Apple & YMTC – Insurance policy?

Sourcing from China raises eyebrows.

• Apple looks increasingly likely to source some of its storage chips from Yangtze Memory Technology Corp. (YMTC) which will raise eyebrows but at the end of the day, this is unlikely to be a particularly big issue.
• YMTC is a subsidiary of Tsinghua Unigroup which is a state-backed semiconductor company and from both companies, the US State Department has uncovered links to the Chinese military (see here).
• YMTC specialises in solid-state storage (NAND) which is very similar in function to a disk drive, but the data is stored on silicon chips rather than magnetic disks.
• This technology has been around for a considerable amount of time, is widely available from non-US suppliers and does not use cutting edge semiconductor manufacturing technologies.
• YMTC manufactures its NAND chips on 20nm equipment which is several generations away from the current leading edge which is at 5nm.
• This means that the equipment to make these chips is available to be purchased in the second-hand market meaning that restrictions on selling equipment to YMTC would be unlikely to have much impact.
• Furthermore, NAND is a commodity where Samsung, Kioxia (Toshiba), SK Hynix and Western Digital are the global leaders.
• As a result of being a commodity, a device maker can go to any one of these companies and buy almost exactly the same product, making switching from one supplier to another pretty simple.
• Samsung has been the global leader for years and is able to undercut all of its competitors on price and still make money while they are losing money.
• This raises the question of why Apple would want to source from YMTC given that it could probably buy the product from Samsung at a cheaper price and avoid the PR headache of being accused of funding the Chinese military.
• One possibility is that the global shortage of semiconductors has forced Apple to dig deeper into the supply pool in order to find the components that it needs to meet the demand that it has in the market.
• YMTC has qualified as a supplier to Apple (see here) and is expected to begin shipments in May presumably for the 2022 iPhone which is expected to be launched in September this year.
• Apple has no requirement to use products from YMTC as it would be able to dual or even triple source NAND memory from a range of established and reliable suppliers without going to YMTC.
• However, Apple does have a very large and thriving business for its products in China and, given the increasing tension between the USA and China, this creates a pressure point that the Chinese state could use against the USA.
• If Apple was to use some Chinese-made components in the devices that it sells in China, any action taken against Apple by the Chinese state would in turn hurt one of the very companies that it is trying to develop.
• This could make the Chinese state think twice about making life difficult for Apple along with the fact that Apple’s products are very popular in China and a ban or restriction would not be well received.
• I also suspect that allowing YMTC to supply Apple with NAND memory is not going to make a meaningful difference in the technology proxy war that is being fought.
• This is because there is no way that China is likely to ever become self-sufficient in semiconductors that use silicon as a substrate.
• The USA, Japan and The Netherlands have dominated the supply of fabrication equipment to silicon chip factories for decades and the Chinese started much too late to ever have a hope of catching up.
• Hence, it is not until the next generation of computing such as Quantum computing becomes the mainstream that the Chinese have a chance of competing on a level playing field in this area.
• The net result is that supplying Apple with a widely available technology that is not made on a leading-edge process is unlikely to have any material impact on the outcome of the technology war.
• This is why I suspect that the State Department will allow YMTC to supply Apple as first highlighted by Roslyn Layton of Strand Consult (see here).
• While China is unlikely to win in semiconductors, it is already neck and neck with the USA in autonomous driving, certain areas of AI and robotics and it is here where I expect that the real technology war will be fought.