Why China opened an investigation into Micron Technology

Micron Technology, the United States’ largest memory chip maker, has become the first foreign semiconductor company to be put under a cybersecurity review by China, months after the American tech firm closed its DRAM design operations in Shanghai at the end of last year.

The Cyberspace Administration of China (CAC) said in a statement on Friday that it launched an investigation into Micron’s products in China to “safeguard key information infrastructure supply chain security” and “prevent cyberspace security risks due to problematic products”.

Boise, Idaho-based Micron said in a statement on Saturday that it was “in communication with the CAC and cooperating fully”. The company said it was “committed to conducting all business with uncompromising integrity” and stands by the security of its products.

The CAC’s move threatens to heat up tensions between Beijing and Washington, following US-led initiatives to tighten exports of advanced chips and semiconductor manufacturing equipment to China. The following are some points for discussion regarding this latest development in the US-China tech war.

Why has China opened a cybersecurity review into a foreign semiconductor firm?
The investigation comes at a time when China has been hemmed in on all sides of the semiconductor market by the US and its allies, even as Beijing pushes its self-sufficiency drive to cut the country’s reliance on American-made technologies.

So it appears to be about “sending a warning signal” to neighbouring countries like Japan and South Korea, according to Wang Lifu, analyst at Shanghai-based semiconductor research firm ICwise.

Those two countries and Taiwan have joined the US-led Chip 4 Alliance, which is seen by Beijing as a plot by Washington to exclude China from semiconductor supply chains. Senior officials of this group already held their first video meeting in February to discuss supply chain resilience.

In particular, South Korea is expected to take notice of the CAC’s cybersecurity review of Micron, according to Wang at ICwise. For Korean memory chip makers Samsung Electronics and SK Hynix, which still have manufacturing facilities in China, the investigation provided a cautionary sign not to follow US actions, he said.

That caution would also extend to the Netherlands, following a reported agreement between the Dutch, Japanese and US governments to restrict exports of some advanced chip-making machinery to China. That has created a powerful new alliance that could undercut Beijing’s ambitions to build up China’s domestic chip capabilities.

Why did China target Micron for investigation?
Before the cybersecurity review of Micron was announced, Beijing had not taken any major steps to hit back at the US for implementing stringent restrictions on advanced chip exports to China on grounds of national security.

Micron has been perceived by the Chinese government as “playing a negative role” in the country’s technology industry, ICwise analyst Wang said. “There is some speculation that Micron was behind efforts to push the US government to impose sanctions against China”.

Micron was said to be among several US semiconductor firms that increased their lobbying spending since the Biden administration enacted into law the CHIPS and Science Act in August last year, offering US$52 billion in federal funding for chip production in the US. Months before that legislation became law, Micron announced the closing of its Shanghai chip design centre at the end of 2022 and offered 150 Chinese engineers relocation packages to the US or India.

In 2017, Fujian Jinhua Integrated Circuit Co, a state-owned memory plant maker in southeastern Fujian province, was accused by the US of stealing technologies from Micron. The Chinese firm subsequently suspended production after it was sanctioned by Washington.

Micron previously warned of the risks of being excluded from the China market. In its 2021 financial report, Micron said Beijing’s support for domestic DRAM makers could restrict its growth. Unlike semiconductor equipment from ASML or graphics chips from Nvidia, Micron’s products can be easily replaced in China with those from local suppliers such as Yangtze Memory Technologies Co and Korean firms Samsung and SK Hynix.

How significant would be the impact of Micron’s cybersecurity review?
The CAC’s investigation comes at a time when Micron appears to be vulnerable. Mainland China accounts for more than 10 per cent of Micron’s total sales, which makes the country its third-largest market behind the US and Taiwan.

Micron last week reported a net loss of US$2.3 billion in the second quarter ended March 2 of its latest financial year, owing to a sharp drop in demand for 3D NAND products, marking the company’s worst quarterly loss in the past two decades. As a result, Micron said it will accelerate lay-offs, reducing its workforce by nearly 15 per cent this year, as a measure to adapt to declining global demand for computers and other electronics that use its products. The job cuts will affect about 7,200 employees worldwide.

Amid that industry slowdown, China’s Micron investigation could potentially benefit the firm’s competitors in the global memory chip market.

As such, the proceedings related to the investigation and its ultimate result is expected to be closely watched by other multinational companies with business in China. For US tech firms, the CAC’s cybersecurity review has added a new regulatory risk to doing business in China, as all foreign companies also must deal with the Ministry of Commerce and the National Development and Reform Commission.

What is the likely outcome of the Micron investigation?
While the CAC’s cybersecurity investigation takes at least 30 days to be completed, the process can take much longer if the case is complicated, according to Beijing-based semiconductor lawyer Feng Qiong, citing China’s Cybersecurity Review Measures.

The CAC’s cybersecurity review of Didi Chuxing, for example, took a year before the agency slapped a fine of 8.026 billion yuan (US$1.2 billion) on the Chinese ride-hailing giant.

Feng said China could impose various “penalties and restrictive measures” if Micron’s products were found to have cybersecurity issues. “The possibility of applying the stricter liabilities under the National Security Law can’t be excluded,” she said.

Wang of ICwise, meanwhile, said fines would represent “the mildest warning” for Micron. If there is “no remorse or any change” implemented by the company after the review, “the next step could be restrictions or even a ban on market access”.

“This move reflects a certain attitude from government officials who would say the market can be opened up to you and you will be given some carrots, but if you offend us, we can hit back with sticks,” Wang said. South China Morning Post