Micron doubles down on its commitment to China despite regulatory ban

The backstory: Last October, the US slapped a ban on companies selling advanced chips and the equipment needed to make them to Chinese companies without a special license. This sent shockwaves through the industry and ramped up tech competition between the two nations. In March, the Netherlands and Japan followed suit, adding similar restrictions on selling chip manufacturing equipment to Chinese companies.

Then, China launched a cybersecurity investigation into Micron, one of the biggest players in the US chip game. That's a big deal because Micron gets about 11% of its revenue from sales in China. And the China and Hong Kong markets contribute to about 15% of Micron's revenues. The company raked in US$5.2 billion from China last year, including US$1.7 billion from Hong Kong, according to Jefferies.

More recently: Last month, the cyberspace regulator in China said that Micron didn't pass the country's network security review, so it decided to ban key infrastructure operators from buying Micron's products. But no specific details were shared about what exactly the risks were or which Micron products would be affected. On another note, Micron locked in a US$1.5 billion deal with Japan last month to boost chip manufacturing in the country.

The development: Micron just announced that it's planning to invest 4.3 billion yuan (US$603 million) in expanding its chip packaging facility in China’s Xian over the next few years. In a statement posted on WeChat, Micron didn't mention anything about the regulator's decision, so it's unclear how that will play out.

As part of this expansion, Micron will add a new production line at the Xian site to make mobile memory, storage and solid-state drive products. The idea is to boost the plant's packaging and testing capabilities. With this investment, Micron's workforce in China will grow to more than 4,500 people. To make it happen, Micron is buying equipment from a subsidiary of Taiwan's Powertech Technology, which Micron has been working with since 2016.

But the company did warn that the Chinese ban on selling its chips to key domestic industries will have a bigger impact on its revenue, and it's expecting almost half of its revenue from Chinese firms to take a hit. Micron also mentioned that the situation with the Chinese regulator is up in the air. The chipmaker also said that the Chinese government has been reaching out to Micron's customers, especially mobile manufacturers, to chat about the future use of Micron's products.

Key comments:

“This investment project demonstrates Micron’s unwavering commitment to its China business and team,” said Micron CEO Sanjay Mehrotra, according to a company statement posted on WeChat.

“Operators of critical information infrastructure in China should stop purchasing products from Micron,” the Chinese agency said last month.

"We also will engage with key allies and partners to ensure we are closely coordinated to address distortions of the memory chip market caused by China's actions," said the US Commerce Department last month about the decision to ban Micron’s products from key infrastructure.

"Since Micron's DRAM and NAND products are much less in servers, we believe most of its revenue in China is not generated from telcos and the government. The ultimate impact on Micron will be quite limited," said investment banking firm Jefferies in a note.

“No one should understand this decision by CAC as anything but retaliation for the US’s export controls on semiconductors,” said Holden Triplett, founder of Trenchcoat Advisors and a former FBI counterintelligence official in Beijing to Bloomberg. “No foreign business operating in China should be deceived by this subterfuge. These are political actions pure and simple, and any business could be the next one to be made an example of.”