Last Thursday, in the aftermath of Apple's biggest one day plunge since Liberation Day, and second biggest single-day drop ever...
.... when the company lost over a quarter trillion dollars in market cap after the company's unprecedented price increase announcement which for some products was as much as 50% as Apple decided to pass on soaring component costs to consumers, following similar moves from other consumer electronics companies....
... and which Apple blamed on "unsustainable" prices by the memory cartel - namely SK Hynix, Samsung, Micron and Sandisk - who have been flooded with unprecedented demand from hyperscalers (freshly funded with hundreds of billions in newly-issued investment grade debt) we predicted that "China's memory makers are waiting by the phone" for a disgruntled Tim Cook to call, demanding bulk, cheaper RAM.
To be sure, Apple wasn't alone: just hours later Microsoft also announced it was raising Xbox prices, in effect launching an avalanche of memory-driven price increases across the industry, now that it has been normalized to pass on soaring memory prices to consumers.
This, in turn, takes place following a series of reports - initially on this website almost a month ago which showed that the recent surge in core inflation is largely due to runaway chip/memory prices as Apple has since confirmed...
... followed last week by the WSJ also joining the chorus by reporting that "the Data-Center Boom is sparking a third wave of inflation."
Fast forward to this morning when with AI stocks tumbling as "check/capex payers", including AAPL, get crushed, while "check/capex receivers" soar...
... the abovementioned Chinese memory makers did not have long to wait, and overnight the FT reported that Apple is lobbying the Trump administration for clearance to buy memory chips from CXMT, a Chinese company that the Pentagon as put on a blacklist because of alleged connections to the People’s Liberation Army.
As we expected, the iPhone maker has been waging a lobbying campaign to get the White House’s blessing in order to ease the financial pressure of the rise in memory chip prices. A person told the FT that Apple approached the commerce department more than a month ago, but the tech company has been targeting other officials across the administration and allies in Washington.
Apple is not barred from buying chips from China's DDR giant CXMT, or YMTC, another Chinese memory chipmaker which focuses on NAND memory and has been growing its market share aggressively, having caught up to Sandisk, and set to become the world's 3rd largest maker of flash memory as soon as this quarter
But the Pentagon has put both companies on its Chinese Military Company blacklist. The so-called 1260H list contains dozens of Chinese groups with alleged ties to the PLA that undermine US national security.
Securing CXMT as a memory supplier would help remedy a situation in which the tech giant is being squeezed by its own suppliers, a position in which Apple has never been before .
The lobbying campaign comes after President Donald Trump met his Chinese counterpart Xi Jinping in Beijing last month. Ahead of the summit, and in the months ahead of their previous meeting in South Korea in October, the US has held back from introducing new technology-related export controls that would affect Chinese companies.
As the FT notes, the Pentagon’s 1260H list creates reputational risk for companies, but in most cases it has no legal ramifications. We said as much just hours earlier when we said that those "worried about Chinese memory roadblocks by the US govt to ease memory inflation forget Trump undid 40 years of Iranian sanctions to lower the price of oil." And now that oil price inflation is contained, Trump has memory-driven cost-push inflation to fix ahead of the midterms, and whether he wants to or not, the only option his Admin has - besides imposing a price ceiling on memory (which may still come) - is to agree with Apple's request.
Last year, when memory prices were far lower and domestic producers did not have their customers by the throat with record chip prices and chip inflation was not yet the biggest driver of core prices, the commerce department added CXMT to a package of Chinese groups it intended to place on a trade blacklist called the “Entity List”. But the White House told it to hold off on new export controls because the administration was in the middle of tough negotiations with China to try to reach a truce in the trade war.
In any case, the FT notes that it remains unclear if Apple would get any guarantee from the administration, especially a promise that the US would not later put CXMT on the Entity List. Trump last year agreed to let Nvidia sell advanced H200 chips to China, a move many of his officials opposed.
In February, the Pentagon updated the 1260H list before withdrawing it within an hour. Several people said it was removed because the White House was angry that someone at the Pentagon had taken CXMT and YMTC off the list. When the Pentagon re-released it this month, both of the Chinese memory chip manufacturers had been reinstated.
