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Apple in talks for first-ever order with a Chinese memory chipmaker

A deal with Yangtze Memory would mark a milestone in China's tech development

The iPhone X being presented to the media in Beijing in October   © Reuters

TAIPEI Apple is in talks with state-backed Yangtze Memory Technologies to buy NAND flash chips from it. The move would mark Apple's first purchase from a Chinese memory chipmaker and a huge boost to the local sector.

For Yangtze Memory, a little known technology company, securing a deal with a global entity such as Apple would be a major coup, even if the initial orders are small. And for China, a deal with Apple would go some way toward its ambition to cut dependence on foreign chip supply, an area in which Beijing has shown it is willing to invest heavily.

Whether Apple is under any pressure to buy from Chinese makers is unclear -- China has been known to apply pressure on foreign technology companies that want to operate within the country. One thing is for sure: Chinese deals would help Apple grow its business there, according to an industry executive.

No Chinese company has yet produced memory chips and Yangtze Memory's first factory lines, worth some $24 billion, in the city of Wuhan are set to start production only sometime in 2018.

As such, the earliest that the deal could come to fruition would be 2019. But industry sources say it is more likely to be after 2020, when Yangtze Memory would be able to produce enough of the components at Apple's required standards. Apple plans to use these chips in new iPhone models and other products for sale in the Chinese market specifically, according to two people familiar with the matter.

Apple currently buys NAND flash memory chips for its iPhones from Toshiba of Japan, Western Digital of the U.S., and SK Hynix and Samsung Electronics of South Korea. It is the world's biggest user of these chips, taking roughly 15% of overall global demand of 160 million gigabytes in 2017, according to Sean Yang, an analyst at Shanghai-based research company CINNO.

CATCHING UP NAND flash memory stores information. It is essential for nearly every major electronic device, but also is one of the most expensive components. For instance, the iPhone X comes in 64 and 256 gigabytes, with a significant difference in price.

CINNO's Yang said that as Apple will only use components that meet its high standards, supplying to the U.S. tech company would help a manufacturer refine the quality of its products, raise its capability for mass production and help it grow quickly into an international player.

Yangtze Memory, previously known as Yangtze River Storage Technology or Changjiang Storage, is an affiliate of state-supported tech conglomerate Tsinghua Unigroup. The company is seen as being China's greatest hope in catching up to market leaders such as Samsung Electronics, Toshiba, SK Hynix, Micron and Intel.

Yangtze Memory's key shareholders include China Integrated Circuit Industry Investment Fund, a high-profile investment vehicle in China's chip sector, Tsinghua Unigroup and the Hubei government.

According to media reports, Tsinghua Unigroup and Yangtze Memory previously tried to work with foreign peers such as Micron, SK Hynix and Intel to license NAND flash technologies, but there was no major breakthrough in talks. Tsinghua Unigroup denied that it had talked to Micron and SK Hynix but declined to comment on whether it would seek to work with Intel. In 2014, Intel invested $1.5 billion for approximately 20% of a holding company under Tsinghua Unigroup.

Intel said that it has had a strong relationship with Tsinghua Unigroup for many years but the terms of that relationship are confidential. The company declined to comment on whether it would license its 3-D NAND flash memory intellectual property to the Chinese group.

Both Apple and Yangtze Memory did not respond to Nikkei Asian Review's request for comment.

China is building a competitive semiconductor industry, pouring in funds from central and local governments and looking overseas for acquisition possibilities. But given national security concerns, Beijing is facing pushback overseas.

Apple CEO Tim Cook, right, attends a session at the Fortune Global Forum in Guangzhou, China's Guangdong Province, on Dec. 6.   © Reuters

In 2015, the $23 billion attempt by Beijing-backed Tsinghua Unigroup to take over Micron was blocked by the U.S. government, citing national security concerns. The Chinese conglomerate later killed a $3.8 billion bid to become the largest shareholder in Western Digital after the investment was flagged for scrutiny by U.S. authorities in 2016.

However, Apple needs to balance the interests of its own nation and of China, one of its key markets and its most significant manufacturing base. Apple also has to meet its own target of securing memory chip supply. In 2017, it joined a consortium led by U.S. private equity company Bain Capital in a 2 trillion yen ($18.8 billion at current rates) deal to invest in the NAND flash memory chipmaking unit of embattled Toshiba.

To this end, Apple's China-based suppliers totaled 19 companies in 2017, up from only seven in 2012, according to an analysis based on Apple's supplier list released annually since 2012.

In the October-December period, after the U.S. and Europe, China was Apple's third largest market, accounting for nearly 20% of the company's revenue of $88.29 billion. CEO Tim Cook has made China sales a priority -- since taking the helm in 2011, he has made 12 visits to China.

Last July, Apple came under criticism after it removed virtual private network services from the Chinese version of its App Store that were helping users in China bypass the country's heavy restrictions on access to foreign websites. It also took down New York Times apps in late 2016 at the request of Chinese authorities, a move seen by many as censorship.

"When you go into a country and participate in a market, you are subject to the laws and regulations of that country," said Cook at the Fortune Global Forum in the Chinese city of Guangzhou last December, responding to questions about the removal of VPNs in the local App Store.

"My hope over time is that some of the things -- the couple of things that's been pulled -- come back. I have great hope on that and great optimism on that," he added.

On the other hand, Apple has also said it will pour in $350 billion to help grow the U.S. economy and create 20,000 jobs over a five-year period. Apple was singled out by President Donald Trump during his election campaign for relying on the global supply chain rather than making its products at home, thereby leading to a decline in domestic manufacturing and costing Americans jobs.

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