At Lenovo Tech World 2024, the company’s annual global innovation event held in Seattle, Washington, Intel CEO Pat Gelsinger announced on Wednesday that Intel has delivered the first sample of its Panther Lake CPU, built on the Intel 18A process, to Lenovo.

Why it matters: For leading Chinese PC maker Lenovo, receiving Intel’s next-gen Panther Lake CPU is a critical tech advance. The partnership highlights Lenovo’s access to cutting-edge processors, promising enhanced performance and competitiveness in the global PC market.

Details: During the event, Gelsinger spoke before handing Lenovo CEO Yang Yuanqing the first Panther Lake sample.

• “You know, we were working together on Meteor Lake, Lunar Lake, and the Core Ultra PC, great battery life, CPU, GPU, NPU. But we’re not done, are we?” Gelsinger said. “So I’d like to give you your first Panther Lake sample. This is our next-year product on Intel 18A that will be launching to build on the great work that we just announced today. Isn’t that cool?” “Definitely,” Yang replied.
• Panther Lake is the codename for Intel’s upcoming third generation of Core Ultra processors, scheduled to succeed the Lunar Lake series, according to Intel. The current generation of Lunar Lake primarily features cores built on TSMC’s 3nm process.
• Although Intel has not released detailed information about Panther Lake, it has indicated that the architecture will largely rely on Intel processes, including key computer cores using Intel 18A technology, hybrid bonding, wafer-to-wafer stacking, advanced packaging, and PowerVia technology.
• Intel’s 18A process node is scheduled to enter production in 2025, the Canadian tech media outlet Wccftech has reported. With the introduction of RibbonFET and PowerVia, Intel’s clients will benefit from enhanced processor scalability and efficiency amid a rush toward AI computing. 
• As for Panther Lake, the Core Ultra 300 SKUs are expected to include Cougar Cove P-Cores and Skymont E-Cores, according to the same report from Wccftech. The integrated GPU will showcase the third significant update of the Xe architecture, known as Xe3, and codenamed Celestial.

Context: The Cybersecurity Association of China (CSAC) stated on Wednesday that any new products from Intel sold in China should undergo a security review, claiming the US chipmaker has “constantly harmed” the nation’s security and interests. 

• Although CSAC is an industry group rather than a government agency, it has strong connections to the state, and its allegations could prompt a review by the Cyberspace Administration of China (CAC). Intel and the CAC have not yet responded on the matter.

Taiwan-based chip manufacturer MediaTek and American chip giant NVIDIA are reportedly set to collaborate on the development of a 3nm AI PC chip, due to begin tape-out this month and enter mass production in the second half of 2025, according to a leak by Chinese tech influencer @MobileChipExpert. The new chip will integrate a NVIDIA GPU (graphics processing unit), and will likely be adopted by major PC manufacturers such as Lenovo, Dell, HP, and ASUS.

Why it matters: The AI PC chip merges MediaTek’s advanced 3nm chip design with NVIDIA’s leading GPU technology. The expected adoption by leading PC manufacturers indicates a significant step in AI-driven computing, impacting both consumer and global markets.

Details: The AI PC chip will mark the first collaboration between NVIDIA and MediaTek in the PC processor sector. Previously, the two companies have only worked together in the automotive chip field.

• Although full specifications for the AI PC chip are not yet confirmed, tech media outlet Wccftech suggested that it will use TSMC’s 3nm process based on ARM architecture. NVIDIA will integrate its next-gen iGPU to elevate the standards of its upcoming SoC (system-on-a-chip), the report said.
• Taiwanese media outlet Economic Daily News previously reported that MediaTek’s AI PC chip will be manufactured using TSMC’s 3nm process, with tape-out expected to be completed in the third quarter. Mass production is planned for 2025, with each chip to cost as much as $300.
• Industry analysts are also optimistic about the collaboration between MediaTek and NVIDIA, as both parties leverage their respective strengths, according to the same report from Economic Daily News. The combination of NVIDIA’s powerful gaming graphics processors and AI GPUs with MediaTek’s design capabilities for ARM architecture processors is expected to shorten processor development time and result  in a generation of high-efficiency, lightweight AI PC processors.

Context：Last year, MediaTek and NVIDIA announced their partnership to create the Dimensity Auto Cockpit platform, an automotive SoC that licenses NVIDIA’s graphics technology and NVIDIA Drive OS. The processor integrates NVIDIA’s graphics and AI computing capabilities while also utilizing its related software tools, such as the autonomous driving software DRIVE OS, DRIVE IX, CUDA, and TensorRT.

• In the second quarter of 2024, shipments of AI PCs reached 8.8 million units, accounting for 14% of total PC shipments, according to market research firm Canalys. The company forecast that the global market is expected to ship around 44 million AI-capable PCs in 2024 and 103 million units in 2025.

Taiwan-based chip foundry Powerchip Semiconductor Manufacturing Corporation (PSMC) on Thursday signed a definitive agreement with Indian tech manufacturer Tata Electronics in New Delhi to assist in the construction of India’s first 12-inch wafer fab, to be situated in Dholera, Gujarat. The partnership includes transferring mature process technologies and training Indian employees.

Indian Prime Minister Narendra Modi met with PSMC Chairman Frank Huang on the same day, expressing his strong support for the wafer fab collaboration and promising administrative assistance and investment protection for Taiwanese companies operating in India.

Why it matters: India’s first 12-inch wafer fab will enhance the country’s semiconductor manufacturing capabilities and reduce the country’s dependence on imports. The partnership will encourage foreign investment while positioning India as a potential new global semiconductor hub.

Details: PSMC CEO Martin Chu signed the definitive agreement with Tata Electronics CEO Randhir Thakur, while PSMC Chairman Frank Huang was present to witness the event.

• The investment in the construction of India’s first 12-inch wafer fab is expected to reach $11 billion, with a monthly production capacity of 50,000 wafers, according to the agreement. The new fab is expected to create over 20,000 local high-tech jobs, though a specific start date for construction has yet to be determined.
• Huang told Prime Minister Modi during their meeting in New Delhi that the semiconductor manufacturing industry covers thousands of small and medium-sized enterprises, and he hopes the Indian government will create a friendly business environment for Taiwanese companies in India. The chip industry will also benefit from India’s extensive market potential and skilled workforce, Huang added.
• The Indian government will fully support the construction of the 12-inch wafer fab by PSMC and Tata Electronics, Modi responded. The Indian leader added that he hoped PSMC will participate in the development of India’s chip industry, and stated that the Indian government will assist Taiwanese companies in investing and establishing operations in India.
• On the same day, Huang and Chu met with Ashwini Vaishnaw, the Indian Minister of Electronics and Information Technology, who said the Indian government will work towards establishing a  mutually beneficial high-tech ecosystem for both parties.

