China Hands Asian Memory Makers Massive Bargaining Chip

(Reuters) - Asian chipmakers are set to cash in on a major realignment in the volatile industry which is tilting the power balance their way at the expense of gadget makers such as Apple Inc, after years of cautious investment kept supply in check.

Manufacturers including Toshiba Corp and SK Hynix are poised to reap the rewards of soaring demand for cut-price tablets and smartphones in China, the world's biggest smartphone market, and the emergence of Chinese mobile device makers such as Huawei Technologies Co Ltd.

At the high end of the spectrum, demand for gadgets armed with ever greater memory capacity will fuel chip sales even if the market for relatively expensive handsets does not see the kind of rapid growth it has in the past.

All of this, combined with reduced investment since 2011, means the prices of dynamic random access memory (DRAM) and NAND memory chips have started to rise, and chipmakers are enjoying the most bargaining power they have had in years.

"Chipmakers are reaping the benefits of curtailed investment of recent years just when demand is exploding," said Hong Sung-ho, an analyst at I'M Investment & Securities.

Chipmakers had little bargaining power until early last year as Apple and Samsung were the sole major buyers of NAND chips used in mobile devices. The two global heavyweights, which focus on the high-end market, are now struggling with slowing growth as this most profitable segment nears saturation.

CHINA IN DRIVING SEAT

China is driving the industry's rapid shift to cheaper smartphones, helping chipmakers broaden their customer base from Apple and Samsung Electronics Co Ltd.

The growth of Chinese smartphone makers such as Huawei, ZTE Corp and Lenovo Group Ltd is threatening to weaken the dominance of Apple and Samsung, playing into the chipmakers' hands.

Some 70 percent of China's smartphone shipments are sold at 1,000 yuan ($160) or less, while 10 percent are in the 1,000-3,000 yuan range. Super-cheap tablets costing less than $100 are also soaking up supply.

"Despite weakening demand from Apple, NAND prices have... firmed up, largely thanks to strong demand growth from China," said HMC Investment & Securities analyst Greg Nho.

"The size of the Apple order was a big price-swing factor, but now demand from Chinese manufacturers is more than offsetting this volatility."

Prices of DRAM chips, mainly used in computers, have leapt nearly 90 percent so far this year even as PC sales have plummeted, while the market for NAND memory chips has tightened.

Outside of China, demand for NAND chips is increasing as consumers need more memory capacity to play high-quality video and music on up-market gadgets.

"In the old days, we only took a few photographs. Now we take videos as well, at potentially higher resolutions," said Damian Thong, director of research at Macquarie Capital Securities in Tokyo.

"I actually think the opportunity for NAND flash is enormous, still, and very untapped."

HTC Corp's flagship smartphone HTC One, for example, has NAND memory capacity of 64 gigabytes, four times bigger than that of most other high-end models.

"Nowadays, consumers want more feature-packed smartphones and we'll have to make sure we can produce these gadgets at affordable prices to compete in the market," said an executive from ZTE, who declined to be identified as he was not authorized to speak to the media.

EXPANSION AGAIN

No.2 NAND manufacturer Toshiba said on Tuesday it would expand a production facility in Japan with an investment of nearly 30 billion yen ($300 million). Samsung - the world's leading producer - is building a $7 billion NAND plant in China.

Micron Technology Inc, which is looking to complete the acquisition of bankrupt Japanese chipmaker Elpida Memory Inc before the end of August, plans to increase investment in 2014 as it integrates with the Japanese firm.

But even as some chipmakers boost investment for the first time in years, few believe the market is heading for a glut. Indeed, memory chipmakers' total capital spending this year is set to decrease by 2.6 percent to $12.3 billion, according to HMC Investment & Securities.

Most manufacturers are keeping investment to a small scale as they prepare for the arrival of three-dimensional chip engineering, a major technological leap from the current planar structure.

Macquarie's Damian Thong said demand for NAND chips would continue to outstrip supply, even with the new production facilities in the pipeline.

"Memory prices and memory profitability will remain high for the next 12 months," he said.

Samsung, which had been one of the most aggressive chip investors, has become conservative in recent years, a departure from its traditional approach of keeping rivals at bay by not allowing profitability to get too high.

"By creating an oversupply situation, Samsung was able to keep memory competitors weak," Bernstein analyst Mark Newman said in a report on Tuesday.

"Today, however, that strategy of lower memory chip prices actually just helps Samsung's handset and tablet competitors. Samsung is thus becoming highly motivated to generate memory shortages and high memory pricing."

Samsung is the world's top NAND chip maker with around 38 percent of the market, followed by Toshiba, which has a 28 percent share and SK Hynix with 13 percent.

(Additional reporting by Sophie Knight in TOKYO and Chyen Yee Lee in HONG KONG; Editing by Stephen Coates)