Samsung’s chip market is hot. Will China take a bite?

Memory chips helped Samsung Electronics through another record quarter. But headwinds are forming, both short and long term. The industry consolidation that has helped all major memory chip players could soon be undermined by new supply from China.

The South Korean tech giant said on Thursday it expects revenue in the last quarter to have hit a record 77 trillion won, the equivalent of $63 billion, an increase of 18% compared to the previous year. Operating profit is also expected to grow 50% year-over-year. Both numbers are above consensus analyst estimates according to data from S&P Global Market Intelligence. Samsung will release its full results later this month.

Strong demand for the company’s new flagship smartphones and memory chips likely helped. Production of NAND flash memory, used for storage, was halted in February at two factories owned by Samsung rivals Western Digital and Japan’s Kioxia due to raw material contamination.

NAND prices could remain high this quarter due to this incident. But overall, the disappearance of the containment effect as well as inflation and the Russian-Ukrainian war could hurt sales of consumer electronics. This will reduce the demand for memory chips this year. DRAM memory prices, used as working memory, are likely to be lower.

Compared to previous downturns, global memory chip makers are likely to be more disciplined in controlling supply growth as the industry has become more consolidated. This could in theory mean an eventual softer drop in chip prices. But a wildcard emerges that could upset this dynamic: China.

China’s Yangtze Memory Technologies Co. is ramping up production of its 128-layer NAND chips. It is still behind major memory makers, like Samsung, which are already mass-producing 176-layer NAND chips, but the gap is rapidly closing. A higher number of layers means more chips are stacked and therefore provides higher storage density. According to a Bloomberg report last week, Apple is considering adding Yangtze Memory Technologies as a new supplier of NAND memory chips for its iPhones.

The immediate impact would be small. Major manufacturers like Samsung also likely have a cost advantage given that it takes time to increase production yields. Memory chip manufacturing is a game of scale: greater scale allows for more expense, which helps reduce costs. YMTC had a market share of less than 1% at the end of last year, according to Counterpoint Research, but the company has increased its production capacity.

But YMTC’s entry into the global market could still pose longer-term risks. The top five NAND manufacturers currently hold over 90% of the NAND market. Adding another vendor would give consumers more bargaining power, which would lower NAND chip prices. Chinese gadget makers will also happily use YMTC’s chips if they have become technologically competitive, given rising tensions with the United States and its allies. Chinese DRAM chipmakers are still far behind the world leaders, so the risks there are less imminent.

The industry has been expecting China’s memory chip supply to disrupt the market for years, but so far there have been few concrete signs that might actually be happening. If the “Chinese price” is coming to memory chips really soon, the pain for major chipmakers like Samsung and Western Digital could be significant.

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About Kristopher Harris

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