Context: The 12-inch wafer fab will make use of PSMC’s mature process technology and expects to produce power management chips, display driver chips, microcontrollers, and high-speed logic chips, as revealed by Tata Group in February. The new fab targets chip markets including automotives, computing and data storage, wireless communication, and artificial intelligence.

• As India’s largest technology conglomerate, Tata Group announced in December 2022 its plan to invest $90 billion over the next five years in domestic chip production, aiming  to establish India as a key player in the global semiconductor supply chain, according to Chinese media outlet Icsmart.

TSMC on Thursday announced its financial results for the second quarter of 2024, reporting a 40.1% year-on-year revenue increase. The Taiwan-based chip foundry also stated that it has raised its full-year revenue and capital expenditure targets for 2024. The firm’s earnings call was also remarkable for TSMC CEO C.C. Wei introducing the new concept of “Wafer Foundry 2.0” for the first time during his comments to investors.

Why it matters: TSMC’s introduction of Wafer Foundry 2.0 signifies a strategic expansion beyond traditional wafer manufacturing. The move aims to capitalize on emerging market opportunities and meet the growing complexity of semiconductor production.

Details: TSMC said the idea of Wafer Foundry 2.0 is intended to better leverage its advanced packaging capabilities for market expansion by encompassing a wider range of activities compared to the traditional wafer manufacturing industry.

• As chip manufacturing becomes increasingly complex, wafer foundries have evolved beyond simple wafer manufacturing services. Wafer Foundry 2.0 was unveiled during TSMC’s second quarter earnings call, during which Wei redefined the foundry industry to include packaging, testing, mask-making, and IDM (Integrated Device Manufacturer) operations.
• Wei also noted that demand for TSMC’s 3nm and 5nm process technologies remains strong. As the company enters the third quarter, the demand for advanced processes driven by smartphones and AI opportunities has slightly raised its full-year revenue forecast for 2024, increasing the expected growth range from 21%-26% to 24%-26% year-on-year, he said.
• TSMC has also raised its 2024 capital expenditure budget from $28 billion-$32 billion to $30 billion-$32 billion. Of this, 70% to 80% will be allocated to advanced process technologies, 10% to 20% to special process technologies, and 10% to advanced packaging, testing, and mask-making, the company said.
• In the second quarter, TSMC reported revenue of NT$673.51 billion ($20.56 billion), a 40.1% increase year-on-year and a 13.6% rise quarter-on-quarter. Net profit was NT$247.85 billion ($7.57 billion), up 36.3% from the previous year and 9.9% from the previous quarter.
• In terms of revenue distribution by process technology, TSMC’s revenue from advanced processes of 7nm and below reached 67% in the second quarter. The firm’s 3nm process revenue accounted for 15% of this total, largely due to the launch of Apple’s A17 Pro series processors last year, as well as its M4 series processors and the upcoming A18 series processors this year.
• By end-use application, the revenue breakdown is as follows: high-performance computing accounted for 52%, smartphones for 33%, IoT for 6%, automotive electronics for 5%, consumer electronics for 2%, and others for 2%.

Context: Apple has secured the first batch of TSMC’s 2nm production capacity, expected to start trial production soon. The new chips, debuting in the iPhone 17 series, may boost performance by up to 15% and cut power consumption by 30% compared with the 3nm process.

On Wednesday, ASML released its financial report for the second quarter and stated that the period’s sales of 6.24 billion euros ($6.82 billion) exceeded the company’s expectations, even though overall net sales declined compared to the same period last year. 

Despite geopolitical uncertainties and restrictions on chip-related exports from the Netherlands to China, demand for ASML equipment in the Chinese mainland market remained strong, accounting for 49% of the Dutch company’s net system sales in the second quarter.

Why it matters: ASML’s revenue was impacted in the previous two quarters after the Dutch government’s chip-making equipment export restrictions took effect last September, and ASML’s export license expired at the end of 2023. Demand in the Chinese mainland market has now primarily shifted to unrestricted DUV (deep ultraviolet lithography) equipment.

Details: ASML reported mixed financial results for the second quarter, with a 7.6% year-on-year decline in net sales but an 18% increase from the previous quarter. On the same day, their US-listed shares dropped 13% due to reports that the US is considering even stricter rules around chip-related exports to China.

• In the second quarter of 2024, ASML achieved net sales of 6.24 billion euros ($6.82 billion), a decrease of around 7.6% from the 6.75 billion euros ($7.38 billion) it reported for the same period last year, though the figure marked an increase of around 18% compared to the first quarter of 2024’s 5.29 billion euros ($5.78 billion), according to the report.
• In terms of regional breakdowns, mainland China continues to be ASML’s largest market, with mainland Chinese net system sales accounting for 49% (2.33 billion euros, equivalent to 2.55 billion dollars) of the company’s total. This proportion remains consistent with the first quarter, reflecting a 20% increase from China’s 1.94 billion euros ($2.12 billion) in the first quarter of this year.
• “Gross margin for the quarter came in at 51.5%, which was above our guidance, primarily driven by more immersion systems than planned,” CFO Roger Dassen said on an ASML investor call. Dassen added that the company expects total net sales for the next quarter to hit between 6.7 billion euros ($7.32 billion) and 7.3 billion euros ($7.98 billion), with R&D expenses estimated at around 1.1 billion euros.
• “Although macro uncertainty remains, overall semiconductor inventory levels continue to improve, trending towards more healthy levels,” ASML CEO Christophe Fouquet said during the same investor call. The company’s outlook for the full year is unchanged with revenue expected to be similar to last year, he added.
• US-listed shares of ASML slumped 13% following a Bloomberg report on Wednesday that the Biden administration is considering tougher restrictions to limit companies exporting critical chip-making equipment to China.

Context: On June 30, 2023, the Netherlands announced new export controls on the sale of advanced chip-making equipment to China, which took effect on September 1 that year. The rules require Dutch manufacturer ASML to apply for a license to ship some of its deep ultraviolet lithography (DUV) systems to China.

• In the first quarter, ASML sales revenue was 5.29 billion euros ($5.78 billion), down from 6.7 billion euros ($7.32 billion) during the same period last year.

The demand for advanced process chips has surged, as AI servers and high-performance computing (HPC) applications transition to AI phones. Taiwanese media outlet Economic Daily News reported on Tuesday that Apple, Qualcomm, Nvidia, and AMD have almost booked TSMC’s 3nm process to full capacity, leading to a queue of customers extending to 2026.

Why it matters: The rapid evolution of AI technology across multiple sectors has driven a surge in demand for advanced process chips. Increasing orders from major clients is expected to further push TSMC to innovate and develop advanced manufacturing processes. 

