China Deep Tech Highlights March 20, 2023
We look at how China is coping with the US sanctions and other news
Interesting News
Flagship semi firm Tsinghua Unisoc had been rumored to be buying Ledcore, which also makes cellular modems. Apparently, this was met with a lot of resistance from employees.
China’s Big Chip Fund has a new boss. Zhang Xin used to be the an official with China’s Ministry of Industry and Information Technology. Not surprising that the new boss comes from the government, what will be interesting is to see if the Big Fund starts taking a new approach or if it just reverts to investing in the big, established companies.
China has the world’s biggest installed base of mobile base stations - 2.1 million towers, and something like 40% of the world’s 5G base stations. They also have a fairly advanced regulatory regime around towers with a lot of incentives for sharing among the operators and deliberately forcing an opening for the newest, smallest operator. Heavy Reading thinks China could have done a better job of sharing this information.
The Wall Street Journal recently published a look at China’s IP regime with some big claims about how it is biased against foreign firms. Mark Cohen is an expert on this subject and has a more nuanced view of the situation, with actual data to back it up. The quick summary of that is the courts do occasionally display bias, but it is not a black and white situation.
China’s largest 100 semiconductor companies.
China Mobile is close to surpassing Guizhou Maotai as the largest market cap stock in China. Here is an investment thesis on China Mobile, as it transitions from a telecoms company to a Data Company. Interesting to see how China’s regulatory regime has led to a very different division of economics than we are seeing in the US where the Internet companies are moving increasingly into telecom infrastructure.
Not all US companies are pulling out of China. Texas Instruments seems to be doubling down. They are probably one of the biggest beneficiaries of China’s rising EV industry.
A bleak assessment that China WFE makers will not be able to progress past 40nm.
Can HiSilicon make a comback? DigiTimes says maybe. We think the answer is no.
One beneficiary of the US sanctions - China’s automotive microcontrollers.
A lot of people are looking to India to replace China as a source of manufacturing labor-intensive electronics. Except most people we speak to who are closer to the ground on this subject think this is going to be very hard to pull off. One path forward is if India gets some help from Foxconn.
Coping Mechanisms
In preparing for this week’s newsletter, we dove down many WeChat rabbit holes reading up on various reactions in China to the new reality for its semis industry. Of course, some of the most interesting headlines linked to blocked articles, and WeChat itself is just a small window, nonetheless we came away with a strong sense that the grieving process has just begun in China. The view we had was one of many professionals trying to sort through a host of not very good options, with reactions ranging from defiance, to denial, to resignation. In all of this, it is important to remember that we have no visibility into what the Policy People are thinking, which could be very different.
Overall, our sense is that there is still a high degree of uncertainty. From where we sit, it looks a lot like the US government is going to block any PRC chip company that wants to produce a chip on an advanced manufacturing process. Admittedly, this is by no means anyone else’s consensus, there are many on both sides who still think there is room for “non-military” chips to get produced. The problem with this view is that the determination of “non-military” is entirely at the discretion of the US government, with a built-in presumption of denial.
So we are not quite clear on what CPU maker Loongson hoped to achieve by talking so openly about its plans last week to not only build a chip, but even its own Instruction Set Architecture (ISA), eschewing both Arm and even RISC V. Loongson has fairly close ties to the PRC government, so our best guess as to the purpose of their comments this week is that they are hoping to win further support domestically.
This follows a pattern of many of the most severely cut off firms like Huawei and YMTC, who are pivoting from designing cutting edge chips to seeking out maximum subsidies. Again, not a consensus view, but it is hard to see where YMTC is going to go from here other than an elaborate R&D effort for some far-off goal.
Another important development this week was a piece published by a research firm which took a decidedly more aggressive view on responding to the US. So far, much of the criticism of the US has been fairly muted, with relatively few, open calls for retaliation. This article took a different stance, openly calling for the Chinese government to start taking names and establishing black lists of foreign firms. They divided these into three buckets “Inciters” those openly advocating for more sanctions, “White-eyed Wolves” opportunists benefiting from China’s problems, and “Horse Pawns” or sheep who are just following along. In all of this, the only company explicitly named is Dell who has probably been the most public about their plans to divest from China. This article was not blocked, but nor does it seem to have been widely promoted. Read into that what you will.
Another strain of thought is what we could classify as Resignation. These either focus on alternative sources of innovation or on what China can still do well - trailing edge processes and analog chips. One author even goes so far as to say that the sudden advances with LLMs like GPT demonstrate the US can still innovate and this should relieve the US government’s anxiety about falling behind and thus take their foot of the gas pedal of further sanctions. Going even further, there are some in China (and the US) who think the US is just waiting for China to respond in some fashion and thus set the stage for negotiations and a path out of the sanctions. We do not really agree with any of that, but maybe Hope dies Last.
That being said, in all of this there is something missing - there is no discussion of China’s real shortcomings. Ten years and $100 billion and so little progress on wafer fabrication equipment (WFE) and domestic fabs. This is a major policy failure, and there are literally people in jail for it. But there is very little online discussion of the subject. A reasonable question to ask is did we, with our limited, rusty language skills, miss something? We probably did, but we also found a tantalizing headline “No EUV? What Future Does China Have?”, but of course this link only led to a Public Security Notice about prohibited content. There are many people in China talking about this subject, but until they can more readily address the failures so far, we think it will be hard to move forward.