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Opinion: Huge demand for memory chips remains, so what is Micron doing about it?

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Micron Technology Inc. needs to supply more memory chips in the current semiconductor shortage, but a decision in 2019 to lower production during a downturn could be costing it money now.

Earlier Wednesday, Micron
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+1.93%

reported better-than-expected results for the fiscal second quarter, amid the worldwide chip shortage. Several analysts on the company’s conference call questioned its capital-spending plans.

“When I look at your full-year capex versus what you’ve spent fiscal year to date, you’re going to be down over 40% in the second half of the year,” said Credit Suisse analyst John Pitzer. “Why not get a little bit more aggressive on capex?”

Sunjay Mehrotra, president and chief executive of Micron, defended the company’s plans to spend $9 billion in fiscal 2021, which he said was close to the highest level of capital spending in Micron’s history.

“We want to make sure we manage it prudently,” Mehrotra said. “Our goal is that over longer term, in terms of supply-growth CAGR [compounded annual growth rate], to be aligned with industry-demand growth CAGR, and we have made prudent decisions over the course of last few years in terms of capex investment.”

But now it appears that the company may be buying a new fab, via a possible acquisition, just after recently deciding to shut down its 3D XPoint memory facility in Utah. Micron has been in discussions with several potential buyers of this fab, and it appears to have a use for the funds.

According to the Wall Street Journal, Micron is interested in potentially buying Japanese NAND-memory company Kioxia, and could end up in a bidding war with Western Digital Corp.
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+1.97%

for the company. The company is estimated to be valued at about $30 billion.

That could be a large chunk of change for the last remaining American memory-chip maker, which slowed down its production of chips in early 2019 amid a slowdown. In its March call with analysts that year, Micron executives talked about slowing down production of dynamic random access memory (DRAM) chips by about 5%, amid a 28% drop in demand, along with price cuts.

Micron’s dilemma shows the difficulty for semiconductor companies that choose to continue to make their own chips in multibillion-dollar fabrication plants. When demand shows, the plants are idled, or slowed to make fewer chips, but the cost to run them remains the same.

The need to somehow build, add or buy more capacity in the middle of an industry shortage, when it will take over a year to get a new factory up and running once the costly key equipment arrives, is a bad position that no company wants to be in. Intel Corp.
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+0.36%
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which is planning on building more plants in the U.S., and possibly in Europe, in an effort to become a manufacturer for other companies besides itself, is probably watching Micron’s situation closely.

Investors, however, seemed to react well to Micron’s comments about its plans for capital spending, and especially the strong industry demand, sending its shares up 4% in after-hours trading. If the company ends up overpaying for another memory-chip maker in order to get more capacity, though, that notion of discipline may quickly disappear.

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