U.S.-China relations continued to be contentious, and the biggest casualties continue to be businesses in both countries. Recently, there's been an investigation into U.S. semiconductor chip manufacturer Micron Technologies (MU, Financial) by the Cyberspace Administration of China (CAC), which could result in a possible ban of sales in the country. Micron stock dropped by ~4% on the news, which broke on March 31, 2023. This comes after the U.S. banned a China state-backed memory chip maker, Yangtze Memory Technologies, which is a rival of Micron. With a potential China ban on the horizon, could Micron be in trouble?
The Cyberspace Administration of China
The goal of the Cyberspace Administration of China (CAC) is to ensure “cyberspace sovereignty." This includes controlling internet usage through the “great firewall” of China, which bans certain websites such as Alphabet's (GOOG, Financial)(GOOGL, Financial) and Amazon (AMZN, Financial) which have been deemed national security risks. This regulator is also responsible for censoring content which does not comply with political ideals, as well as ensuring the cybersecurity of networks and supply chains.
On March 31, the CAC announced a review of Micron and its products sold in China. The goal of this is to ensure the security of the key “information infrastructure supply chain," mitigate unknown network security risks and safeguard national security, according to a statement by the CAC on its official website. This review will be done in accordance with the regulator's “Network Security Review Measures," which can be summarized as follows:
- Evaluation of network security risks.
- Security of supply chains.
- Review of network equipment and products.
- Security of personal information on Chinese citizens.
- Data localization requirements- Ensuring companies store data related to China's critical information infrastructure within China's borders.
In a statement by Micron, the company said it was “in communication with the CAC and cooperating fully." The company also added it “stands by the security of its products."
What impact would this have on Micron?
Micron derives approximately 10% of its revenue from China. Therefore, if we take the company's revenue of $3.69 billion for its fiscal second quarter of 2023, a ban in China would have given its revenue a $369 million haircut. This is not great given Micron’s revenue is already down 52.6% year over year due to lower chip prices driven by a supply glut and a cyclical decline in the semiconductor industry overall. A portion of Micron’s products also flow to non-Chinese consumers through China, and thus a ban may also impact these customers.
Micron’s recent earnings report and earnings call only mentioned the word “China” once. This was in reference to the reopening of the Chinese economy from Covid lockdowns, which was expected to act as positive momentum for chip sales in the country. Thus, we can infer that Micron is not particularly focused on growth efforts in China.
Micron has offices in major cities such as Shanghai and Shenzhen, and a chip packaging facility in Xian. However, interestingly enough, in early 2022 the company closed one of its DRAM design facilities in Shanghai permanently.
While Micron also has operations in Japan, Singapore, Taiwan and Malaysia, the vast majority of its revenue comes from the U.S., which is where it is headquartered. Micron is also poised to benefit from the $280 billion CHIPS Act, which aims to bolster U.S. manufacturing of semiconductors, incentivising Micron to focus on U.S. growth above all else.
In fact, a White House press release indicated Micron has announced a huge $40 billion investment into U.S. chip manufacturing. This could bring the U.S. market share of memory chip production from 2% to 10%. Micron aims to invest $15 billion with a new facility in Boise, Idaho and execute a huge $100 billion expansion of its facility in Clay, New York over the next decade. Overall, I think the focus on the U.S. market could make up for losing the revenue in China.
How likely is it that a ban will actually happen?
Just because a regulator review happens doesn't necessarily mean there will be a ban. As Micron is a hardware company, it should not have too many issues with the storing of data on Chinese citizens, unlike a social media company. In addition, its hardware products are not networking products that broadcast, and thus the cybersecurity risks are minimal from a technical standpoint.
Micron is the world’s third largest supplier of DRAM and generates 74% of its revenue from this product. DRAM is an essential part of all computers, but it is not a networked product and thus is rarely a target for state-sponsored hacks.
The main attack type on DRAM is called a “Rowhammer attack." This is when a hacker repeatedly reads/writes to certain memory locations on the DRAM, which causes the electrical chart on cells close by to flip. This can enable a hacker to gain access to sensitive information stored on DRAM, which is a type of temporary storage that wipes when a computer is powered down. In theory, this type of attack could be executed remotely via SSH (Secure Shell) or through access gained via a phishing attack.
A positive is these attacks are very rare and difficult to do. In addition, memory manufacturers such as Micron use ECC or Error Correcting Codes and memory scrambling techniques to avoid impacts from an attack.
Micron also derives 24% of its revenue from NAND, or flash memory. This is a type of memory used in USB flash drives, memory cards and the majority of solid state drives (SSDs). Generally, cyberattacks or exploitation of these devices is fairly rare and usually requires remote access to the device. A hack of an SSD is possible through an exploitation of the firmware, but often encryption can help to prevent this.
It should be noted Micron provides the raw components, and its components are not "smart" right out of the box. Therefore, from a purely technical point of view, I believe a ban on Micron’s products in China would be unlikely.
However, a ban on foreign products is often driven by political factors, not technical or economic logic. The U.S. has enacted controls on many semiconductor manufacturers that export to China and blacklisted many Chinese companies, despite the resulting detriments to the U.S. economy.
The most relevent case to Micron is that of Yangtze Memory Technologies Co Ltd. This is a company that only started to mass produce DRAM in 2020, but has received a significant investment of $1.9 billion from China’s National Integrated Circuit Industry Investment Fund. China aims to become more self-reliant and not have to rely on other countries (mainly Taiwan) for its semiconductors. The U.S. was quick to add Yangtze Memory Technologies to its blacklist.
Nvidia (NVDA, Financial) was also barred from exporting its latest artificial intelligence (AI) chips to China. In addition, Japan (home of Samsung Electronics (XKRX:005930, Financial), the largest DRAM supplier in the world) has announced it will align its policy with the U.S. The Netherlands has also followed suit by announcing it won’t export its advanced lithography technology used for chip manufacturing to China.
Thus, I would not be surprised if China decided to ban Micron for political reasons. In terms of general relations, China looks to be building allies with “BRIC” countries which include Brazil, Russia, India, and South Africa. China has recently annouced it is ditching the U.S. dollar for trade with Brazil, which is a major step in the alliance between the two countries.
Final thoughts
U.S.-China relations are a continuous rollercoaster as the two superpowers aim to secure their country's supply chains and separate from their historical economic reliance on each other. For investors, navigating this uncertainty can be challenging.
