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Business trends

Memory chip market set for a tumble as China moves in

Mega-producer of 3-D chips will have price-setting power

China's local governments offer memory makers strong financial incentives, enticing both established foreign firms and domestic companies looking to crack the high-end chip market.

TOKYO -- China's state-backed investment in cutting-edge memory chips could set global prices tumbling if output is not carefully controlled, repeating the boom-and-bust pattern of markets such as display panels and solar cells.

Yangtze Memory Technologies, an affiliate of state-owned semiconductor maker Tsinghua Unigroup, is poised to become China's first mass-producer of 3-D NAND flash memory chips, which offer vastly higher capacity than their conventional counterparts. "Two or three years ago, I wouldn't have believed it," said a salesperson at Japan's Advantest, which makes chip-testing equipment. "It seems like they will get things up and running at the end of 2018 and into 2019." 

Because 3-D chips can pack more memory into a small package, they are prized for their use in devices such as smartphones, as well as in the booming field of data centers. And though Yangtze Memory's technology lags behind the leading edge of the 3-D memory field, production yields have improved substantially as the company has turned out successive rounds of samples.

Semiconductors are a central part of the "Made in China 2025" plan the government unveiled three years ago to upgrade the country's manufacturing sector. Chips are currently China's top import, used to feed its powerful electronics manufacturing business. Producing more of those core components at home is essential if the country hopes to improve its trade balance with the rest of the world.

China's regional governments are offering generous subsidies and other incentives to attract foreign and domestic chipmakers. Japan's Ferrotec Holdings is building a plant for semiconductor wafers in the city of Hangzhou, but was courted by "city governments all around" while planning the facility, according to the company.

The Chinese market for semiconductor manufacturing equipment will grow 40% this year to $11.3 billion, predicts SEMI, a global electronics industry association. This includes demand from foreign companies' Chinese plants, and accounts for 20% of the global market, a share second only to that of South Korea.

China has already made itself indispensable as a supplier of slower but more reliable NOR flash memory that is used in appliances and automobiles. "China's contract manufacturers have become highly prized" as demand has surged for those chips in settings such as cars and display panels, according to a salesperson for a semiconductor trading company. Beijing hopes the country can do the same in the NAND business.

The NAND market is soft at present, amid a slump in smartphone demand. But this is normal for the beginning of the year, and the chips are widely expected to grow scarce once again this summer as procurement of smartphone parts kicks off in preparation for the end-of-year holiday shopping season.

How the market will shift in the longer term is less clear. "Starting in 2020, Yangtze Memory will determine the balance of the NAND market," according to Akira Minamikawa, principal analyst at IHS Markit. If all of the company's plans play out as written, supply of those chips could exceed demand as soon as 2021. The price of a 256-gigabit NAND chip could tumble to around $2.40 in 2021 from $7 or so in 2017.

When China has ramped up investment in steel, petrochemicals and solar panels, such market crashes have followed. But when it comes to semiconductors, some argue the country will take past experience into account. "China won't just keep selling semiconductors until the market falls out of balance," a source at a semiconductor materials maker predicted.

Chinese demand itself has the potential to absorb some new supply. Domestic internet companies such as Tencent Holdings and Alibaba Group Holding are increasingly investing in data centers, adding to substantial outlays in that field by American information technology providers.

At the outset, Yangtze Memory will primarily supply the lower end of the chip market, according to an official at a major semiconductor maker. The company is experiencing growing pains in the industry, including the challenge of finding enough engineers.

But China's liquid crystal display makers also got their start producing lower-end smartphone screens for domestic manufacturers, and now command a growing share of the world market for small-to-midsize panels. Even in high-resolution screens, where South Korean and Japanese makers have long reigned supreme, the price of Chinese offerings has come within 10% or so of market leaders' products.

Recent trade friction with the U.S. could serve as a countervailing force to China's growth in the chip market if it results in the Asian economic powerhouse importing more semiconductors. But absent any major changes, the country could soon dominate the market, setting prices from both the supply and demand sides.

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