D2D China: Jurisdictional Arbitrage

M&A with Chinese characteristics, and a lot of cognitive dissonance

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In this issue we take a look at the steps PRC electronics companies are taking to embed themselves in local economies around the world, likely in anticipation of rising trade restrictions. The broader market needs to understand that these companies learned how to maneuver around trade barriers within China, navigating local restrictions.

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Noteworthy Items

Semis and Deep Tech

Beijing-based Mobvoi filed to go public. They are probably the first generative AI company to show financials publicly. The company offers its own GPT-style consumer product, but makes most of its money licensing its model to enterprises. Revenue last year reached RMB 500 million, with an operating loss of RMB 387 million, so that’s not great. Lots of good information here on the state of China’s AI market.

Randall Stewart attended Semicon China, and is as confused about the state of China’s semis industry as the rest of us. A big presence from Japanese and Korean firms, but almost no US companies in attendance.

Profile of Hygon, arguable China’s leading CPU vendor. This company has been around for a while, which means it has really survived more than thrived. That may be changing and Hygon could end up as a big beneficiary of the US sanctions, but the story is probably more complicated than that.

PRC press is reporting that the Chinese version of Intel’s Gaudi 3 AI accelerator will offer 92% less performance than the international version of the chip. We are not sure about those numbers, but a window into the anxiety China’s software companies are experiencing under the US restrictions.

China’s robotics industry “enjoys blissful uncertainty”. Blissful in that Nvidia is solving a lot of their software problems, uncertainty because maybe they lose that access some day. Beyond the playful framing, interesting to note how quickly China’s robotics companies are advancing. The simple summary of that is China has a lot of good mechanical engineers to make robots do interesting things, but lacks the software engineers needed to provide complete systems.

A common theme in PRC government economic policies in recent years is a greater reliance on the State. In semis, this seems to mean a favoring of state-owned electronics companies. Given these entities’ track records over the decades, this seems to exactly what the US government wanted when it implemented their sanctions.

RISC V has fallen a bit below the radar in the US, but remains a vibrant topic in China. There is growing interest in RISC V based FPGAs. These are a high priority item for the PRC government (think missle guidance and radio communications). so RISC V makes a fair amount of sense. At some point, some of these companies could potentially start to expand on the global stage.

In the US, M&A has become a fairly staid process. It may not feel that way for our readers in the middle of a deal, but look back in history and today’s deals offer little in the way of broad drama. That is not the case in China semis. The level of brinkmanship and sharp elbows there resembles the 1890’s railroad wars more than the 1990’s Barbarians at the Gate. There is a fair amount of cognitive dissonance in Chinese markets. On the one hand, the State seems to be moving in everywhere, but many parts of many markets are pure Darwinian struggle.

Apparently, China has had policies to encourage growth in its EDA sector for more than 20 years. Last year, with US sanctions taking hold, domestic semiconductor design tools companies had one of their best years on record, and have now captured a whole 10% of the domestic market…Interesting also to see the course of development here with every city boasting its own EDA company, but a cluster apparently growing in Shanghai. And while 10% is not great, there are ways in which Chinese EDA makers are looking to leapfrog competitors. There is no point in building tools for digital processors, but other markets like RISC V offer a more approachable opportunity.

The pace of change in automotive semis is frenetic, especially for an industry that moves this slowly. Globally, automakers are making big changes to the ways in which they use semis in cars, moving from discretes to modules. At the same time Chinese companies are steadily gaining ground, at least domestically. At some point, do these trends converge?

Huawei

Huawei is reportedly building a new campus in Shanghai to focus on building semiconductor wafer fabrication equipment. Even though China already has hundreds of WFE companies, Huawei may end up as the most advanced and the lead candidate for catching up to ASML. Interesting implication here - for those worried that US sanctions are just going to end up strengthening China’s domestic competitors, what if it just ends up helping Huawei. Not great for the US, but not necessarily great for China.

DigiTimes examines how Huawei is surviving (thriving?) beneath US sanctions. Domestic replacements, internal solutions, US waivers and loopholes, a fair amount of duct tape and big support from the government.

Automotive, Industrial and Macro-Economics

Last year, 10,000 “semiconductor companies” closed for business in the PRC, but 11,000 new ones opened. At some point, these numbers are just silly. The vast majority of these companies are not even tangentially really semiconductor companies, but there does seem to be some movement towards much-needed consolidation in the sector.

A profile of battery maker CATL. Everyone seems very worried that Li-on batteries are in overcapacity globally, and CATL’s response to that always seems to be to add more capacity. Many of the expansions can in part be explained by the company’s desire to appear local everywhere they want to sell products (see below for more).

One of the hardest things foreigners find in understanding the PRC’s economic policies is the gap between what the central government says and what actually happens at a local level. This analyst provides a good review of this issue (and a Twitter thread summary) with his analysis of Local Government Funding Vehicles (LGFV). LGFV’s are collectively a debt-laden mess right now and a big part of the problem Beijing faces in righting the economy.

Volkswagen signed a fairly extensive partnership agreement with Xpeng. There has been speculation for months that VW was going to have to license automotive software from someone in China, and Xpeng is a better alternative than Huawei. For their part, Xpeng could probably use some support and cash. Still, not a good look for the European automotive sector’s future.

Hytera makes personal, mobile radio systems (aka walkie-talkies). Their growth in recent years, and their prevalance on the Russian front lines in Ukraine have sparked fears of the company becoming labeled as the “Little Huawei”, with all that entails for US government scrutiny.

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For Paid Subscribers below we take a look at some of the unintended consequences of the US restrictions on China semis.