-We think China issue is overblown- Zero sum game theory
-US should respond Tit-for-Tat and then some- Chop Chinese Chips
-Chip equip makers duplicitous behavior- smacks of hypocrisy
-Exporting chip equip biz/jobs to Asia while asking for CHIPS Act$
Memory Market remains a zero sum game market much like petroleum
China’s “banning” of Micron memory products in China generated a large blowback, in our view overreaction, in Micron’s stock. The reality is that while it may cause some dislocation in the near term, in the longer run there will likely be less impact.
Much like the oil market, memory is a commodity product that is essentially interchangeable with one another. Yes, there may be differences between Texas sweet and Brent, they kind of all burn the same way at the end of the day.
If the US bans the import of Russian or Iranian oil, some other country will buy it instead. Such is the same with memory products. There may be near term dislocation but in the longer run market share between Samsung, SK & Micron will remain similar to today as just the shipping destination will vary.
Its certainly far from the negative impact the stock saw.
The US can speed up the rearrangement of customers
One very easy way to speed up the redistribution of market share would be for the US government to ban any and all Chinese memory products, including memory made by foreign companies in China, from being imported in any product into the US.
In this way Micron will pick up those empty slots while Chinese memory companies will replace Micron in China and we can all go home and call it a day…..
Seems a pretty simple Tit for Tat solution…and effectively nullifies China’s move
We see no reason not to…..
Perhaps up the ante by cutting off 300MM to China?
Right now China is by far the biggest buyer of semiconductor equipment in the world. The US continues to sell China fishing poles even though we have cut off their fish supply….
One problem we have seen is that there is a lot of dancing around which tools can and cannot be sent to China and where in China they can be sent to.
We have heard rumor of some tools being degraded in software in order to be exportable to China or perhaps having the label and name changed to get around export restrictions only to be able to be used for more advanced purposes later. China can even get around a lot of restrictions by multiple patterning and other difficult tricks.
Perhaps the simplest and easiest way is to just restrict China to 200MM (8 inch) and below wafer tools. It essentially would make any and all work arounds impossible, and highly limit how advanced the technology node could be.
It would be super easy to enforce, any idiot with a tape measure could do so. More importantly no dancing around or negotiating specifications and features. Essentially a truly impenetrable technology wall.
Perhaps a Tit for Tat response is not enough….just drop the hammer….
The not so hidden duplicity behind Applied’s “Epic” announcement
We were quite pleased and happy to hear Applied Material’s announced plan to spend billions of dollars on a new “Epic” R&D center in California. Kind of like the existing Maydan center on steroids. The spending and additional hiring over the next few years will be needed in any event to support the expected growth of the semiconductor industry and in order to keep up this is the type of effort that is needed. We view this not as above and beyond spending but spending in line with expectations if we look at current and expected growth and spending rates.
We would note that Applied added an interesting caveat in its press release that this spending is dependent upon CHIPS Act funding. Would they not fund increasing R&D without CHIPS Act money??
Perhaps much more interesting is the juxtaposition of the “Epic” announcement coming six months after another record expansion and spending effort by Applied Materials in Singapore in December. Obviously the celebration of spending all that money and moving many AMAT US jobs to Asia was not accompanied by US government officials in a big splashy announcement.
In December Applied announced “Singapore 2030”. An effort to double its operation in Singapore by building a $600M 700,000 sq foot facility for R&D and manufacturing in Singapore (about three times larger than the 180,000 sq foot “Epic” center in California). It is expected to create well over 1000 direct jobs and many indirect and construction jobs. Singapore is already Applied largest facility outside the US and this expansion will obviously make it larger than a single location in the US.
The spending in Singapore also includes academic partnerships, AI, ML robotics etc;. just like Epic.
If anything , Applied growth in Asia, and specifically Singapore, is at a much higher rate than the US and in fact is likely contributing and causing slowing manufacturing & R&D job growth that would have otherwise happened in Applied in California or Texas.
We find it somewhat amusing that Applied can spend all that money, by itself, in Singapore, creating & moving jobs there while it needs CHIPS Act money to expand in the US?
Is taxpayer CHIPS Act money being used for stock buy backs and dividends?
One other fact we found ironic and interesting juxtaposed timing about the need for CHIPS Act funding for Applied’s Epic center is their earnings announcement just a few days prior……
On the earnings call the CFO Brice said “The board of directors approved a 23% per share dividend increase which is the largest increase in 5 years and supplemented our share buyback program with a new $10 billion repurchase authorization. We believe our free cash flow can continue to grow and support increasing the dividend at an accelerated rate over the next several years which would double our previous dividend per share”
Somehow that does not sound like a company that desperately needs CHIPS Act corporate welfare to afford its baseline R&D spending and new “EPIC” center. Especially after the Singapore expansion.
The optics are even worse in that we are in an “epic” downturn in the industry yet we are accelerating exporting jobs, jacking up shareholder rewards while holding out a hand for CHIPS Act money.
We thought the CHIPS Act was not supposed to support, even indirectly, corporate welfare of shareholder rewards or exporting jobs.
Lam Leaving Livermore
Applied Materials is far from alone in continuing to move jobs from the US to Asia. It seems part of Lam’s plan of accelerating and increasing manufacturing at its new location in Malaysia is to ramp down and eventually close its manufacturing operation in Livermore California. Essentially moving all those thousands of jobs as well as indirect jobs to Asia in the process.
Lam is also doing quite well despite the downturn and like Applied could make slightly less profit while keeping jobs in the US.
However we haven’t heard about Lam asking for CHIPS Act money……at least not yet.
We have seen this movie before…and it didn’t turn out well…CHIPS Act II
It is amazingly ironic that the semiconductor equipment industry is following in the exact same footsteps of the semiconductor industry that it serves.
Over the last 30 or so years the semiconductor industry exported chip manufacturing to Asia to save costs and increase profits while keeping chip design in the good ole USA.
Now the semiconductor equipment industry is doing the exact same thing despite the huge outcry of what happened to the semiconductor industry itself and now huge rescue and re-shoring efforts that are taking place.
Semi equipment companies are exporting manufacturing while keeping R&D in the US, hence the Epic R&D center, just like the semiconductor industry did and did not work out so well for the industry.
In our view the best way to re-shore the semiconductor industry is to not offshore it in the first place and certainly not support companies that do so for the sake of profitability over patriotism.
The alternative is to have the CHIPS Act II which will be aimed at re-shoring the equipment industry like semi industry before it a few years down the road. It would be much easier to fix right now before we export all equipment manufacturing…..
The very ultimate irony would be for all the new shiny semiconductor fabs being built in the US in Arizona, Idaho, Ohio & Texas etc; to have to import their equipment made in Asia by US companies who moved manufacturing there at the same time the fabs were being built in the US…… how stupid can you get?
Wake up and smell the coffee….
While we have no desire to run out and buy Micron shares in the face of the disaster in the memory industry that will be long lived we do believe the sell of was unwarranted and overdone.
If the US does react with restrictions on Chinese memory, which we believe they should, Micron could easily jump back and more.
Nvidia is a shining light in an otherwise dark and gloomy industry and its earnings should help lend some emotional support. We would continue to own (and do so in our personal account) as one of the better and only plays in the semiconductor industry that is seeing a huge success.
With memory in the dumps and foundry/logic not much better we can still wait for better days to own the equipment stocks that are likely overbought in the recent run up.
About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor), specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.
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