D2D China - Divided They Long To Unite....

China's push to boost manufacturing exports risks seriously distorting the domestic economy as well and eroding the pillars which drove its semiconductors successes.

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In which we explore the importance or regional variations in China’s semis industry. More on the growing over-capacity of everything in China, two steps forward two steps back in China’s auto industry’s attempts to supply semis domestically, and much more.

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Noteworthy Items

Semis and Deep Tech

Why is leading liquor brand Kweichow Moutai investing in Semis? Just go read this, and also subscribe to Jordan’s newsletter.

Last year, 90% of global venture funding for semiconductors came from China. Intuitively, we knew this was the case, but to see the data laid out this way is still a gut punch.

“Domestic Chips are Difficult, Difficult, Difficult.” The title pretty much sums it up. Financing is still very tight in China semis and as much as China’s export engine is helping, conditions on the ground are still challenged by too many competitors.

That being said, regulators appear to be cracking open the IPO window with autonomous vehicle software maker Pony.Ai planning to list in New York, and autonomous vehicle chip maker Black Sesame planning a Hong Kong listing. Two years ago, we had to race to keep up with all the venture funding in China. That came to an abrupt halt last year, but those now may be thawing as well. With drone maker Autoflight raising hundreds of millions of dollars from CATL, and flying car maker Xpeng AeroHT raising $150 million. We detect a theme.

A memoir from one of the Omnivision co-founders. Interesting read both for the personal journey involved and also the ways in which China’s semis industry has evolved so much over that time period.

One industry analyst’s view of how RISC V can help China’s semis industry get out from US sanctions - “One less finger wrapped around our neck” sums up it up. Makes explicit the idea that should the RISC V organization fall under US restrictions, there is enough talent in China to create their own fork.

The World Integrated Circuit Association released a list of the “Top 100 Semiconductor Cities of the World”. The PRC has two cities in the top 10, which sparked a surprising number of headlines there. To give some perspective - Santa Clara (population 120,000) is ranked #1, San Jose (pop. 970,000) is #4, Milpitas (pop 78,000) is #23; Shanghai (pop. 26 million) is #5 and Beijing (pop. 21 million) is #9.

Huawei

Huawei sold 10% of its auto software company, Yinwang, to Avatr an EV company. The deal valued Yinwang at about $16 billion and in communications around the deal, Huawei revealed that Yinwang had about $3 billion in losses accumulated over the past three years, with revenue last year of $660 million. There is a lot going on here. The headlines revolved around Huawei’s financials, but we already had some of the data. More interesting is parsing the strategy behind this. We imagine Huawei has the most advanced automotive software stack in China, why would Avatr’s parents (state-owned Changan Auto, a large ICE vendor, and battery giant CATL) want this deal? Why wouldn’t they build their own stack and eschew a key dependency on an outside company? How much did the State encourage this deal?

A sanctions-proof laptop - the open source version of Huawei’s Harmony operating system (OS) running on a RISC V powered CPU. One take on this is that there will be almost no software to run on it. On the other hand, it does have a browser, that may be enough. We could see this becoming a common replacement for Android powered embedded systems which seem to power all sorts of random devices in China. But it could eventually lead to something more substantial.

Much is made of China’s “Wolf” discipline which in the context of tech companies refers to a somewhat ruthless work ethic. We are not entirely convinced that this ethos is really endemic, as opposed to sporadic, among PRC start-ups, but this academic studied it in depth. Most relevant here is tracing its origins to Huawei’s founder Ren Zhongfei.

Digitimes wonders what is hampering production of Huawei’s 910c chip. Remember, Huawei’s achievements in working with SMIC to get to “5nm” is highly impressive, but also that Huawei is unique among PRC companies with the technical and financial resources to achieve those results.

Automotive, Industrial and Macro-Economic

The PRC government has been “conducting a survey” among domestic auto makers to evaluate their rate of domestic semiconductor usage. Maybe this is just a survey, there is a lot of data out there now about this topic. Or maybe this survey is what we would call a “push poll” in the US. A not so subtle set of suggestions. Either way, domestic semis use is about 10% across the PRC auto industry. Double the figure two years ago, and higher in some categories, but still very low.

On the other hand, the big auto makers, especially the EV makers, are pushing hard to design their own auto processors and ADAS chips. Along those lines, Geely announced the second generation of its chip, this one built at 5nm, there is no mention of which foundry they used (answer: TSMC). In the near term this is bad news for MobileEye, as many of Geely’s peers are similarly advanced in their efforts. Designing semis carries a fairly steep learning curve, so the fact that Geely is on its second generation already is noteworthy.

China approved ten new nuclear plants. This received a fair amount of coverage in the US, but we wanted to emphasize the scope of China’s nuclear power capabilities. On a related note, China’s “Green Leap Forward”, massive investments in alternative energy sources. And one more source on that same topic. Finally, China’s wind and solar capacity now exceeds its coal electricity generation, a major achievement.

Lots of news recently about China’s industrial expansion. A bunch of data came out recently that shows the PRC is pushing hard on manufacturing exports to bolster an economy damaged by the doldrums of its real estate industry. We want to highlight Brad Setser’s response; “Not having an industrial policy means accepting China’s industrial policy.”

PRC regulators restricted access to trading data “to stave off foreign capital flight” from China’s equity markets. As much as PRC policy makers sometimes seem like hard-calculating visionaries, it is good to remember they are not, and often implement highly counter-productive policies.

Amidst all the talk of US companies moving their supply chains out of China, Yicai reports the extent to which much of Vietnam’s recent manufacturing boom is just an extension of China’s, with PRC companies driving much of the gains.

Xiaomi launched its EV earlier this year, and it is totally not a copy of a Porsche. Apparently, they are not planning to export any of them.

Michael Pettis on why China struggles to boost domestic demand. The implication being Beijing’s only tool for growing the economy is exports.

Uber which was essentially pushed out of China, is going to buy 100,000 BYD EVs. And of course, BYD is adopting Huawei’s autonomous driving software.

Diversions

For years, we have noticed a massive disconnect between what we read in the US about China and what life feels like there. The press is filled with stories about “Big Issues” - trade, technology, geopolitics. Lost in all that is any sense of what average people do in China. For one thing, some of them are are now taking up surfing, others are, apparently, night kayaking. Of course, they play a lot of video games like Black Myth: Wukong. And let’s not forgot the country’s once-thriving rock, rap and punk music scenes.

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For Paid Subscribers below we dig into the domesticization (or lack thereof) of China’s wafer fabrication equipment (WFE) market.