For a couple of reasons, investors in Micron (MU) -- and for that matter, DRAM rivals Samsung and SK Hynix -- probably don't need to worry too much about the Chinese government's price-fixing probe.
However, Beijing's clear long-term desire to reduce, if not break, the market power wielded by the DRAM industry's big-3 is certainly worth keeping an eye on. Even if it's the kind of effort that could take several years or more to have a big impact on DRAM industry profits.
On Monday, reports emerged that Chinese regulators had begun probing Micron, Samsung and Hynix over allegations of price-fixing. All three companies have reported getting visits from regulators, and a South Korean ministry has issued a statement calling on Beijing to provide fair treatment to Samsung and Hynix.
It's not hard to figure out why China might be displeased with the DRAM industry status quo: DRAM prices skyrocketed in 2017, and (though price increases have moderated in 2018) remain far above their late-2016 lows. That has done wonders for the top and bottom lines of the big-3 -- Micron's DRAM revenue rose 76% annually during its February quarter, and was responsible for the lion's share of the $3.5 billion in net income it reported -- but hasn't been so wonderful for the many Chinese electronics makers that buy from them.
Throw in the success that Beijing has seen in some other battles large foreign tech companies -- for example, obtaining lower 3G/4G royalty rates from Qualcomm (QCOM) -- and it's understandable why some investors could be on edge about the price-fixing probe.
But proving that overt price-fixing occurred could prove tricky. While the DRAM price surge seen over the last 18 months does have a lot to do with the efforts of DRAM makers to keep a lid on supply growth, no evidence has surfaced to date indicating that they directly colluded with each other to fix prices.
What appears to have happened, rather, is that the Micron, Samsung and Hynix each followed the public disclosures that the other two made (via earnings calls and other events) about how much they plan to grow their DRAM bit shipments. And with those disclosures in mind, the companies made sure their own future DRAM investments wouldn't lead to industry supply exceeding demand.
That kind of behavior naturally isn't going to sit well with customers that have to contend with higher prices because of it. But that doesn't make it illegal.
The other reason China is unlikely to crack down too hard on the big-3: Its massive electronics manufacturing/export industry can't afford to see any major disruption to its DRAM supplies. For all their understandable gripes about higher DRAM prices, the likes of Foxconn, Huawei and Pegatron would rather contend with higher prices than any disruption to hardware output caused by a crackdown -- for example, if the big-3 responded to Chinese DRAM price controls by giving priority to shipments made to other regions.
Political considerations could also affect how China acts in the near-term. Beijing is offering to take major steps to narrow its trade surplus with the U.S., should the Trump Administration abandon its plans to impose new tariffs on Chinese goods. Needless to say, an attempt to seriously crack down on Micron wouldn't mesh with such an effort.
For all these reasons, the price-fixing probe could ultimately end in a settlement that amounts to a slap on the wrist. One that could yield, for example, moderate price cuts and a commitment to keep prices from rapidly growing in the future, rather than any massive reduction in prices.
On the other hand, China's attempts to become a major DRAM producer -- part of a broader effort to grow its domestic chip industry -- might eventually make life a lot tougher for Micron, Samsung and Hynix. A pair of local chipmakers, JHICC and Innotron Memory, are promising to begin volume production of DRAM in late 2018 and early 2019, respectively. State-run Tsinghua Unigroup, which one showed buyout interest Micron before political opposition made it think twice, is also promising to make large memory fab investments.
However, for now, JHICC and Innotron plan to rely on 22-nanometer manufacturing processes that are easily less advanced than Micron, Samsung and Hynix's cutting-edge processes. Catching up with the big-3 from a technology standpoint -- both with regards to manufacturing processes and other fields -- will be challenging, and could be complicated by U.S. export controls on chip manufacturing equipment.
In addition, it looks as if both firms' DRAM output will be a small fraction of that of the big-3 in 2018 and 2019, even if they don't see any delays (hardly a given). Innotron, for its part, is aiming for a modest initial capacity of 10,000 DRAM wafer starts per month.
However, with Chinese authorities committing billions in funding to growing the local memory industry, the story might be very different in a few years' time. Particularly -- as Bernstein analyst Mark Newman thinks it might -- if Beijing can leverage its price-fixing probe to obtain technology transfers that strengthen the competitive standing of local players.
Considering how many billions in long-term profits are at stake here for Micron and its peers, this is a story that deserves close monitoring, even if there's no need for panic at such an early juncture. Especially since markets could start pricing in the impact of a Chinese DRAM production surge well before it happens.