Details: Currently, TSMC’s 3nm lineup includes N3, N3E, N3P, N3X, and N3A, according to the Economic Daily News report.

• N3E, which entered mass production in the fourth quarter of last year, primarily serves AI accelerators, high-end smartphones, and data centers. N3P is expected to enter mass production in the latter half of this year and will become the preferred chip process for mainstream applications including mobile devices, consumer electronic products, base stations, and networking by 2026. N3X and N3A are designed for customized demands such as high-performance computing and automotive clients.
• The latest high-end chips this year are all adopting the 3nm process, according to Chinese media outlet Icsmart. Apple will introduce the M4 series processors this year and is set to release the next-gen A18 series processors for its new iPhone16 series this September. Later this year, Qualcomm will launch its flagship mobile platform Snapdragon 8 Gen 4, while Nvidia is set to unveil the RTX 50 series graphics cards. AMD will release the fifth-gen EPYC Turin processors in the second half of the year, with plans to launch the MI350 series next year.
• TSMC, as the exclusive supplier of Apple’s A-series processors for the new iPhones, will see a significant increase in demand for related 3nm orders. Apple’s iPhone 16 series this year is expected to increase sales volume by 5% year-over-year to 92-95 million units, the Economic Daily News report forecasted.
• To ensure stable supply over the next two years, TSMC’s strategy is to convert some of its 5nm equipment to support 3nm production. Industry sources indicate that TSMC is likely to up its production of 3nm wafers to between 120,000 and 180,000 a month.

Context:The total production value of the top ten semiconductor foundries in the first quarter reached $29.2 billion, a decrease of 4.3% compared to the previous quarter, according to market research firm TrendForce.

• In the first quarter, TSMC led with a revenue of $18.85 billion and a market share of 61.7%, followed by Samsung with $3.36 billion and an 11% market share. Shanghai-based chip foundry SMIC took third place with $1.75 billion in revenue and a 5.7% market share.

Shanghai-based chip foundry Semiconductor Manufacturing International Corporation (SMIC) on Thursday unveiled its first quarter financial results, revealing that the state-owned company achieved a revenue of $1.75 billion, representing a 19.7% year-on-year increase. This result marks the first time that SMIC surpassed both United Microelectronics Corporation (UMC) and GlobalFoundries in quarterly revenue, with the two Taiwan-based firms reporting revenues of $1.71 billion and $1.549 billion respectively for the same period.

The ranking does not include IDM (Integrated Device Manufacturer) companies such as Intel and Samsung.

Why it matters: Amid US sanctions on Chinese chip development, SMIC’s growth signals China’s efforts to strengthen its domestic semiconductor capabilities and reduce reliance on foreign suppliers.

Details: Its first quarter financial results place SMIC second among the world’s wafer foundries, albeit with a considerable gap to TSMC, which reported a revenue of $18.262 billion for the same period.

• In the first quarter, SMIC shipped 1.79 million units of 8-inch wafers, a 7% increase compared to the previous quarter. The company’s capacity utilization rate reached 80.8%, up by 4% quarter-on-quarter.
• Revenue distribution across chip-related business segments is as follows: smartphones account for 31.2%, computers and tablets for 17.5%, consumer electronics for 30.9%, IoT (Internet of Things) and wearables for 13.2%, and industrial and automotive for 7.2%. 
• Revenue from China makes up 81.6% of the firm’s total, while the US contributes 14.9%, and the EMEA (Europe, Middle East, and Africa) region accounts for 3.5%.
• However, SMIC’s net profit for the quarter plummeted by 68.9% compared to the previous year, to $71.8 million. The semiconductor industry as a whole witnessed a substantial decline in profits in early 2024 due to product price drops and inventory backlog, according to local media outlet Jiemian. SMIC told Jiemian that this net profit decline was primarily due to shifts in product assortment, depreciation, and diminished investment returns.
• SMIC CEO Zhao Haijun disclosed that the company received urgent orders from customers in the smartphone and computer sectors in the first quarter, the same Jiemian report said. Efforts are underway to coordinate orders from lower-priority customers for delayed processing, and the 12nm chip production line is almost at full capacity, Zhao said.

Context: Thanks to the AI-related needs of Nvidia and AMD, orders of TSMC’s advanced packaging capacity, including Chip-on-Wafer-on-Substrate (CoWoS) and System-on-Integrated-Chip (SoIC), have been fully booked for 2024 and 2025, according to an Economic Daily News report from last week. TSMC predicts a compound annual growth rate of 50% for AI chips over the next five years. By 2028, AI chip orders are expected to contribute over 20% to the company’s total revenue.

On Tuesday, MediaTek held the MediaTek Dimensity Developer Conference (MDDC) 2024 in Shenzhen, where the Taiwan-based semiconductor company unveiled its latest flagship 5G chipset, the Dimensity 9300+. With a theme of “AI Empowers Everything,” MDDC 2024 delved into the applications and advances in artificial intelligence technology across various domains, and the possibilities it brings to terminal devices.

Why it matters: MediaTek introduced the Dimensity 9300+ less than two months after the launch of Qualcomm’s Snapdragon 8s Gen 3. Amid slow growth in the smartphone industry, MediaTek is aggressively competing for Qualcomm’s market share of mobile chipsets. 

Details: The Dimensity 9300+ chipset and generative AI were the main highlights at MDDC 2024.

• The Dimensity 9300+ has adopted TSMC’s third-generation 4nm process technology, according to MediaTek. The new chip boasts big-core CPU architecture, housing an octa-core CPU comprising four Cortex-X4 ultra-large cores clocked at up to 3.4 GHz, and four Cortex-A720 large cores operating at 2.0 GHz.
• MediaTek claims that the full big-core CPU ensures low power consumption across varying application loads and enables smartphones to deliver sustained high performance over extended periods by combining high speed with energy efficiency.
• The Dimensity 9300+ supports on-device LoRA (Low-Rank Adaptation) Fusion and NeuroPilot LoRA Fusion 2.0 technology that allows developers to quickly introduce new generative AI applications with text, voice, imagery, and music, the company said. This translates to smartphones equipped with the Dimensity 9300+ chip offering enhanced AI functionalities.
• The flagship processor integrates a 2nd-gen hardware ray-tracing engine with an Arm Immortalis-G720 GPU, delivering 60 frames per second (FPS) ray-tracing and console-grade global illumination effects for gamers, according to the official website. MediaTek HyperEngine technologies further enhance the gaming experience, according to the company, with MediaTek Adaptive Gaming Technology optimizing power efficiency for longer battery life. Furthermore, HyperEngine’s Network Observation System improves dual-network concurrency and offers up to 10% power savings and 25% cellular data savings.
• During the event, MediaTek unveiled the Dimensity AI Pioneer Program for global developers, collaborating with industry partners such as Alibaba Cloud, Baichuan Intelligence, Transsion, Oppo, Honor, Vivo, and Xiaomi. The program aims to offer resources, technical support, and business opportunities for global developers to create innovative generative AI experiences on Dimensity-powered devices.
• At the same time, MediaTek partnered with Alibaba Cloud, Baichuan Intelligence, Huya, Kugou Music, Oppo, Tencent AI Lab, and Vivo to jointly release a Generative AI Smartphone Industry White Paper. The white paper defines Generative AI smartphones as devices utilizing large-scale, pre-trained generative AI models to achieve multi-modal generation, context awareness, and evolving human-like capabilities.
• The white paper signals a strong integration trend in generative AI for smartphones and explores the AI strategies of various chip manufacturers, phone makers, large model developers, and developers in the generative AI ecosystem. Industry analysis firm Counterpoint forecasts rapid growth for generative AI phones in the coming years, with a global user base of around one billion expected by 2027.

