China is not the solution to the US chipflation problem

The writer is author of ‘Chip War’

The world is poised to spend more money this year buying memory chips than soft drinks, shoes or smartphones. We’ll collectively allocate nearly 0.7 per cent of world GDP to purchase these chips — six times higher than the average of the past two decades.

This surge in demand is well known, but the numbers are still staggering. Over the past two decades, spending on semiconductors averaged 0.47 per cent of world GDP per year, of which a quarter was on memory chips — used to store data in devices, from phones to data centres. This year, total spend on semiconductors is projected at 1.25 per cent of the world economy, more than half of which will accrue to memory companies. Next year’s spend may exceed 1.5 per cent of global GDP — roughly three times higher than three years ago.

The reason, of course, is AI and the data centre build-out. Nvidia is a roughly $5tn company because the world plans to spend around five times more on AI chips than it did three years earlier. As demand has surged, Nvidia has taken advantage by charging high prices, as its 75 per cent gross margins attest. Its suppliers have done the same, with chipmaker TSMC and equipment manufacturer ASML planning higher prices.

Memory chip companies, however, are unique in their price hikes. Micron and SK Hynix have both reported gross margins above 80 per cent. This will partly fund new capacity: Samsung and SK Hynix are building major new plants in South Korea, while Micron is expanding in Taiwan and the US. They have committed tens of billions of dollars in capex this year alone and announced hundreds of billions in planned spending over the next decade.

But the companies have also tried to take advantage of the cyclical market to raise prices as high as they can. As recently as 2023, memory chip companies were losing money, as prices slumped in an oversupplied market. Memory chips in phones and consumer devices are mostly commodities, with one provider’s products…