A couple months ago, China announced that it had placed Boise, Idaho based memory chip maker Micron Technology (NYSE: MU) under review for national security reasons. Of course China wants to imply that the U.S. chips can pose some kind of risk, like the U.S. government hacking cell phones made in China with Micron chips and stealing sensitive data.
China’s accusations are similar in style to what the U.S. said about telecom equipment and smartphones made by Chinese firm Huawei – that Huawei’s phones and network equipment could be used to collect data on people that used them and that data could end up in the hands of the Chinese government.
To kick off the U.S. – China tech war, the Trump administration banned the sale of Huawei phones and equipment in the U.S. and also restricted the company’s access to U.S. chips. These actions cut Huawei’s revenue by ~35% or so.
And of course, the tech war has escalated ever since, with the U.S. and its allies further restricting China’s access to advanced semiconductors and the equipment to make them. For instance, Dutch company ASML (NASDAQ: ASML) makes the lithography machines that etch circuits into semiconductor wafers…
As I explained back in January:
These machines are among the most complicated mankind has ever produced. The cheapest ones run around $150 million. Each one consists of 100,000 parts, and it takes 4 jumbo jets carrying 40 cargo containers to deliver them.
ASML’s newest machines will run you $400 million or so. They are the only company in the world with the engineering know-how to make the most advanced ones (Japan’s Nikon and Canon also make lithography machines.).
ASML stopped selling its most advanced machines to China in 2019, in accordance with the Trump administration export bans to China. Now, China will be cut off from all of AMSLs machines.
ASMLs technology is mission critical for making today’s most advanced chips — the kind that power AI, smartphones, and cutting edge weaponry. The ban that keeps these machines out of China’s hands is a big deal.
But a ban on Micron’s memory chips? Mmmmm…not so much…
Micron makes NAND flash and DRAM memory chips. NAND memory chips store data even when the power is cut off, like the way your smartphone stores pictures.
DRAM (dynamic random access memory) is the kind of memory that computer hard drives use.
The functionality of these types of memory comes from the architecture of the chip. Memory chips do not run software or code…which means they’re not going to be very useful for spyware or surveillance.
Now of course memory chips might store info that could be considered sensitive. But you’d still have to find a way to access the device to get at the chips. The notion that Microns memory chips themselves represent any kind of security threat is kinda silly…
Besides that, Micron doesn’t really do that much business in China. Back in October 2022, when the U.S. chip ban went into effect, Micron was getting maybe 17% of its revenue from China.
Because of falling sales from companies like Huawei, Micron’s Chinese revenue has fallen to about 11%.
I’m sure pressure has been building for China’s leadership to flex it’s superpower muscles and do something — anything — to counter U.S. actions.
Sadly, slapping a ban on Micron has about as much bite as floating a spy balloon over the U.S.
A Question of Leverage
China’s action against Micron doesn’t really hurt Micron. It doesn’t hurt the U.S. economy at all. And it doesn’t benefit the Chinese tech sector either. And that’s because China’s domestic chip industry is only capable of making the most basic chips, like those that go into appliances, cars and Internet of Things (IoT) applications.
In other words, China doesn’t really have any leverage in the semiconductor space. And in fact, there aren’t many areas where China does have much economic leverage.
As we’ve discussed before, China dominates the lithium-ion battery market. And it has launched subsidies to protect its domestic electric vehicle (EV) makers against competitors like Tesla. China’s EV makers are getting discounts on batteries from CATL, the world’s biggest battery maker, in exchange for long-term supply contracts.
China could also try to leverage its currency – the yuan – by making it useful for international trade. For instance, there’s speculation that Brazil could sell yuan denominated bonds and purchase oil from Saudi Arabia and/or Russia with yuan, in an attempt to change the global dependence on the U.S.
This potential is called “de-dollarization.” And given the tension between the U.S. and Russia and its allies, and other countries like China and Saudi Arabia, I expect there will be some motivation by some countries to de-dollarize and use the yuan.
It remains to be seen if the yuan can actually be a viable alternative to the U.S. dollar. I suspect that China would seek to leverage interest in the yuan into expanding its influence into other countries. And really, this would be a logical outcome for a world that is de-globalizing.
I expect we’ll be talking about this in the future, so stay tuned…
That’s it for me today, take care and I’ll talk to you Wednesday.
Chief Investment Strategist