D2D China: CES 2025 - The Whole Value Chain

The best and the worst of the PRC economy was on full display at CES this year.

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In which we recount our visits with a few hundred China electronics vendors at CES . PRC companies have literally every possible manufactured gadget on display. Immense capabilities - not just in building but also branding. But there are so, so many of them - in every category.

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Noteworthy Items

Semis and Deep Tech

The FT wrote a scary piece about the dark side of the PRC venture ecosystem, where VCs are chasing CEOs of failed venture-backed companies to pay back their principal. This is a fairly new phenomenon, and demonstrates that something has gone very wrong in China’s once-vaunted venture model. Not good for entrepreneurship, but very good for the US venture ecosystem (if they can get visas for some promising Chinese entrepreneurs).

Sino-European cooperation in semis. At one point, we imagine someone thought this sounded like a clever policy. Now it reads like a guidebook for self-sabotage.

Large, but struggling shoe maker Aokang, is acquiring a Lianhe Storage, a company that makes storage systems and memory chips. It is increasingly clear that the PRC government is encouraging companies to consolidate in the hope that this gets the semis industry to a sustainable level of competition. This deal is a case study in the unintended consequences of state-directed industrial policy. We suspect that there is a local government somewhere pushing this deal where the political logic makes more sense than the commercial logic.

The government seems to be circulating a warning that semis companies have two years to get their finances in order. After that the funding valve gets shut off. It is hard to tell how true this is, but our guess is that the timeline is less than two years.

On that note, we thought a quote from this story lays out the future for the PRC’s semis complex. To be clear, this is not official policy, just one analyst’s interpretation of common sense.

The chip industry also follows the law of the jungle, survival of the fittest and the strong of the weak. Before, many investors thought that the chip industry was divided into cakes. The bigger the cake, the more shares. The domestic chip industry is a typical law of the jungle. The eldest son eats meat, the second son drinks soup, and the third son starves to death. No matter how big the market is, each track segment is basically allocated market share on a 7:2:1 basis.

An important, but hard to translate story about Bytedance’s AI semis ambitions. Bytedance has been in the news in China a lot lately. Rivals claimed they somehow jumped the queue and got a larger than expected allocation of chips from Nvidia. At the same time, PRC analysts reacted fairly strongly to reports that Broadcom sees a major revenue opportunity in supporting Bytedance’s AI ASIC designs. Bytedance is on track to spend RMB 160 billion on AI capex this year. This author pushes back on Broadcom’s number by noting that Bytedance is sourcing some of its chip via ZTE, but also that 60% of its compute is actually offshore.

China semis distributors had a really good year, if they can collect their payables. This is a fantastic story, China’s semis distributors seem to lead a fabulous life at the cutting edge of 21st century capitalism. But the fact that it is suddenly getting much harder to collect debts from their customers is making everyone a little nervous.

We saw several dozen stories about growing M&A and IPOs in PRC semis. This one, in particular, caught our eye. It repeatedly mentions the growing number of “cross-border” deals. In this context, cross-border refers to cross provincial borders. The fact that companies are buying companies from different provinces is telling about the true dynamic behind many of these companies.

Changxin Memory

The most important semiconductor news right now is the come-from-behind success of Changxin Memory (CXMT). CXMT makes DRAM and now claims they have reached commercial yields for the latest version of DRAM (DDR5). The South Korean press claims this is not true, that CXMT’s yields are closer to 20% than 80%, but we think CXMT is actually hitting the mark. The assumption is that CXMT will swamp the market and wreck pricing, which they can do because they essentially have no cost of capital. CXMT is probably nowhere close on HBM, on which the memory triopoly is pinning all its hopes, but the memory complex is on the precipice.

Another take on CXMT:

CXMT's monthly DRAM capacity has expanded from 40,000 in 2020 to 160,000 wafers. The Chinese company is currently the world's fourth-largest DRAM manufacturer. Its monthly capacity is expected to increase to 200,000 by the end of this year and a further 300,000 by the end of 2025.

This author lays out CXMT’s ambitions - a focus on supplying domestic phone makers.

The background of the rapid growth of Changxin storage is the strategy of smart phone companies to use domestic parts. Smartphone makers such as Xiaomi and Transsion last year began installing LPDDR5, the 12Gb (gigabit) low-power mobile DRAM stored by Changxin.

Spoiler alert - YMTC is doing the same thing in the NAND market.

Software

The big news in China last month was the launch of Deepseek’s large language model (LLM). Less well known is that one of the lead developers on that team recently joined Xiaomi to help build that company’s LLMs. They seem to be focused on smartphone use cases, for now, but Xiaomi also sells some very nice cars and has an eye on autonomy.

Automotive, Industrial and Macro-Economic

At a macro-level, China’s electric vehicle (EV) industry appears unstoppable. So it is important to remember at the micro-level, the PRC has 70+ EV companies and they will not all succeed. Case in point, autonomy pioneer Biadu and leading auto OEM Geely had a joint venture to develop software-defined autos. That venture has now largely collapsed. The causes of its downfall are familiar - joint ventures are unwieldy and full of conflicted interests, designing cars is hard and the market is currently in a cyclical point of saturation. That being said, the fact that these two high-profile companies failed is a sobering reality.

Interesting ranking of the brand health of EVs for sale in China. Tesla is still high (#4), and is the only foreign company in the top 20.

The PRC press loves Elon Musk. And at this moment when they perceive him as having big political sway, they want to make sure he knows that.

A profile on auto OEM Zeekr and the consolidation of its multi-brand strategy.

The PRC defense complex is getting more serious about cracking down on corruption. Two prominent universities in Sichuan were recently blocked from bidding on military contracts for several years. Critically, this also includes several of their affiliated companies (a whole other story is how universities have affiliated companies). These are pretty serious levels of punishment.

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For paid users, below we dig into the breadth of China’s manufacturing capabilities