Micron President and CEO Sanjay Merotra welcomes people to Boise last September to celebrate the company’s expansion here. Speaking in Japan on Monday, he said the company would continue talks with Chinese authorities.

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Just as Micron Technology investors began to see an end to the painful slump in demand, China’s government is making the path to recovery more dim.

The largest US maker of memory chips is up nearly 40% this year on optimism that the worst is over after a supply cut aimed at rebalancing amid falling sales of personal computers and other devices. Now restrictions in China threaten to hamper Micron’s recovery and potentially help rivals such as South Korea’s SK Hynix.

“There’s a lot of enthusiasm that we’re going to bottom out in a quarter or two and you’re going to see a recovery in Micron’s key markets,” said Daniel Morgan, senior portfolio manager at Synovus Trust Co. – This makes it much more difficult for Micron to overcome this obstacle.

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While Boise-based Micron gets only about a tenth of its revenue directly from China, the country is home to factories that make a large share of the world’s electronic devices, which can complicate the firm’s supply chain and customer relationships.

As long as investors don’t hit the panic button. Micron shares fell less than 3% on Monday, paring losses of as much as 5%, after China said the firm’s products had failed cybersecurity checks and warned operators of key infrastructure not to buy its products. SK Hynix rose 0.9% on Monday.

Most Wall Street analysts expect China’s move to affect only a fraction of Micron’s sales in the country because it is currently limited to “critical information infrastructure” and most of the firm’s chips are for electronics such as cellphones and personal computers.

Micron expects China’s actions to reduce total revenue by a low to one to high percentage, Chief Financial Officer Mark Murphy said in remarks at an investor conference on Monday. About a quarter of revenue from direct and indirect sales through distributors comes from companies headquartered in China, he said.

For Stifel analyst Brian Chin, Monday’s news was enough to lose confidence in a call he made last month that the stock should rise 10-20% based on improved sentiment about supply and demand dynamics in the memory market.

“Given the unfavorable outcome of the review, we believe the short-term trade here is complete,” Chin wrote in a note on Monday.

So far the trade has been going well. Micron’s 12% gain last week was the most since January after Bloomberg News reported that the company was poised to receive about $1.5 billion in financial incentives from the Japanese government to make next-generation memory chips.

Micron is looking to rebuild its business after two consecutive quarters of net losses. It gave a better-than-expected third-quarter sales forecast amid an improving supply-demand balance amid a global chip glut and more job cuts.

China’s cyberspace regulator said this week that its products had failed the country’s cybersecurity checks.

Beijing warned operators of key infrastructure against buying the company’s products, saying it had found “relatively serious” cybersecurity risks in Micron products sold in the country. According to a statement from the Cyberspace Administration of China (CAC), the components posed “significant security risks to our critical information infrastructure supply chain,” which would affect national security.

“We have received notice from the CAC to complete its review of Micron products sold in China,” Micron Chief Executive Officer Sanjay Mehrotra said at a news conference at Micron’s Hiroshima plant on Monday. “We are evaluating the conclusion and assessing our next steps. We look forward to further engagement in discussions with the Chinese authorities.”

The technology sector has become a key national security battleground between the two largest economies, with Washington already blacklisting Chinese technology firms, blocking the flow of sophisticated processors and banning its citizens from providing certain aid to China’s chip industry. In a statement, the US Department of Commerce said that Beijing’s conclusion “has no basis.”

Micron “remains unclear about what security issues exist” with its products and has had no complaints from customers, Chief Financial Officer Mark Murphy said at a JPMorgan Chase conference in Boston on Monday.

Holden Triplett, founder of Trenchcoat Advisors and a former FBI counterintelligence officer in Beijing, described the move as “retaliation for US export controls on semiconductors.”

“These are purely political actions, and any business could be the next example,” Triplett said.

On Tuesday, US Sen. Jim Risch, R-Idaho, the ranking member of the Senate Foreign Relations Committee, issued a statement calling China’s actions “outrageously violent” and saying they had “nothing to do with China’s national security.”

“The direct hit on a US company is an escalation of coercive tactics by Beijing and shows that China is not interested in President Biden’s hopes for a ‘thaw’ in relations,” Risch said. “As always, I will support Micron and work with US allies to limit the damage from China’s actions.”


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