Concerns are mounting among investors that a significant surge in production from China may jeopardize the ongoing recovery of the memory-chip market. While the immediate threat appears minimal, China remains a potential variable that could influence future developments.

Following a robust rally that commenced last year, the shares of memory-chip manufacturers experienced a significant downturn by midyear. SK Hynix of South Korea and Micron Technology from the United States have recently recovered some of their losses; however, they, along with Samsung Electronics, remain approximately 20% to 30% below their peaks observed in July.

The surge in artificial intelligence has spurred robust demand for high-performance memory chips, particularly benefiting SK Hynix and Micron. Samsung, the dominant player in the memory market, has fallen behind its competitors. The company issued an apology for its lackluster performance following the release of disappointing results this month.

However, the most pressing issue facing the industry is the rapid capacity expansion undertaken by Chinese memory manufacturers. The notable rise in capital investment in DRAM—memory chips utilized in processing—originates from ChangXin Memory Technologies, commonly referred to as CXMT. According to industry tracker TrendForce, the share of global DRAM capacity held by Chinese manufacturers, measured in wafers—the essential silicon slices utilized in chip production—rose from 4% in 2022 to 11% in the current year. Morgan Stanley anticipates that China’s DRAM capacity may account for 16% of the global market by the conclusion of the upcoming year.

The current impact is considerably more modest, however. Bernstein reports that CXMT’s bit density, a metric for actual storage per area, stands at merely 55% of that of its more advanced competitors. It also exhibits a reduced production yield, indicating that it generates fewer functional chips per unit of capacity.

Currently, the supply constraints have predominantly impacted what are referred to as legacy chips, those originating from earlier generations. The prices of lower-end chips have begun to decline, whereas those at the higher end exhibit greater resilience. This elucidates the underperformance of shares belonging to smaller memory-chip firms that concentrate on this particular segment. This year, the share price of Taiwan’s Nanya Technology has experienced a decline of 43%. The leading trio of competitors—Samsung, SK Hynix, and Micron—command over 80% of the market yet exhibit comparatively limited engagement with the lower-end segment.

Western export controls may pose significant obstacles for Chinese manufacturers aiming to swiftly transition to the next generation of technology. Bernstein has assessed that the technological gap between CXMT and its international counterparts is approximately six to eight years. In light of the deteriorating geopolitical landscape between China and the West, it is increasingly advantageous for Chinese firms, particularly in the smartphone sector, to prioritize the integration of domestic memory chips in their offerings whenever feasible. With Beijing allocating substantial financial resources to the initiative, it is plausible that progress may be achieved more swiftly than initially anticipated. China represents a significant market for memory-chip manufacturers, contributing approximately 20% to 25% of global DRAM demand, as reported by JPMorgan.

Should Chinese suppliers begin to replace foreign firms in fulfilling domestic demand, it would result in excess capacity for their Korean and U.S. competitors, compelling them to either reduce production or resort to offloading their products onto the global market. Major memory-chip manufacturers appear to be insulated from Chinese competition for the time being. However, they must remain vigilant.