D2D China: Normalizing Huawei
How would we evaluate Huawei if it were any other company? Let's do some math.
In this issue we take a deeper look at Huawei’s public financial data. We also examine the state of China’s semis market, beset with overcapacity, but potentially some signs of consolidation on the horizon. We also dig a bit deeper into the man facets of the PRC automotive semis market in all its splendor.
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Noteworthy Items
Semis and Deep Tech
With the advent of US sanctions, China’s leading foundry SMIC, has become the center of everyone’s attention. This profile comes from a former SMIC employee and has a distinctly positive view of the company. Most interesting to us was the changing view of the Central Government towards SMIC. The company seemed largely ignored by Beijing until just the past few years. This is a lesson in not assuming that the PRC’s strategy towards semis is 100% omniscient, and also a lesson for policy makers elsewhere that everyone has blind spots.
We have written a lot about tough conditions in China’s semis market - with too many companies chasing small markets. We have argued a wave of consolidation is overdue. This may finally be starting, with a number of M&A deals announced in recent weeks. We are also seeing some companies starting to raise prices, like Rockchip which is attempting to pass on its own rising costs to customers. Or Cambricon, which has come back from the brink of bankruptcy since Chat-GPT re-energized interest in AI.
That being said, conditions are still very hard for most companies. China had 3,451 design companies in 2023, with 1,233 founded since 2020. According to the China Semiconductor Association. There are 300 chip design companies in the rest of the world. We can quibble with their methodology for counting, but that is roughly the right scale. This article focuses on the market for microcontrollers (MCUs). The PRC has “several hundred MCU companies”, and prices for low-end 8-bit parts are now below $0.10. If consolidation is coming, the sooner the better. One observer predicts that “within five years more than 90% of the PRC’s 3,000 design companies will disappear”.
Wuxi in eastern China has developed into a hub for semiconductor packaging. At 7.5 million, Wuxi’s population is only medium-sized for PRC cities, but it seems to be punching above its weight in terms of attracting higher value-add industries. It has long been a hub for biotech and pharma production, but now seems to be emerging as a semis packaging cluster too.
China’s Big IC Fund reduces its stakes in three companies, chaos ensues.
Another profile of Northern Huachang highlights the progress the wafer fabrication equipment (WFE) maker’s technical progress, but also focuses on the extent to which that is not well appreciated by the stock market. WFE is a tough category for investors everywhere.
Most people in the PRC assume that no matter who wins the US election, more sanctions are coming. So Huawei and Baidu are reportedly stockpiling Samsung HBM.
Intel was accused of installing NSA backdoors into its chips for China. More than any US chip company, Intel has navigated (i.e. avoided) PRC politics and this kind of backlash for decades. Amidst the company’s other problems, it is worth keeping an eye on these stories. If they gain more prominence in PRC press, it likely signals bigger regulatory problems for the company soon.
Electronics distributor Avnet has started to increase its offerings of PRC chips. The first sign of that looming wave of cheap chips coming to the rest of the world.
Huawei
German mobile operator Deutsche Telekom had a plan to convert its entire network to OpenRAN, but has delayed those plans, in part because the German government gave them some wiggle room on ripping Huawei out of their network. As much as governments are pushing to remove Huawei from mobile networks, operators still have a lot of interest in using their gear.
Huawei has inked a deal to provide self-driving systems to EV leader BYD. We are curious why BYD is not doing it themselves, and suspect they were ‘persuaded’ to work with Huawei.
Huawei’s Automotive unit was valued at $16 billion.
Software
The market for domestic EDA software design tools has been one of the biggest beneficiaries of US sanctions. But even this sector is struggling with overcapacity, with 86 PRC EDA companies in the market now. None of these has a complete set of tools, just a series of point solutions. In the US, all those point solutions got consolidated down to three companies years ago. So even though the entire sector has seen a lot of growth in China since 2022, individual companies are still struggling.
More layoffs at AI company Sensetime. Hard to tell if this is a company making a rational strategic shift to focus on fewer product lines - especially large language models, and how much is just a company hitting hard times.
Automotive, Industrial and Macro-Economic
In Automotive semis “China cannot be ignored”. We probably need to do a broader profile on China’s rapidly emerging auto semis. This article focuses on ADAS processors (for infotainment and driving assist), where a handful of PRC companies are slowly emerging as domestic competitors for Qualcomm and Mobileye, but there is also the wild world of MCUs and the very complex market for autonomous vehicle chips. The title says it all.
On the subject of autonomous vehicle processors. A fierce rivalry is emerging between Black Sesame and Horizon Robotics, two merchant providers duking it out in one corner. At the same time, car makers Xpeng and Nio, are designing their own chips. It looks like whoever launched the most recent chip has the best chip on the market. There is a lot of friction in this, but it seems to be a deliberate facet of China’s development policies. Eventually, one or two of these companies will emerge on top and go on to compete with global players.
And just to double down on MCUs, PRC companies are starting to roll out microcontrollers with built-in tensor cores for processing small AI models. This had looked to be a bright spot for Western MCU makers, but China is not going to make it easy.
Baidu’s autonomous robo-taxi service has 500 cars on the road in Wuhan. The unit aims to reach profitability next year. This profile has a lot more information in it, but the headline stats speak for themselves.
Diversions
Like media outlets everywhere, China’s tech press writes for its audiences (within the confines of the censors). In the US, the tech press writes a lot about software and Internet companies. In China, there is an equal focus on semiconductors and electronics. One benefit of that is there are a lot of ‘explainer’ pieces written for general audiences about many deep tech topics. For instance, this one on copper interconnects, is written at a Techcrunch level - nuanced and well-reported, but not overly technical. Pick any topic, and we can probably find a helpful explainer in Chinese.
A 5,000 year old royal tomb was uncovered in central China. A pretty incredible find.
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