Chinese companies are increasing their investments in chip manufacturing, which may lead to a new wave of overcapacity, disrupting the recovery of the memory chip market. While this is not an immediate risk for large foreign memory chip manufacturers, the threat of Chinese overcapacity is looming.
The latest concern in the industry is the active expansion of production capacity by Chinese memory chip manufacturers, especially CXMT, which has increased its capital investment in DRAM (Dynamic Random-Access Memory). According to data from the industry tracking agency TrendForce, China’s DRAM capacity as measured by wafer has risen from 4% of global capacity in 2022 to 11% this year. Morgan Stanley predicts that by the end of next year, China’s DRAM capacity will reach 16% of the global market.
However, the actual impact for now is much smaller. According to data from Bernstein, CXMT’s bit density (measuring the actual storage capacity per unit area) is only 55% of its more advanced competitors. Additionally, its yield is also lower.
Nevertheless, Chinese companies are acquiring chip manufacturing equipment to expand their capacity. According to data published by the global semiconductor industry association SEMI, in the first half of 2024, China’s spending on chip manufacturing equipment amounted to $24.73 billion, surpassing the total spending of $23.68 billion in Korea, Taiwan, North America, and Japan during the same period. However, China’s investment focus is on “trailing nodes,” which are less advanced processes. Given the difficulty in obtaining advanced process equipment, Chinese enterprises still cannot compete with international giants.
Chinese companies have experience in producing traditional chips using process nodes of 28 nanometers or above. These chips are widely used in consumer electronics, automotive, medical devices, and household appliances.
As geopolitical tensions between East and West continue to escalate, Chinese companies, such as smartphone manufacturers, have a strong incentive to use domestically produced memory chips in their products as much as possible. With the Chinese government pouring money into this sector, they may make faster progress than expected. China is a large market for memory chip manufacturers: data from JPMorgan Chase shows that China accounts for about 20% to 25% of global DRAM demand.
If Chinese suppliers start replacing foreign companies to meet domestic demand, Korean and American companies may face overcapacity issues in the Chinese market, possibly having to cut production or find other markets in different countries.
In the future, cheap Chinese chips may also flood foreign markets. Without further restrictions from Western countries, manufacturers worldwide may find it challenging to compete with Chinese companies.