China's $30 billion memory chip plant: Boom and bust?

The global over supply of NAND flash and DRAM looks to get worse for vendors: Tsinghua Unigroup plans a $30B chip plant. That's about 6x the cost of most new fabs today. That's good news for consumers, but can China's economy support it?

Tsinghua Unigroup, owned by China's elite Tsinghua University, has announced plans to build a $30 billion dollar chip fab focused on NAND flash - popular in smartphones and SSDs - and DRAM. Security concerns have led several western countries, including the US, to veto Chinese acquisitions of important chip suppliers.

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In 2015, for instance, the US blocked Tsinghua's proposed acquisition of Micron Technology, the big US chipmaker. In December, President Obama blocked another Chinese firm's acquisition of the US business of German chip maker Aixtron.

Boom and bust

Chip plant economics force them to run at full capacity whether there is demand or not. Letting $5 billion, or worse, $30 billion, sit idle is costly. Better to risk a loss on product sales than to guarantee a loss by not producing anything.

NAND flash demand spikes at year end, as people buy new smartphones, so it's common to see prices drop in the spring and firm later in the year. When demand slows, a glut can build quickly, forcing suppliers to cut prices to clear inventory.

The Storage Bits take

TU can certainly build this plant - plus splash out another $4.3 billion for an "international city" to house Chinese and foreign employees to staff it and other enterprises. And the extra capacity will be good for consumers, as it forces prices lower.

The bigger issue is whether China's economy can support such a massive investment along with all the other investments the government and enterprises are making. China's total debt level is approaching 300 percent of GDP, much of it held by loss-making state owned enterprises.

There is both concern and debate about the sustainability of China's current debt levels, and its reliance on increasing debt to sustain full employment. While I expect Tsinghua to build its new plant - and to force global flash and DRAM prices lower - it may force other companies to shutter older plants.

But what doesn't seem to get factored in is the future impact of NVDIMMs on the flash and DRAM markets. If one of the non-volatile memory technologies takes off, a lot of fabs could be left idle around the world.

Comments welcome, as always.