suppliers start supplanting foreign firms to meet that domestic demand, it would leave those Korean and U.S. rivals with excess capacity, forcing them to cut production—or else dump product on the global market.
Big memory-chip makers are probably safe for now from Chinese competition. But they still have to watch their backs.
Write to Jacky Wong at jacky.wong@wsj.com
