After a few quarters of dismal results, memory chip manufacturer Micron Technology (NASDAQ:MU) expects to return to growth during its fiscal first quarter, results for which it will announce on Dec. 21. The company expects revenue to surge 18.7% year over year, driven by improving conditions in the DRAM and NAND markets. Micron stock has exploded higher this year, up about 44% year to date, due to optimism that Micron's results would soon begin to improve.

While the short-term picture for Micron is looking bright, especially compared to the past few quarters, management has its eye on a long-term threat that could plunge the company back into the red. At a ceremony earlier this month in Taiwan marking the successful acquisition of Inotera Memories, Micron CEO Mark Durcan warned about China's efforts to build a domestic semiconductor industry, and what the effects could be on Micron's business. The possibility of oversupply in the memory chip markets a few years down the road, driven by China, creates a cloud of uncertainty over Micron.

Micron Hq

Image source: Micron Technology.

The backstory

Last year, the Chinese government announced plans to invest as much as $161 billion over the next 10 years in an effort to build a domestic semiconductor industry. According to Bloomberg, China buys half of the semiconductors produced each year, with the vast majority of chips coming from foreign companies.

Such a large investment has the potential to dramatically alter the dynamics of the semiconductor industry. In November, U.S. Commerce Secretary Penny Pritzker warned that China's semiconductor investments had the potential to distort the global market for semiconductors, creating a disastrous amount of capacity that would drive down prices and hurt U.S. semiconductor companies.

Pritzker pointed out that the planned investment by China would be equivalent to half of annual global semiconductor sales. She minced no words when describing the possible outcome: "The world has seen the effects of this type of targeted, government-led interference before. The result has been overcapacity in the global marketplace that has artificially reduced prices, cost jobs in both the United States and around the world, and caused significant damage to those industries globally."

Big trouble for Micron

Micron sells DRAM and NAND chips, both of which are commodity products. Supply and demand determine pricing, a fact that leads to unavoidable cycles in Micron's business. During times of oversupply, per-bit prices fall faster than Micron can cut costs, leading to slumping margins and potentially losses. During times of undersupply, Micron is able to cut costs fast enough to turn a profit. In the best of times, Micron manages operating margins approaching 20%.

Micron is far more susceptible to a possible flood of Chinese supply than semiconductor companies that sell products that aren't commodities, like Intel or NVIDIA. If China begins producing DRAM and NAND chips at volume in the coming years, Micron could be put in a situation where it's impossible to turn a profit.

Micron's Durcan expressed concern to reporters at the ceremony about China's plans, according to the Nikkei Asian Review:

It's possible if China spends the money that they say they are capable of spending, that they can create oversupply. Is it a concern or something to think about? Absolutely.

Durcan expects Micron's results to be solid in the short term, but was cautious about the future:

We are just coming out of the bottom of the cycle over the last three months. The memory chip market over the next year to 18 months is probably very positive. And we will have to see beyond that.

The election of Donald Trump throws another complication into all of this, with the President-elect promising to be tough on China. Trump's potential policies, and the results of those policies, are both big unknowns.

It's possible that China will ultimately dial back its ambitions, instead opting to partner with a foreign company. Durcan raised this possibility, saying that various Chinese entities have been eager to recruit his company.

The bottom line: China's semiconductor ambitions represent a wild card for Micron, one that could have potentially disastrous consequences for the company. This threat could also turn out to be overblown. But judging from Durcan's remarks, the company is taking the threat from China seriously.

Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.