Not everything is about the sexy microprocessor or GPU in your desktop.
Memory is one of the major categories in the semiconductor world.
The memory industry as it currently exists is dominated by a number of incumbents.
The reason for this is because memory is a brutal and cyclical industry.
But it can also serve as a critical starting point for many semiconductor companies to
nurture their fabbing expertise.
The industry’s dynamics also make it easier for new, low cost entrants to sell in the
market.
One of those new entrants into the market is Wuhan-based Yangtze Memory Technology Company.
The company began as a low cost supplier but has impressively scaled the value chain in
recent years.
In this video, I want to look at one of China's two leading memory companies and one of its
flagship semiconductor champions.
Memory chips are semiconductors same as the fast Intel processors inside your computers.
But the Intel chips are classified as "logic chips", meaning that they perform mathematical
operations.
Memory chips on the other hand store data.
There are two types of memory in the market: DRAM (Dynamic Random Access Memory) and Flash
memory.
DRAM refers to the 8GB or 16GB in your MacBook.
This memory can only store data temporarily - it vanishes when the power is turned off
- but in return you are able to access it much faster.
Flash memory is the type of memory that is in your USB stick or serves as the faster-access
data storage medium in your computer.
It is capable of retaining its data even after the computer's power is turned off.
China's memory market is massive.
You cannot make a computer or a smartphone without having both of these types of memory.
Well I guess you can make a computer with a spinning hard drive, but it’s certainly
hard to make one without DRAM.
Out of the $150 billion of semiconductors that the country imports each year to make
their products, memory represents 35% of that amount.
So it is a huge market.
Despite this, domestic memory makers held just 3% market share in 2018.
The reason for this is that memory chips are a cheap commodity that at the lower end competes
on price.
It is easier to fab and the product has little differentiation from other low cost competitors.
Scale, technical mastery, and market position are what matters in this industry.
And Chinese memory makers lag far behind.
The global NAND flash market is dominated by a few companies, mostly clustered in Asia.
(Same goes for the DRAM market.)
The market incumbents are Samsung (South Korea), Kioxia (Japan), Western Digital (US), Micron
(US), and SK Hynix (South Korea).
The DRAM market is almost literally just Samsung, SK Hynix and Micron.
Competing against these giants, Yangzte Memory is the most advanced and promising domestic
memory company in China.
Their specialty in producing NAND memory is impressive.
In my video about Tsinghua Unigroup, I mentioned Yangtze Memory in passing.
Here we are going to flesh out the story a little more - a story that actually intersects
with another video of mine.
The company that is now Yangtze Memory begins with SMIC, currently China's leading independent
semiconductor foundry.
Isn’t that cool?
It’s like a Marvel movie universe!
Everything’s connected!
Anyway, I go into it more in my SMIC explainer video, but SMIC's operating style throughout
its wild early years was to strike deals with local city governments in China so to get
state funding for its expensive fabs.
Wuhan had been party to one of these deals.
In order to get results fast, SMIC set up Wuhan's foundry to build memory.
But the thing about the memory market that I already mentioned is that though it can
be relatively easy to enter, for that same reason it is also a brutal market short on
profits.
SMIC's Wuhan factories endured years of losses.
Uncomfortable about these seemingly unending operating losses, Wuhan terminated the SMIC
partnership and established their own independent foundry: Wuhan Xinxin Semiconductor (XMC).
In 2008, an American company called Spansion, a flash memory joint venture between AMD and
Fujitsu, decided to outsource some of its foundry work to Wuhan Xinxin.
In 2014, the two companies expanded their partnership and allied to develop 3D NAND.
3D NAND is an advanced version of memory chips.
Older generations of memory are called "planar NAND".
They are flat, 2D structures.
3D NAND on the other hand looks like skyscrapers and can have many dozens of such layers.
It allows for much more storage in the same amount of space.
Samsung first commercialized this technology back in 2013.