“Apple choosing to partner with a Chinese military company would be a grave mistake,” John Moolenaar, the Republican chair of the House China committee, told the FT. However, he expect that the Republican will rapidly change his tune once there is public outcry in a the next few weeks against soaring electronic component prices, which will ultimately be blamed on runaway memory costs.
“Helping the [Chinese Communist Party] succeed in its plans to dominate critical supply chains will make our country’s tech industry and economy more dependent on China at a time when we must build secure tech supply chains with our allies,” Moolenaar said, seemingly unaware that by not using Chinese components, he is allowing South Korea's memory cartel dictate not only US inflation but also the country's monetary policy, now that even Fed officials are pointing to AI/memory prices as key inflation drivers.
- *KASHKARI: INFLATION DRIVEN BY SUPPLY ISSUES, INCLUDING AI-BUILD
Readers may recall that back in 2022 - when the world's faced another major surge in chip and component prices due to the logistical nightmare following covid - Apple faced a backlash when it considered buying memory chips from YMTC for iPhones to be sold in China. Marco Rubio, who was then the top Republican on the Senate intelligence committee, told the FT that “Apple was playing with fire”. Back then Rubio added that Apple would be “subject to scrutiny like it has never seen from the federal government” if it proceeded to procure YMTC chips. However, back in 2022, memory hadn't emerged as the biggest source of rising core inflation. It has now, and should Rubio refuse to pivot on his position, he would promptly become the target of public ire over surging consumer goods prices.
Yet even with Tim Cook, and soon all other US consumer electronics products makers pushing hard for alternative memory sources, the memory lobby won't give up easily on the (temporary) oligopolistic position the commodity makers have achieved. “It makes no sense for the administration to decouple America’s reliance on critical minerals from China, only to approve new dependencies in a field as critical as AI,” said Michael Sobolik, a security expert at the Hudson Institute.
One former official warned the US risked losing another industry by letting Apple buy memory from a group that receives Chinese subsidies. “Trump can show the courage to keep American memory alive for our security and our competitiveness or pour it down the drain so [Apple chief executive] Tim Cook can squeeze out a few more points of margin.”
It wouldn't surprise us if the "unnamed former official" is on South Korea's payroll because while China is still a modest actor in the memory space, the actual giants are all located in South Korea: Apple relies on US chipmaker Micron in addition to South Korea’s Samsung and SK Hynix for the DRAM memory used in its devices.
Meanwhile, in advance of a historic flood of orders that could send its market cap soaring, we reported that China's DRAM giant CXMT has received regulatory approval to list in Shanghai for the largest mainland IPO since 2022 as the Chinese national champion positions itself to challenge the DRam incumbents. The IPO of its domestic NAND peer, YMCT, is set to follow just weeks later
Oh, and for those confused what happens when a commodity price surges, the post-covid case study should serve well: in 2023, DRAM prices because of a supply glut. This was a boon for buyers such as Apple, which was able to secure massive amounts of cheap inventory.
But the AI boom of the past three years has seen a reversal in fortunes for the memory suppliers. As hyperscalers spent hundreds of billions of dollars for AI infrastructure, demand for advanced DRam — known as HBM — has led to a protracted shortage of traditional memory for consumer electronics.
However, now that the market has shown it will no longer reward ridiculous amounts of hyperscaler capex spending - a U-turn from the market's reaction function for much of the past year - especially now that most of the big chip spenders no longer generatepositive cash flow and forced to issue billions in new debt for every incremental order of memory...
... in the end it won't be Trump that decides the fate of memory prices: it will be hyperscalers' own shareholders who will eagerly punish their management teams for incremental capex spending, forcing these companies to come up with new and creative ways to use and optimize existing Ram (likely in the form of many more Software-driven TurboQuant moments) to come up with more efficient and faster models.
In any case, after soaring into the stratosphere for the past year courtesy of all Hyperscaler free cash flow and hundreds of billions in on and off balance sheet debt, the party is finally ending and the memory bubble is about to burst.