Context: In the fourth quarter of 2023, MediaTek maintained its lead with a 36% share of the global smartphone chipset market, followed by Qualcomm at 23% and Apple at 20%, according to data provided by Counterpoint‘s Global Smartphone AP-SoC Shipments & Forecast Tracker by Model.

• On March 18, California-based chip firm Qualcomm launched the Snapdragon 8s Gen 3, the company’s latest flagship chipset, equipped with several on-device AI capabilities. The new 4nm chipset arrives as a more affordable version of the top-of-the-line Snapdragon 8 Gen 3 chip launched last October.

Chinese universities and research institutions were still able to purchase servers equipped with the restricted GPU (Graphics Processing Unit) chips as of Feb. 28, despite US export restrictions on the chips being in place since October 2022 and tightened in November 2023, according to an exclusive report by Reuters.

Why it matters: The Reuters report reveals loopholes in the US export restrictions on high-performance GPU chips to China. The findings have raised concerns within the US government about the efficacy and enforcement of these regulatory measures.

Details: Ten Chinese entities acquired advanced Nvidia chips integrated into server products produced by Super Micro Computer, Dell Technologies, and Taiwan’s Gigabyte Technology after the US tightened licensing rules for chip exports on Nov. 17 2023, the Reuters review of tender documents revealed.

• In China, trading in GPU chips coming from the US is not illegal. Chinese retailers may have fulfilled orders using stockpiles acquired before the US tightened chip export restrictions in November.
• The buyers included the Chinese Academy of Sciences, the Shandong Artificial Intelligence Institute, Hubei Earthquake Administration, Shandong and Southwest universities, a tech investment firm owned by the Heilongjiang provincial government, a state-run aviation research center, and a space science center.
• Nvidia responded by stating that the relevant tenders were for products exported and widely used before Nov. 17 2023. Sales may have included inventory previously exported to Chinese distributors, and the documents did not indicate that any of its partners violated export control regulations, Nvidia said. The US chip giant added that it would conduct further investigations into the matter.
• Dell told Reuters it had not seen any evidence of servers containing restricted chips being shipped to China after the embargo was implemented. “If we become aware of a distributor or reseller that is not complying with these obligations, we take appropriate actions, including termination of our relationship,” a Dell spokesperson said.
• Gigabyte said in an email to Reuters that the company consistently complied with related laws and international regulations. It did not reply to inquiries regarding tenders that identified its products as a source of banned Nvidia chips.

Context: Last October, the US government announced new export regulations to prevent the sale of advanced artificial intelligence chips to China, impacting on sales for US companies such as Nvidia, Broadcom, AMD, and Intel.

• Last December, Nvidia unveiled a Chinese version of the RTX 4090 graphics card to adhere to US regulations, in an effort to maintain its market presence. The Chinese version of the graphics card has a 12.8% smaller CUDA core (down to 14,592 from 16,384) and consumes 5.9% less power (425W from 450W) compared with the standard RTX 4090.

Intel is preparing to launch modified Gaudi 3 chips for the Chinese market when it releases the new generation AI accelerator chip this year, according to British technology media outlet The Register. Intel has disclosed the existence of the two China-exclusive models in its Gaudi 3 white paper, with HL-328 set to launch on June 24 and HL-388 on September 24.

Why it matters: Intel’s launch of customized Gaudi 3 chips for China is part of the American chip giant’s efforts to work within US sanctions on chip exports to China.

Details: Based on the information provided in Intel’s Gaudi 3 white paper, the Chinese editions of the Gaudi 3 models may ultimately require a reduction of around 92% in AI performance to comply with US export controls. 

• Due to US export restrictions, high-performance AI chips need a computing performance below 4,800 TPP (total processing power) to be eligible for export to China. This implies that the 16-bit performance of the Chinese editions of the Gaudi 3 chips will not exceed 150 teraflops.
• Similar to the Nvidia’s Chinese-edition H20 chip, the two modified Intel chips will offer a 148 teraflops of FP16/BF16 performance, just below the permitted limit.
• According to Intel, the original version of the Gaudi 3 chip can achieve 1,835 teraflops in FP16/BF16, formats used in computing to represent a balance between accuracy and efficiency for chips commonly used for AI to process large amounts of data quickly and efficiently. 
• Compared to the original version, the HL-328 and the HL-388 versions have the same 96 MB cache, 128GB of HBM2e memory with a bandwidth of 3.7TB/s, PCIe 5.0 x16 interfaces, and decoding standards. However, both models are capable of just 450 watts of thermal design power (TDP), while the original versions of respective models have a higher TDP of 600 watts and 900 watts.

Context: In the first quarter of 2024, Nvidia strategically re-entered the Chinese market with the H20 AI chip. In terms of performance, the modified-for-China H20 chip’s AI computing power is slightly less than 15% of the H100, the original version of the chip available in the rest of the world.

The US Department of Commerce and the semiconductor foundry TSMC jointly announced on Monday that they have reached a preliminary agreement to provide the Taiwanese manufacturer with up to $6.6 billion in subsidies under the US CHIPS Act to support the construction of advanced semiconductor manufacturing facilities in Phoenix, Arizona. As part of the agreement, TSMC will also construct its third fab in Phoenix, bringing its total investment in the US to over $65 billion.

Why it matters: The agreement supports TSMC’s expansion in the US while also demonstrating a strategic partnership to strengthen advanced semiconductor manufacturing in the country as it concurrently looks to limit China’s development in the field.

Details: Following the subsidy announcement, TSMC revealed plans for a third fab in Arizona to introduce 2nm process chip technology or more advanced processes, with production beginning by the end of the decade.

