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  • Are memory makers colluding against China?

    Biggest Challenge of Adoption of 3D IC Technology-dram.jpgMaybe OMEC is the new OPEC? A bargaining chip in June trade show down?

    China has started an apparent investigation into pricing of DRAM memory with Samsung, Micron and SK Hynix as targets. We find this somewhat coincidental given the current trade issues. Memory pricing has been unusually strong for a very long time. Much longer than any previous period in the usually volatile memory market. The tight supply demand and therefore pricing in a normally volatile and less profitable memory market begs the question of whats going on?

    Is it simply that memory makers have finally gotten intelligence and self control? Is next generation memory so hard to make that supplies are limited by technology? Or is it potentially a more nefarious reason like the collusion that China may be searching for?

    If it is collusion, whats wrong with that? It may not be illegal or even wrong for memory makers to collude. Maybe not to set prices but maybe to set supply, which in turn will support pricing, much like the oil market.

    The other, potentially more plausible answer is that China may be looking to preempt the trade showdown looming from the Trump administration on June 15th and June 30th.

    If China can claim that the US and others are conspiring against it then perhaps they have more of a leg to stand on in trade issues. Maybe the investigation could be a bargaining chip to be bargained away in trade negotiations. Go easy on us or we will bust your companies for colluding against us.

    There is also clear precedent of anti trust behavior in the DRAM market in the US. From 2002 to 2006 there were investigations and guilt found for violating violating the Sherman anti trust act in regard to DRAM pricing for Samsung, Micron and SK Hynix.

    DRAM price fixing history link
    Could this simply be history repeating itself? It could. The impact of the real truth behind memory makes a significant difference in the fortunes of the memory companies and trade issues.

    Looking for leverage
    It would seem clear that China wants leverage in coming trade talks and raising the specter of anti trust creates a FUD factor (fear uncertainty & doubt) that helps its position. Price collusion is very plausible given the industries history, so it appears to be very solid.

    It is the timing that makes us suspicious but there is nothing that can be proven as it is a legitimate concern.

    We would not be surprised to hear that the Chinese are dropping their price collusion investigation in return for some concession from the US and others.

    What are other concessions that Chinese may ask for?
    China already asks for, and gets, "technology sharing" on the part of the selling company. In other words the price of doing business in China is giving away some of your trade secrets to the customers and would be competitors. The trick is to give away useless information or nothing of true commercial value. Many companies in the tech space have made an art form of this. Seemingly giving away things without really doing so. Intel's first foray into China was to locate a packaging factory which gave away little if any of the company's true crown jewels.

    Given the recent ZTE scare, China may push a lot harder to get access to real, true hard core leading edge technology to reduce dependency on the US and others. We are certain this is the case as ZTE made them painfully aware. Showcase and "make believe" technology sharing will likely not suffice any more.

    Is OMEC the modern day OPEC???
    Maybe the US and Korea (and Japan too for Toshiba) governments should get together and form OMEC (the organization of memory exporting countries). The reason that OPEC can collude is that "sovereign states" (not companies) are immune from Sherman anti-trust.

    Maybe we don't understand the power and leverage of producing memory.

    If oil was the driver of the 20th century global economy through transportation then memory is the driver of the 21st century economy through "big data" and other data driven applications. They are both truly global commodities that are central and the life blood of new economies. China is a new economy that needs memory perhaps as much or more than it needs oil.

    Ratcheting up the rhetoric
    One of the problems we see is that both sides seem to be ratcheting up both rhetoric and ammo for some sort of trade show down. As we have said before, this could be a big game of chicken but it becomes harder to back down and unravel all the rhetoric and come to a reasonable accord. Much as was the case with the North Korean issue, we see no resolution in sight for the China trade issue. We would feel much better if there were a hint of progress but so far we don't see it.

    No collusion?
    Like and Unlike presidential politics, there appears to be little evidence of collusion among DRAM makers other than the circumstantial evidence that prices remain high and supply remains low. As is the case in US politics, the facts never stopped anyone, as China could still indict any or all DRAM companies, as enemies of the state, with or without evidence and hold them hostage and linked to trade talks. After all it appeared that ZTE and its ongoing existence was being held hostage from China's vantage point.

    The stocks
    We still are very concerned about both June 15th and June 30th as things are incrementally more complicated and ratcheted up in the past day given the DRAM collusion investigation. We still think semis and semi equipment are squarely in harms way in a trade war and this DRAM issue proves the point perfectly.

    While over the longer run we see little impact on the stocks there is risk of companies giving too much away to China to "pay to play" in the Chinese market.

    The short term risk in the stocks remains the headline risk in June which just got a bit worse.

    We still like Microns stock, and if anything, this issue just serves to underscore the immense value in a memory supplier to the global economy. Both Samsung and Micron have already seen that value reflected in their earnings if not their respective stock prices. Micron's stock remains especially cheap.

    The semi equipment names remain at risk of being sucked into the vortex of the trade dispute as they have yet to be directly involved or called out by name. The first equipment company to get caught in the trade tussle will take down the entire group. It will not be good to be the test case. If we can get past the trade talks without semi equipment getting caught up it will be a minor miracle.

    In the meantime we look forward to the Trump administration publicly saying that there was "no collusion" in DRAM pricing in response to China's allegations...