3D NAND is difficult to fab at scale, but memory firms need to do it in order to produce
products that can compete at the higher rungs of the market.
Achieving it is indicative of a firm with potential in the market.
Likely due to several promising advances in the 3D NAND field, in July 2016, semiconductor
holding company Tsinghua Unigroup purchased a majority stake in Wuhan Xinxin Semiconductor
and established a holding company to govern the company.
This holding company was named in reference to its location on the Yangtze River: Yangtze
Memory.
Tsinghua has been interested in the semiconductor and memory market for a long time.
The company is the owner of Unisoc, one of China's largest fabless companies.
They had also unsuccessfully attempted to purchase shares in American memory giants
Micron Technology and Western Digital.
When that failed, the company turned inwards.
Then-Tsinghua CEO Zhao Weiguo vowed to invest $100 billion over the next 10 years to turn
Yangtze Memory into a world-class domestic memory chip company that can compete with
the likes of Samsung.
Yangtze Memory's ability to be competitive in the memory market depends on it scaling
the technological sophistication ladder.
And more than just announcing a breakthrough on a press release, Yangtze's manufacturing
yields need to be good too or else the company's cost structures cannot compete in the global
market.
In 2019, Yangtze Memory announced the mass production of a type of 3D NAND with 64 layers
using a 20nm process.
This is a critical breakthrough that instantly puts the company in the same realm as the
market leaders.
Furthermore, they could produce 60,000 wafers each month by the end of 2020.
This would be close to Intel's estimated 85,000 wafers per month capacity, but is far behind
Samsung's 470,000 monthly wafers.
Intel later sold their NAND flash business to SK Hynix for $9 billion in late 2020.
In April 2020, they announced their next big step: That they have developed a 128-layer
3D NAND memory chip.
Again they expect mass production to begin sometime in the following year.
If and when that happens, then Yangtze is going to bring a near-leading edge product
into the NAND market.
Some of Yangtze's product will go to manufacturing partners.
Makers and sellers of laptops and the like.
But the company is also selling its SSD products directly to consumers under the Zhitai brand.
Are people buying Yangtze's products?
We do not know.
The company is not public so they don’t need to report how consumer sales are doing.
But considering that NAND prices hit a down cycle in 2019 and COVID has been throwing
things into a twirl throughout 2020, it is likely that sales are starting off slow.
Which is fine.
Much of Yangtze's great memory advances are on the NAND side.
When it comes to DRAM, the temporary memory inside your computer, Yangtze is still behind
the current incumbents.
The company is competing with various other Chinese companies in the space for this, but
nothing solid yet.
DRAM is harder to manufacture than NAND due to several required extra steps, but not impossible.
We should probably look to anticipate some announcement in the coming years.
The government has strongly gotten behind Yangtze Memory and in April 2018 President
Xi visited the Wuhan factory.
He gave a speech there, in which he said that in order to achieve China's 200-year goals,
some major core technologies must overcome difficulties on their own.
Such a visit shows official approval at the highest levels of political leadership.
The current flash memory incumbents are bracing for the anticipated entry of Yangtze and other
Chinese memory national champions into the global markets.
Within 1-2 years, the company is probably going to surpass Micron in terms of production
capacity, flooding the market with this new supply.
Furthermore, Yangtze's announced goal of eventually getting to 300,000 wafers a month adds 10-20%
to current supply and will cause disruptions, assuming the product is good.
It would not be the first time it has happened.
Chinese companies entered the LED and solar cell markets and crashed margins for the incumbents.
In the case of the European solar incumbent, margins fell from 25% to zero in just three
years.
Even before Yangtze’s entrance, the NAND market was pretty competitive, with five major
players.
Despite this, the incumbents have enjoyed high margins, preventing the industry from
consolidating.
The recent sale of Intel’s NAND memory business though is indicative of the future.
The memory world is bracing for Yangtze Memory's rising presence.