• TSMC Arizona’s first fab is set to gear up for production of 4nm chips by the first half of 2025, while the second fab will produce both 2nm and 3nm chips in 2028.
• TSMC Arizona will establish a cutting-edge cluster, generating 6,000 direct manufacturing roles, over 20,000 construction jobs, and tens of thousands indirect employment opportunities in the next decade, according to the US Department of Commerce.
• With this new funding, TSMC’s total investment in the US has increased from $40 billion to $65 billion. This investment represents the largest foreign direct investment in Arizona history, and the largest foreign direct investment in a greenfield project in US history, TSMC said in the statement.
• “Our US operations allow us to better support our US customers, which include several of the world’s leading technology companies. Our US operations will also expand our capability to trailblaze future advancements in semiconductor technology,” said TSMC Chairman Dr. Mark Liu. 
• TSMC is the fifth company to receive public subsidies from the US government since the enactment of the CHIPS Act in 2022, and the only foreign entity to date, according to Chinese media outlet Jiemian. The other four companies are BAE Systems, Micron, Qualcomm, and Intel, which received subsidies of $35 million, $162 million, $1.5 billion, and $8.5 billion respectively.
• TSMC holds over 60% of the global orders for advanced process chip manufacturing, with nearly 70% of its clients coming from the US, the same Jiemian report said. According to TSMC’s previous financial conference calls, the focus of the Arizona factory is to serve clients in the US.

Context: The current construction of two fabs by TSMC in Phoenix is experiencing delays due to issues such as a shortage of skilled workers, as revealed by Chinese media outlet Icsmart.

• Fab 1’s production of 4nm technology has been delayed from 2024 to 2025, while Fab 2’s 3nm production, initially planned for 2026, is now scheduled for 2028. The two fabs are intended to produce over 600,000 wafers per year, potentially generating a market value exceeding $40 billion annually.

Chip giant TSMC is seeing increasing orders from its three major clients – Apple, Intel, and AMD – for its 3nm chips, according to Taiwanese media outlet Economic Daily News. TSMC launched its 3nm process in late 2022, but up until the fourth quarter of 2023, Apple was its only customer for the technology, as the foundry slowly ramped up its production. As that situation changes, TSMC’s revenue share from 3nm chips is expected to surpass 20% of its total this year, positioning them as the company’s second-largest revenue contributor after its 5nm chips according to the Economic Daily News report.

Why it matters: With orders for its 3nm chips from major clients continuing to rise, TSMC is expected to experience significant short-term revenue growth and cement its dominance in the advanced semiconductor manufacturing sector.

Details: The Economic Daily News has analyzed the order status of TSMC 3nm chips from three key clients: Apple, Intel, and AMD.

• The upcoming iPhone 16 series by Apple will feature the new A18 series processor, while its new Mac processor (the M4 series) is expected to launch in the first quarter of 2025. Both are 3nm chips scheduled for production by TSMC starting in the second quarter of this year.
• In the second quarter of 2024, Intel will start the mass production of Lunar Lake CPUs (central processing units), GPUs (graphics processing units), and high-speed Input/Output chips at TSMC. This marks the first time that Intel has outsourced its complete range of chips for mainstream consumer platforms to TSMC. The CPU/GPU cores may also adopt 3nm technology, representing a new source of orders for TSMC’s 3nm process this year.
• AMD this year will unveil its new Zen 5 architecture platform, which is expected to greatly enhance AI applications. The report suggests that AMD’s Zen 5 architecture utilizing TSMC’s 3nm process is scheduled for a release in the second half of 2024.
• In the fourth quarter of last year, TSMC’s revenue contribution from 3nm chips already rose to about 15%, driven by the order of the 3nm A17 Pro processor for the Apple iPhone 15 series, according to TSMC’s financial reports.

Context: TSMC has secured over 90% of the total global AI chip foundry orders, as tech giants such as Nvidia, Google, Intel, Qualcomm, Microsoft, and AMD compete fiercely in the AI chip market, Economic Daily News reported.

• Driven by the high demand for AI chips, the high utilization rates of advanced processes of 6nm, 5nm, 4nm, or 3nm will further improve TSMC’s performance, a company insider told Economic Daily News. TSMC’s revenue in 2024 may increase by 24% to 26% year-on-year, the source claimed.

Nvidia is making a strategic return to the Chinese market by introducing its China-specific H20 AI chip, a move that comes after US policies affected the company’s sales in China. Nvidia has begun taking pre-orders from distributors for its H20 AI chips, priced almost on par with Huawei’s Ascend 910B, according to Reuters.

Why it matters: To address challenges posed by the US’s bans on the sale of certain GPUs (Graphics Processing Units) to China, Nvidia has launched cut-down variants compliant with American export policies. Amid concerns about potential limitations on accessing Nvidia’s products, Huawei’s chip is widely acknowledged as the leading alternative AI offering in China.

Details: Prior to the US curbs, Nvidia held over 90% of the AI chip market in China, according to the Reuters report. However, it is now facing growing competition from local competitors such as Huawei. The H20 AI chip is priced at $12,000 to $15,000, positioning itself as a competitor to Huawei’s Ascend 910B. 

• In October 2023, the US government imposed new restrictions on the export of advanced AI chips, leading Nvidia to immediately halt shipments of high-performance AI chips including the A100, A800, H100, H800, and L40S products. Subsequently, Nvidia initiated the development of new AI chips specifically designed for the Chinese market, including the H20, L20, and L2. All three chips are modified versions of Nvidia’s H100 AI chip.
• While the H20 is expected to provide less computing power than Nvidia’s flagship H100 AI chip, specifications suggest its performance is also inferior to Huawei’s Ascend 910B in certain key aspects. Notably, the H20 may lag behind the 910B in FP32 performance, a critical metric that measures processing speed, and is rated at less than half of its competitor’s capability, the source behind the Reuters report told the news agency.
• However, the H20 is likely to have an edge over the 910B in terms of interconnectivity speed, with the H20 being competitive in applications that require the connection of a large number of chips to function as a system, the report explained.
• In terms of performance, the H20 chip’s AI computing power is slightly less than 15% of the H100, according to US media outlet Wccftech. The H20 AI chip features 96GB memory capacity operating at up to 4.0 Tb/s, 296 TFLOPs computing power, and a performance density of 2.9 TFLOPs/die, compared to the H100’s 19.4 TFLOPs/die.
• Distributors have reportedly informed clients that they can start deliveries of H20 products in small batches during the first quarter of 2024, with larger quantities available from the second quarter. Last month, it was reported that Nvidia intends to mass produce the H20 in the second quarter of this year.

