BREAKINGVIEWS-China’s chip champions miss their cue

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Katrina Hamlin

HONG KONG, Dec 2 (Reuters Breakingviews) - China's chip champions are missing in action. The rise of artificial intelligence has created the strongest demand for memory chips since the 1990s boom in personal computers, per Jefferies. This has resulted in severe shortages of all data storage products, including so-called dynamic random access memory, or DRAM, vital to PC and handset makers from Lenovo 0992.HK to Dell Technologies DELL.N to Xiaomi 1810.HK . It’s a chance for Chinese suppliers to seize market share. Their conspicuous absence in the current crunch, however, hints that they have a long way to go to catch up to market leaders.

The fast and furious growth of AI infrastructure has encouraged memory chip giants such as South Korea's SK Hynix 000660.KS and Samsung Electronics 005930.KS to divert resources to making high-bandwidth data storage, sapping supplies of less sophisticated semiconductors like DRAM. As a result, contract prices for the latter are rising sharply, up roughly 30% for the three months to December compared to the previous quarter, reckon analysts at Bernstein. It will take time for new production to come online, so the shortage will probably keep prices high for the next year.

The shortfall in commoditised memory products should be an opening for China's homegrown chipmakers, which have spent years building up their capabilities in this segment - thanks to generous support from the government. National darling Changxin Memory Technologies (CXMT), which is eyeing a Shanghai listing at a $42 billion valuation, last month unveiled its latest generation of DRAM, known as DDR5, in a direct challenge to its South Korean rivals. The Chinese group's products may be just three years behind the duo's, research firm TechInsights reckons. In 2020, the gap was more than twice as large.

In reality, though, CXMT and its compatriots will probably find it tough to capitalise on the global shortage and substantially grow their DRAM market share, which stands at around 5%, Bernstein estimates. Analysts at Citi expect CXMT to double its DDR5 production by next year, but its offerings still underperform those from Samsung and SK Hynix "in power consumption and form factor". The biggest hurdle is Washington's technology restrictions on the People's Republic, which have cut off access to high-end equipment and tools. U.S. officials were also considering placing CXMT on a more stringent "Entity List" that would subject it to more onerous restrictions, Reuters reported in May, citing a source.

China's chip challengers will find it hard to seize the moment.

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CONTEXT NEWS

Lenovo is stockpiling memory chips, among other critical components, in order to withstand a supply crunch, CFO Winston Cheng told Bloomberg TV on November 24.

The company has also signed contracts with key suppliers to ensure sufficient supply for next year, CEO Yang Yuanqing said on November 20.

Lenovo’s adjusted net profit rose 25% to $512 million in the quarter to the end of September, while revenue rose 15% to $20.5 billion, according to results released on November 20.

(Editing by Robyn Mak; Production by Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))