Micron And The Chinese Dragon

Summary

• ChangXin Memory Technologies has become the first Chinese DRAM company to start mass production.
• The addition of a fourth large player in the DRAM market could result in depressed prices for years and force consolidations in the industry.
• I think that if ChangXin successfully bridges the technological gap and becomes a significant DRAM producer, this could lead to the merger of Micron with SK Hynix.
• I do much more than just articles at The Gold Commonwealth: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Introduction

Almost a year ago. I wrote an article covering Micron (NASDAQ:MU) and the issues of China's ambitious plans to enter the DRAM industry. My conclusion was that Fujian Jinhua Integrated Circuit (JHICC) was in deep trouble and that the plans of other local players such as Innotron Memory and Xi'an UniIC Semiconductors seemed limited and unlikely to have a significant impact on the global DRAM market. Well, it seems I was wrong. ChangXin Memory Technologies (CXMT), formerly Innotron, has recently started to mass produce its homemade DRAM chips.

Memory chips are effectively commodity goods with little differentiation among them and the global DRAM market is dominated by Samsung (OTCPK:SSNLF), SK Hynix (OTC:HXSCF) and Micron. They currently control together almost 95% of the global market.

(Source: DRAMeXchange)

The entry of a new player from China is likely to shake this business.

ChangXin and its ambitions

ChangXin has reportedly invested approximately $21.1 billion into its DRAM project in Hefei in the province of Anhui plus another $2.5 billion injected into research and development. The company recently completed its Fab 1 and R&D facility and is currently producing 20,000 wafers per month. Output is scheduled to double in the second quarter of 2020, although a few months ago some media reported that the company had estimated a production capacity up to 120,000 wafers per month and hoped to deliver them before the end of 2019.

(Source: EE Times)

ChangXin currently is using a 19-nm process technology and is producing LPDDR4, DDR4 8Gbit DRAM products. Many of its competitors already have advanced to the 16nm and 12nm process nodes.

The company was established in 2016 by the Hefei Industrial Investment Fund and GigaDevice and is run by the latter's former president Yiming Zhu. Some 70% of its 3,000 employees are technical staff and ChangXin has hired several people from German memory company Qimonda, including the latter's VP of technology and pre-development Karl Heinz Kuesters. As a reminder, Qimonda filed for bankruptcy in 2009 and was among the only three companies in the world to have mass produced GDDR3, GDDR5, and XDR memory.

According to a report from Tom's Hardware, word on the street is that ChangXin's DRAM design team borrowed inspiration from Qimonda's technology and made several modifications to the design with the aim of reducing the influence of U.S. technology. I think this is a smart move since patent issues related with Micron were the reason JHICC failed.

ChangXin also confirmed it has been hiring engineers from Korea and Taiwan to build up its capabilities. However, I think that none of the employees are as crucial as Kuesters. Back at Qimonda, he was in charge of the development of stack capacitor process technology, but the company failed before it could move away from trench technology. Now, ChangXin says it's using stack capacitor process technology and that it has received access to 10 million know-how documents from Qimonda.

Since there's a Qimonda link, now you could ask "what about IP issues?" Well, ChangXin's executive vice president at Hongyu Liu has refrained from talking about any definite agreements with IP holders, but she did mention WiLAN, so the latter could be among the companies with which ChangXin is negotiating. WiLAN is the company which bought most patents of Qimonda back in 2015.

The impact on Micron

As I already mentioned, memory chips are effectively commodity goods so even a small new player can tip the market into oversupply and crush DRAM prices. For the moment, ChangXin has chosen to focus on mainstream DRAM, but I think it's only a matter of time until the company bridges the technology gap and sets its sights on the lucrative commodity DRAM market. If ChangXin can close the technological gap and ramp up production, DRAM prices could be low for several years.

According to semiconductor analyst Jim Handy of Objective Analysis, China's entry into the DRAM market will lead to the industry contracting back to three main suppliers. This means that either Samsung, SK Hynix or Micron will exit the market or be acquired.

The most likely scenario seems to be one in which Micron merges with SK Hynix so that it can add DRAM and NAND capabilities in one move.

Conclusion

Much of Micron's high valuation is based on the assumption that DRAM prices have bottomed. However, the emergence of a new player in the global market could significantly change things.

ChangXin is still small, but it has a much better chance of succeeding where other Chinese DRAM companies have failed due to its access to Qimonda's IP. China has ambitious goals as it aims to produce 70% of its own chips by 2025 and ChangXin is likely to receive serious backing from the state as the other local DRAM makers have either shut down or are years away from production.

I think that unless WiLAN decides to act like a patent troll, Micron and the other major DRAM producers could be in trouble soon.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.