Context: On Jan. 20, Nvidia CEO Jensen Huang visited the company’s offices in Shenzhen, Shanghai, and Beijing for the annual parties held in celebration of China’s Lunar New Year holiday, with the company clarifying that the visit did not involve business operations.

US chip giant Nvidia is gearing up to mass produce a range of AI chips including its H20 model for China in the second quarter of 2024, with Taiwanese electronics manufacturer Wistron picked as the major supplier of these GPU (graphics processing unit) substrate orders, according to US media outlet Wccftech.

Why it matters: Despite the US government’s ban on high-performance AI chip exports, Nvidia has developed modified AI chips for the Chinese market and is ready to ship limited sales of less powerful AI chips to China as long as they adhere to regulatory standards.

Details: Nvidia is modifying its latest AI chips specifically for the Chinese market, including the HGX H20, L20 PCle, and L2 PCle. The three chips are based on the Nvidia H100, but allow the company to comply with the latest US export control policies announced last October.

• Nvidia originally planned to start selling a modified version of these AI chips by the end of 2023, but postponed the launch to early 2024 as the China-US chip war escalated, the Wccftech report said. 
• Since then, the US government has adopted a softer stance on commercial sales in China, and Nvidia has assured the government that their chips will fully meet compliance guidelines established by US trade and commerce authorities. Last week, Nvidia launched its China-exclusive GeForce RTX 4090D, a less powerful version of the flagship RTX 4090 GPU it sells elsewhere.
• The H20 AI chip is a scaled-down version of the H100 GPU, equipped with 96 GB memory capacities that operate at speeds of up to 4.0 Tb/s, according to Nvidia. It offers computing power of 296 TFLOPs and a performance density of 2.9 TFLOPs/die, in contrast to the H100’s 1,979 TFLOPs and 19.4 TFLOPs/die.

Context: Last October, the US government issued a new ban, further restricting the export of high-performance AI chips by Nvidia. Subsequently, the chip giant announced an immediate halt to the shipment of its A100, A800, H100, H800, and L40S products.

• In December 2023, during an interview with Reuters, US Secretary of Commerce Gina Raimondo stated that the government was in discussions with Nvidia about allowing the chip firm to sell AI chips to China under certain conditions. Raimondo emphasized that the government would stop Nvidia from exporting its most complex and powerful AI chips, but would not curb its chip sales to China altogether. 

China imported 42 lithography systems (chip-making equipment) with a total value of $8.168 billion in November, mostly from the Netherlands and Japan, according to South China Morning Post. Included among them were 16 lithography machines imported from the Netherlands valued at $7.627 billion, representing a year-on-year increase of 1,050% in value of such equipment from the European chip machinery powerhouse.

Why it matters: Lithography machines are a core type of equipment in chip manufacturing, with advanced models available only at extremely high cost. The Chinese demand for lithography machines is increasing rapidly as the domestic semiconductor industry is being boosted in an effort to offset the impact of tighter US chip export controls. At the high end, only a few companies worldwide are capable of producing them.

Details: China aims to stock as much advanced lithography equipment as possible before the Netherlands’ export restrictions come into full effect in January 2024. 

• Among the 42 lithography machines imported by China in November, 16 are from the Netherlands’ ASML, the world’s largest lithography machine manufacturer, as reported by SCMP. 15 machines are from Japan’s Canon and Nikon, while the remaining 11 are reported to have come from second-hand equipment dealers in other countries.
• Although the quantity of lithography machines imported from the Netherlands in October was higher at 21 units, the total value was only $672.5 million, significantly lower than the total value of $7.627 billion for the 16 lithography machines imported in November, an average 46% more.
• The monthly unit price difference suggests that Chinese companies are continuing to acquire more advanced chip-making systems despite the US’s attempts to limit such purchases, according to SCMP. 
• Most of the equipment shipped in November obtained approval from the Dutch government by the end of 2022 or early 2023, said Jan-Peter Kleinhans, director of technology and geopolitics at Stiftung Neue Verantwortung, a German non-profit think tank based in Berlin. ASML’s lead time in 2023 was around 18 months, indicating that equipment shipped in the fourth quarter of 2023 would have been ordered in either the second or third quarter of 2022, he added.

Context: In June this year, the Netherlands announced export controls, placing restrictions on the shipment of ASML’s chip-making machines to China. Starting from September 1, ASML has been required to acquire a license for the export of its deep ultraviolet (DUV) lithography systems to China.

• Following the new rules, ASML announced that its existing licenses allowed it to continue shipping DUV lithography machines to China until the end of 2023, despite export restrictions in the Netherlands taking effect from September. 
• ASML’s export licenses necessary for shipping these systems to Chinese customers will become invalid from January 1, 2024, and are unlikely to be renewed.
• As of 2021, domestically manufactured lithography systems made up less than 5% of those used in Chinese fabs, according to SCMP’s report.

The CEO of Chinese GPU (graphics processing unit) maker Moore Threads, Zhang Jianzhong, sent an open letter to staff on Monday, stating that the company would begin layoffs within a week, according to a report by local media outlet Icsmart. In the letter, which comes just weeks after the company was added to the US government’s restricted Entity List, Zhang also said “There are no darkest hours for Chinese GPU makers, only boundless possibilities.” 

Why it matters: On Oct. 17, the US government implemented a series of new restrictions, limiting the export of more advanced AI chips and semiconductor equipment to China. As one of 13 Chinese companies now added to the Entity List, Moore Threads and its subsidiaries have been substantially impacted by the policy.

Details: In his letter, Zhang directly blamed the impact of US sanctions on Moore Threads’ personnel cuts. The company will now undergo a restructuring, with plans to establish two new divisions: an AI strategy group and a metaverse computing strategy group.

• The exact number of employees facing layoffs at Moore Threads has not been disclosed, and the size of the company’s total workforce before the job cuts remains unknown. However, the company’s LinkedIn page shows a range of 500 to 1,000 employees.
• In the open letter, Zhang claimed that the entire domestic GPU and AI chip industry has been severely impacted by the new limits, but that nothing could deter the company’s determination to move forward. Moore Threads will continue to build high-quality GPUs in China at the juncture between challenges and opportunities, he stated.
• To address the challenges brought by the external environment and policy changes, Zhang announced a three-year plan. The company will focus on four key areas: accelerating independent research and innovation, refining high-quality products, promoting application implementation, and building efficient teams.
• On Oct. 31, the spokesperson for the China Council for the Promotion of International Trade, Zhang Xin, stated that the US measures violate market economic principles and international trade rules, exacerbating fragmentation and risks in the global semiconductor supply chain. 

