The $80 billion global memory chip industry could be heading for oversupply and a potential price war if a state-backed Chinese entity buys U.S.-based Micron Technology, the world's No.3 memory chipmaker.

China's emergence into a global force, squeezing out market share, would shake up an industry dominated by South Korea's Samsung Electronics and SK Hynix, Japan's Toshiba Corp and Micron.

"When a new player enters the market, who says it's OK not to make money, no good can come from it," said C.W. Chung, an industry analyst at Nomura, referring to reports of Tsinghua Unigroup Ltd's interest in buying Micron for $23 billion.

It could, though, be good news for those buying smartphones and other mobile devices if cheaper chips are passed downstream.

The global chip industry rides a volatile boom and bust cycle but has seen healthy profit growth in the past couple of years as it consolidated into just a handful of suppliers, keeping a check on supply growth.

Samsung and Hynix together control nearly 70 percent of the market for dynamic random access memory (DRAM) chips, widely used for temporary storage of data on computers and mobile devices. In flash-type memory chips, Samsung and Toshiba control around 53 percent, followed by SanDisk Corp and Micron.

"The bigger worry for the market right now is the risk of market oversupply. Micron hasn't been that aggressive in capital expenditure, but there's greater uncertainty as to what happens after a Chinese buyer takes over," said Jay Yoo, an analyst at Korea Investment. "Capital expenditure could increase, so concerns about that are being reflected."

Shares in SK Hynix tumbled 6.7 percent to a 15-month low on Tuesday, and Samsung dropped 3.2 percent. Both companies declined to comment.

The supply of DRAM chips ballooned by 89 percent in 2007 when the industry was caught up in huge oversupply as Hynix and Elpida, since bought by Micron, more than doubled their output to squeeze out smaller rivals such as ProMOS and the now defunct Qimonda.

That glut has since eased, and supply grew just 19 percent in 2013, according to Macquarie.

China has been a key destination for big spending by chipmakers, with production increasing in a market that uses around a fifth of the world's memory chips.

Samsung last year began full-scale production at a new $7 billion chip factory in Xi'an, and SK Hynix will next year likely take its cumulative investment in its China plant, which produces about half its total DRAM output, to above $10 billion.

Acquiring Micron's cutting-edge manufacturing technology would be a major advance for China's still modest chip industry, which Beijing sees as one of vital strategic importance.

China is the world's largest consumer and manufacturer of smartphones yet relies heavily on imported chips - particularly the processors that power the latest devices. In 2013, Chinese demand represented more than half of global semiconductor consumption, worth 917 billion yuan ($147.7 billion).

A Chinese-owned Micron would help China - home to big hardware makers including Lenovo Group and Xiaomi - be less reliant on foreign technologies and increase its bargaining power.

"With Micron, China would get access to not only critical DRAM and NAND intellectual property, but also the manufacturing and design know-how that would significantly reduce its learning curve in mainstream memory," JP Morgan analysts wrote in a note.

"It would take at least a few years given the (technology and manufacturing) complexities of developing mainstream memory capabilities."

By: DocMemory
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