China's Biggest Salvo

Posted: Jul 05, 2018 9:49 AM
China's Biggest Salvo

Micron Technology (MU) has long been coveted by China to power their grand ambitions of “Made in China 2025.”  In 2015, Chinese state-owned Tsinghua offered $23.0 billion for the company. The bid was rebuffed mostly because management didn’t want to sell, and there was the belief it would never pass the Committee on Foreign Investment in the United States’ (CFIUS) scrutiny.

Thereafter, China resorted to stealing the technologies it desired. United Microelectronics Technology (UMC) of Taiwan has been a key partner in that theft. There have been break-ins and the luring of Micron engineers with fat job offers in return for stolen technology.

UMC has deep roots in China that have to yield great profits. In the first quarter of 2018, UMC saw its profits surge 48%, largely because of tax breaks in Taiwan, and China’s subsidies for its subsidiaries HeJian Technology and Xiamen Fabrication.

Micron has filed lawsuits against UMC and China-based Fujian Jinhua Integrated Circuits, which hired UMC to help it build a $5.7 billion-dollar factory.  UMC countered with a lawsuit in the People’s Court of the Republic of China making claims of intellectual property theft by Micron.  Senators Crapo and Risch of Idaho, home of Micron Technology, sent a letter to President Trump, expressing concern about this sham case, which was speeding through the court system, and UMC’s request that Micron be barred from selling products in China.

On Tuesday, UMC announced the People’s Court of the Republic of China ruled that Micron had infringed on UMC patents; as a result, the court has issued a temporary ban on 26 Micron products covering the range of DRAM and NAND flash memory products.  Thus far, the management of Micron said they haven’t been informed of a decision or of an injunction.

In 2017, Micron derived 50% of its revenue in China.

Talking Smack vs Getting Smacked

This week, the United States debated continuously over whether ZTE Corporation should be allowed access to the U.S. market and technology. However, there are more stories of bans and/or limited access to Huawei and China Mobile. 

The Micron news goes beyond rhetoric.  This action is a haymaker from China.

The news comes one day after UMC announced that its China operations are going public on the Shanghai Stock Exchange to raise $380 million. 

Another Blow to the Heartland

Micron started out with four guys working on semiconductor designs in Boise, Idaho. The company’s string of innovation put them on the map. The company was quickly fueled by investments from Idaho potato king J.R. Simplot. Currently, about a quarter of the company’s 20,000 employees are still in Boise.

Impact on the Market

On Tuesday, Micron lost more than $3.0 billion in market capitalization. The technology sector was the biggest loser of the session. With tens of billions lost in capitalization in chips and other tech niches, the news is infinitely more important than retaliatory tariffs by the European Union (EU) and Canada.

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Today’s Session

Micron released a press statement regarding the preliminary injunction against two of its Chinese subsidiaries.  The preliminary injunction blocks Micron’s Chinese subsidiaries from selling, manufacturing or importing certain products.  According to Micron, “The affected products make up slightly more than 1% of Micron's annualized revenues. Since the fourth fiscal quarter is underway, Micron anticipates that the negative impact to revenue this quarter relating to the injunction will be approximately 1%, and the company continues to expect revenue to be within the previously guided range of $8.0 to $8.4 billion. Micron will comply with the ruling while requesting the Fuzhou Court to reconsider or stay its decision.”  MU went on to say, “The central government of China has often stated that the rights of foreign companies are fairly and equally protected in China. Micron believes the ruling issued by the Fuzhou Court in Fujian Province is inconsistent with this proclaimed policy.”   

The bottom line is China is showing it will use everything, including its court system, in its goal to steal U.S. technology.  It was a salvo in the trade war and the kind of intimidation we can expect.  MU rebounded sharply after the release and is currently trading higher by 3.5%, but we cannot lose sight of the notion China could facilitate theft through sham legal decisions. 

Several economic reports are out this morning, including Mortgage Applications, ADP report, and initial claims.  Later in the morning, we will get ISM and crude inventories.  We will review these in the afternoon report and go in depth into the ADP report tomorrow morning.

Futures are pointing to a strong opening.  Let's see if we can hold on to these gains, especially considering volume will be light.