Context: Established by Zhang, the former global vice-president of Nvidia and general manager of Nvidia China, in October 2020, Moore Threads is a Chinese technology company specializing in graphics processing unit design. The firm has developed two consumer-grade cards for China’s domestic gaming segment, including the MTT S80 and the MTT S70. 

• Chinese retailers are currently offering promotions for the annual 11.11 Singles’ Day shopping festival. Among these deals, the MTT S80 and MTT S70 GPUs are available at their lowest prices ever. The MTT S80 has been reduced from RMB 2,999 ($412) to RMB 1,199 ($165), while the company has cut the original price of the MTT S70 from RMB 2,499 ($343) to RMB 899 ($124).

On Tuesday, US chip giant Nvidia revealed that the US government has instructed it to immediately halt the export of certain high-end artificial intelligence chips to China, as regulators have expedited the enforcement of new restrictions, which were originally scheduled to take effect from Nov. 16.

Why it matters: The US withdrew Nvidia’s 30-day exemption period for chip exports to China on Oct. 23, implementing the new regulation 24 days earlier than expected. Currently, Chinese customers, such as Tencent and ByteDance, can no longer obtain any AI-related products from Nvidia. 

Details: The US government notified Nvidia of the immediate implementation of export restrictions on AI chips starting Oct. 23, as per Nvidia’s announcement to the US Securities and Exchange Commission. The affected products include five GPUs (graphics processing units): A100, A800, H100, H800, and L40S.

• On Oct. 17, the US Department of Commerce announced a series of new restrictions on chip exports, addressing loopholes identified after the US imposed export limitations on chips last October. These new regulations broaden the definition of advanced AI chips and impose additional licensing requirements on chip products destined for over 40 countries and regions, aiming to prevent resale to China. According to the regulations, the new restrictions will take effect from Nov. 16.
• Following the implementation of the new regulations, Nvidia must cease shipping A800 and H800 chips to China unless it has express permission from the US government. A800 and H800 chips are alternative solutions Nvidia offered in place of the originally prohibited A100 and H100 chips, following the initial AI chip export restrictions imposed by the US last October. The Nvidia L40S, an advanced GPU for data centers, will also be affected by the new restrictions.
• Due to the widespread global demand for these products, the sudden acceleration of US restrictions is not expected to have a short-term impact on the company’s financial performance, Nvidia said in its announcement. 
• However, Nvidia CEO Jensen Huang earlier stated that the new ban is expected to significantly impact Nvidia’s sales in the Chinese market, though he added that the company remains committed to complying with US regulations. 
• Several AI industry professionals in China have voiced concerns and doubts over the new measures, according to a report by local media outlet TMTPost. They worry about the potential impact of the new restrictions on the future training of large-scale AI models in China, which could result in a tech gap compared to US-based AI companies like OpenAI.

Context: In August, Nvidia reported a fourfold increase in its Data Center revenue over the last two years, establishing itself as a leader in AI chips with a market share of over 70%. Nvidia’s stock continues to rise, as the company achieved a market cap of $1 trillion earlier in 2023.

• The data center sector comprises processors such as central processing units (CPUs), data processing units (DPUs), and graphic processing units (GPUs). GPUs are favored for AI applications due to their ability to handle multiple tasks simultaneously.

TSMC is urgently seeking equipment suppliers from whom it can buy CoWoS (Chip on Wafer on Substrate) machines, as Nvidia, AMD, and Amazon expand orders for AI chips, local media outlet Economic Daily News exclusively reported on Monday. TSMC has increased its equipment orders for CoWoS by 30% to meet growing AI-fueled demand, the report claimed.

Why it matters: The AI boom has reshaped the semiconductor landscape, positioning chip-making companies as critical enablers of the tech revolution while presenting complex challenges related to supply chain resilience and technological advancement. 

Details: CoWoS is a high-density advanced packaging technology developed by TSMC for high-performance chips. The current shortage of CoWoS packaging capacity has become the main bottleneck in the production chain for AI chip orders.

• Nvidia is TSMC’s largest customer of CoWoS advanced packaging, accounting for 60% of the production capacity, according to the report. Recently, in response to the strong demand for AI computing, Nvidia has increased its orders from TSMC, while AMD, Amazon, and Broadcom have also been placing urgent orders.
• Due to its shortage of CoWoS machines, TSMC has sought the assistance of local equipment suppliers including Scientech Corporation, AllRing-Tech, Grand Process Technology, E&R Engineering Corporation, and Group Up Industrial. TSMC has increased its original equipment orders by up to 30%, with delivery expected in the first half of 2024. Mass production will commence in the second half of 2024.
• Currently, TSMC’s monthly capacity of CoWoS advanced packaging is approximately 12,000 units, sources familiar with the matter told Economic Daily News. To accommodate the proposed production expansion, the monthly capacity of CoWoS will be increased to between 25,000 and 30,000 units.
• Major customers such as Nvidia and AMD have increased their orders of TSMC wafers in the third quarter, boosting TSMC’s 7nm and 5nm advanced process capacity utilization.
• Pressure on CoWoS production capacity is expected to ease after next summer, TSMC’s president C. C. Wei stated during a recent earnings call. The Economic Daily News report revealed that TSMC has been expanding its facilities at plants including Zhuke, Zhongke, Nanke, and Longtan, so as to increase CoWoS production capacity.

Context: On September 24, Chinese media outlet IThome reported that Qualcomm’s next generation Snapdragon 8 Gen 4 may have been manufactured using TSMC’s N3E process technology, as indicated by leaked documents from Qualcomm.

• On September 8, TSMC announced net revenue for August 2023 of approximately NT$188.69 billion ($5.87 billion), representing an increase of 6.2% from the previous month.

TSMC is working with Broadcom and Nvidia to develop silicon photonics and co-packaged optics (CPO), after the  AI craze has lifted demand for data transmission, local media outlet Economic Daily News exclusively reported on Monday. The company has already formed an R&D team of over 200 employees to target emerging opportunities in high-speed computing chips based on silicon photonics technology, with production expected to start as early as the second half of next year. TSMC declined to comment on this matter.

Why it matters: The semiconductor industry has been under pressure to achieve faster data transmission speeds with zero signal delay, as AI applications flood most tech fields. This means that the traditional method of using electricity as a signal transmission medium is no longer sufficient. The cutting edge technology of silicon photonics works by converting electricity into light, significantly improving data transmission speeds.

Details: TSMC asserts that silicon photonics represents a new era for semiconductors. Douglas Yu, vice president of TSMC, stated that two key problems, energy efficiency and AI computing power, can be solved if TSMC succeeds in developing an applicable silicon photonics integration system in the upcoming years.

