China’s restrictions on Micron, criticized as political, cloud its recovery path

Just as Micron Technology investors were starting to glimpse the end of a painful demand slump, the Chinese government is making the recovery path murkier.

The largest U.S. maker of memory chips had rallied nearly 40% this year amid optimism that the worst is over after supply cuts aimed at restoring equilibrium amid a drop in sales of personal computers and other devices. Now, restrictions in China threaten to throw a wrench into Micron’s recovery and potentially aid rivals such as South Korea’s SK Hynix.

“There’s a lot of enthusiasm that we’re going to bottom out in a quarter or two and you’re going to see a recovery in Micron’s key markets,” said Daniel Morgan, senior portfolio manager at Synovus Trust Co. “This makes it that much harder for Micron to overcome that hurdle.”

While Boise-based Micron gets only about a tenth of revenue directly from China, the country is home to factories that produce a large share of the world’s electronic devices, adding potential complications to the firm’s supply chain and customer relationships.

So far, investors aren’t hitting the panic button. Micron shares fell less than 3% on Monday, paring a drop of as much as 5%, after China said the firm’s products failed to pass a cybersecurity review and warned operators of key infrastructure against buying its goods. SK Hynix rose 0.9% on Monday.

Most analysts on Wall Street expect China’s move to affect only a portion of Micron’s sales in the country, because it’s currently limited to “critical information infrastructure” and most of the firm’s chips are destined for electronics such as mobile phones and personal computers.

Micron estimates China’s actions will reduce total revenue by a low-single-to-high-single-digit percentage, Chief Financial Officer Mark Murphy said in remarks at an investor conference Monday. About a quarter of revenue, in the form of direct and indirect sales through distributors, comes from China-headquartered companies, he said.

For Stifel analyst Brian Chin, Monday’s news was enough to lose conviction in a call made last month that the stock was due for a 10%-to-20% rally based on improving sentiment about supply-and-demand dynamics in the memory market.

“Given the unfavorable conclusion of the review, we believe the short-term trade here has concluded,” Chin wrote in a note Monday.

Until now, the trade had worked well. Micron’s 12% gain last week was its best since January after Bloomberg News reported the company is poised to land about $1.5 billion in financial incentives from the Japanese government to make next-generation memory chips.

Micron is striving to turn around its business after two consecutive quarters of net losses. It provided better-than-expected sales guidance for the third quarter, on the back of improving supply-demand balance in the global chip glut and more job cuts.

China’s cyberspace regulator then claimed this week that its products failed to pass a cybersecurity review in the country.

Beijing warned operators of key infrastructure against buying the company’s goods, saying it found “relatively serious” cybersecurity risks in Micron products sold in the country. The components caused “significant security risks to our critical information infrastructure supply chain,” which would affect national security, according to the statement from the Cyberspace Administration of China, or CAC.

“We have received the CAC’s notice of conclusion of its review of Micron products sold in China,” Micron Chief Executive Officer Sanjay Mehrotra said, speaking at a news conference at Micron’s factory in Hiroshima on Monday. “We are evaluating the conclusion and assessing our next steps. We look forward to continuing to engage in discussions with Chinese authorities.”

The tech sector has become a key battlefield over national security between the two largest economies, with Washington having already blacklisted Chinese tech firms, cut off the flow of sophisticated processors and banned its citizens from providing certain help to the Chinese chip industry. In a statement, the U.S. Commerce Department said Beijing’s conclusion had “no basis in fact.”

Micron “remains unclear as to what security concerns exist” with its products and has had no complaints from customers, Chief Financial Officer Mark Murphy said at a JPMorgan Chase conference in Boston on Monday.

Holden Triplett, founder of Trenchcoat Advisors and a former FBI counterintelligence official in Beijing, described the move as “retaliation for the U.S.’s export controls on semiconductors.”

“These are political actions, pure and simple, and any business could be the next one to be made an example of,” Triplett said.

On Tuesday, U.S. Sen. Jim Risch, R-Idaho, the ranking member of the Senate Foreign Relations Committee, released a statement calling China’s actions “blatantly coercive,” and he said they had “nothing to do with China’s national security.”

“The direct targeting of a U.S. company is an escalation of Beijing’s coercive tactics, and shows China is not interested in President Biden’s hopes for a ‘thaw’ in relations,” Risch said. “As always, I will support Micron and work with U.S. allies to limit the damage of China’s actions.”