D2D China: Turning Point in China Semis?
US sanctions have had a big impact, but there are now signs of growth or at least stability starting to emerge in the sector.
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Foreign Affairs published a balanced assessment of China’s AI semis. Much of this rings true for us. Until very recently, there was a strain of thinking that China had a massive lead in AI. Chat GPT put that myth to bed, and people are starting to take a more sober look as to where China’s “AI Industry” stands. Foreign Affairs sees progress in some areas, but also a fairly sizable gap from the state-of-art.
Oppo has disbanded much (but not all) of its internal semis team. This blogger compares the unit to Huawei’s HiSilicon team, which was flying high until being brought low by the US government. His take, which we plan on discussing further soon, is that the costs were high but more importantly Oppo was not seeing any benefit to their efforts as they continued to bleed share to Apple and domestic competitors.
DigiTimes compares the differing approaches between Huawei and SMIC in dealing with US sanctions. Put simply, Huawei is trying to go it alone and build everything itself, while SMIC is making do with whatever they can source anywhere.
We have written extensively about the structure China uses to direct investments in its semiconductor companies. In general, government entities act as Limited Partners investing in Venture funds who in turn invest according to commercial principles. This model has done a great job of growing the number of fabless companies in China, but of course comes with some downsides. These academics surveyed VC funds and found that working with government entities is actually just as frustrating as you would expect.
While we are on the subject of unintended consequences of government policy, the Information has a story about one US company who ruined a competitor by falsely reporting the competitor was working for China’s government.
Huawei will reportedly start using internally designed chips again later this year. Cut off from access to TSMC, they will use domestic foundries on older processes. Hard to see how competitive these phones will be, but we suspect commercial imperatives are not the top priority for this project.
Memory companies have remained surprisingly resilient in the face os US semis sanctions. YMTC is moving ahead with production of its 232 layer NAND, but is reportedly very limited in capacity. DRAM maker CXMT and lithography tool-maker Naura also both seem to be moving forward. These companies may all be constrained in producing at the most advanced nodes, but there is still plenty of demand for memory.
Nvidia’s Jensen Huang recently gave a speech in Taiwan which was well covered in the US, but coverage in China interpreted his comments differently, with a focus on his statement that no one should “underestimate China’s ability to catch up in chips”.
A review of China’s publicly traded semis stocks’ performance this year, which has been not great. These companies are enduring the same demand and inventory woes of their global peers, with the added weight of US sanctions.
Automotive and Hardware
With Micron’s sales now hobbled in China, the fear of China’s government blocking other US companies is now on many people’s minds. For reasons we can detail some other time, Dell has long been on the target list of more hawkish elements in China. Case in point, another blogger calls for tightening scrutiny of the PC maker. It is always hard to predict these things, but if we were Dell we would be treading very cautiously in China right now, and hire a stronger government affairs team in Beijing.
Taiwanese ODM Wistron has walked away from a plan to build iPhones in India. Wistron was stuck between the most demanding customer there is and the difficulties of setting up businesses in India. As much as everyone is talking about de-coupling from China, making that happen remains challenging. That being said, Foxconn is still moving forward for its iPhone plant in India.
Last year, a rumor surfaced that Volkswagen was looking to acquire Huawei’s autonomous vehicle operations. Instead, they just hired away a team of executives from Huawei. But then VW’s software team got stuck, and now it appears that they have restarted talks with Huawei.
EV start-up Li Auto’s CEO has been talking up his company’s use of domestic chip suppliers. We expect to hear a lot more of this from other companies, some of it is happening now, some of it is more aspirational in nature. A slightly more patriotic take on this.
One Chinese manufacturing consultant detailed his experience building factories in the US. Two ways to read this - starting a company in another country is always challenging. There is an entire genre of Western executives’ memoirs from twenty years ago listing the same complaints as they opened factories in China. More relevant is the growing interest in Chinese companies to participate in the US’s efforts to onshore manufacturing.
Software and the Cloud
There is a price war underway among China’s public cloud providers. Tencent joined the fray this month, cutting prices by as much as 40%. Part of this reflects standard commercial competition, but it also reflects the results of China’s regulatory thumb on the scale in favor of (state-owned) telecom operators’ cloud ambitions.
Tencent has invested in two AI model builders. They invested in a $250 million raise by MiniMax which is developing large language models, as well as an undisclosed amount in DeepLang AI. MiniMax already has several AI-powered apps with sizable usage. Chinese companies seem to be a step behind in developing the cutting edge of AI models, but they also seem to have an advantage in being able to rapidly productize them in ways that still seem to escape many of their US peers.
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