• SEMICON Taiwan 2023 held its grand exhibition in Taipei from September 6 to September 8, with TSMC and Advanced Semiconductor Engineering (ASE) addressing topics related to silicon photonics. Intel, Nvidia, Broadcom, and other leading semiconductor companies have all successively launched development programs for silicon photonics and co-packaged optical components, according to Economic Daily News. The overall market is projected to grow from as soon as 2024.
• TSMC is partnering with Broadcom, Nvidia, and other major customers to develop new products related to silicon photons and co-packaged optical components, citing sources familiar with the matter. These will include chip processes from45 nm to 7 nm, and are expected to enter mass production in 2025.
• TSMC has assembled a team of 200 R&D employees to target silicon photonics, aiming to introduce the new technology into CPU, GPU, and other computing processes in the future. Due to faster transmission speeds enabled by light, the computing power of these new products will be several times greater than existing computing processors. 
• With rapid advancements in transmission speeds, managing power loss and heat dissipation become the next big issues. A solution proposed by the semiconductor industry involves integrating silicon photonics components and application-specific integrated circuits (ASIC) into a single module through co-packaged optics (CPO) technology, a method both Microsoft and Meta have adopted in their new-generation network architecture.

Context：Silicon photonics is the study and application of photonic systems, which use silicon as an optical medium. Silicon photonics technology was introduced by Intel in 2010, with the challenge being the conversion from traditional electricity. Due to its relatively high cost, it is currently limited to data centers and server markets.

ASML, the Netherlands-based producer of the world’s most advanced lithography systems (chip-making equipment), has asserted that it is capable of fulfilling its contracts with Chinese customers before the end of this year, according to Bloomberg, despite the Dutch government’s new export control measures for chip-manufacturing equipment coming into effect on September 1. Under the new regulations, Dutch companies need to apply for export licenses from Dutch customs in advance if they intend to export certain high-end semiconductor-related items outside the EU. A spokesperson from ASML added that the company cannot obtain export licenses to export these products to China in 2024.

Why it matters: ASML’s commitment to fulfilling its China orders up to the end of the year will help ease some of the pressure on the country’s chip sector, which has been the subject of a series of stringent export control measures on semiconductor-related items from first the US and subsequently Europe and Japan. From January next year, the export ban on ASML’s advanced DUV (deep ultraviolet) equipment is expected to have a far-reaching impact on China’s domestic semiconductor industry chain.

Details: On June 30, the Dutch government officially introduced new semiconductor export controls, with the measures set to take effect on September 1, 2023. Prior to this date, ASML was permitted to submit export license applications to the Dutch government.

• On August 31, ASML said that the company owned licenses to ship restricted chip-making machines to China until the end of the year, despite the new export restrictions coming into effect in September. Industry observers have therefore speculated that ASML had already applied for export licenses in advance. 
• ASML is the exclusive EUV (extreme ultraviolet) lithography supplier for chip-making below 7nm, according to a report from TMTpost. The company’s most advanced EUV products were already banned from being exported to China even before the Dutch government’s new regulations. Instead, ASML mainly exports DUV lithography for chip-making above 7nm. However, in 2024, the firm will discontinue the export of DUV equipment to China since it is unlikely that new licenses will be approved by the Dutch government beyond the end of this year.
• On July 19, ASML announced its second-quarter financial report for 2023. Sales to China accounted for 24% of ASML’s total revenue in the second quarter, representing an increase of 200% year-on-year, according to the company’s financial report.
• CEO Peter Wennink stated on an earnings call that the new export control measures were unlikely to have a significant impact on the company’s revenue performance in 2023.

Context: At present, China’s import of lithography equipment depends heavily on the Netherlands. In response to new restrictions in 2024, China may increase its imports in the remaining four months of this year. However, this is clearly not a long-term solution.

• China’s lithography imports reached $3.96 billion in 2022, with the Netherlands accounting for 64.3% ($2.54 billion) of this total, according to data from China Customs. From January to July in 2023, lithography imports from the Netherlands amounted to $2.58 billion, marking a significant increase of 64.8% year-on-year.

Semiconductor giant Qualcomm is set to work with both TSMC and Samsung simultaneously to create a new 3nm version of its Snapdragon 8 Gen 4 chip, Taiwanese media outlet Commercial Times reported on Aug 17. It seems likely that Qualcomm will only be able to secure around 15% of TSMC’s 3nm production capacity for its chips, with Apple’s upcoming iPhone 15 Pro series expected to dominate the Taiwanese firm’s output. Samsung’s 3nm process yield has significantly improved in recent months, allowing it to catch up with sector leader TSMC.

Why it matters: Adopting 3nm technology will allow Android devices using Qualcomm’s Snapdragon 8 Gen 4 to narrow the performance gap with the forthcoming iPhone 15 Pro series and its A17 Bionic chip. Qualcomm’s Snapdragon system on chip (SoC) lineup currently powers the majority of Android smartphones on the market, with the Snapdragon 8 Gen 4 processor scheduled to launch in 2024. 

Details: Qualcomm looks set to adopt a dual-source approach by partnering with both TSMC and Samsung for next year’s Snapdragon 8 Gen 4. 

• TSMC has indicated that demand for its 3nm process remains strong. The process will support HPC (High-Performance Computing) and smartphones in the second half of this year, accounting for an estimated 4% to 6% of TSMC’s wafer revenue in 2023. The firm has already received customized orders for its N3E process, its latest 3nm offering, which has successfully passed verification and is expected to start mass production in the fourth quarter.
• To meet the demand for Apple’s A17 Bionic chip, TSMC aims to reach a monthly production capacity of 100,000 units for the 3nm process by the end of the year. Compared to the 5nm process, the 3nm process is set to deliver an 18% increase in speed, while reducing power consumption by up to 30% under the same performance conditions, according to TSMC.
• Qualcomm’s Snapdragon 8 Gen 3 and MediaTek’s Dimensity 9300 are expected to be released in October using TSMC’s N4P (4nm) process, according to the report from Commercial Times. Both companies are projected to adopt the N3E (3nm) process in 2024. 
• According to Wccftech, a leak of the Qualcomm Snapdragon 8 Gen 4’s specs shows that it will feature custom Phoenix cores and TSMC’s N3E technology. The report mentioned that Qualcomm will apply its self-developed Nuvia CPU architecture to the new chipset.
• Qualcomm opted for the 4nm process for this year’s Snapdragon 8 Gen 3 due to the high cost of TSMC’s 3nm process. Currently, Apple dominates the allocation of these cutting-edge 3nm wafers, according to media outlet Wccftech. 
• In July, Korean media outlet KMIB claimed that Samsung now boasts a 60% yield rate for its 3nm process, slightly higher than TSMC’s 55%. TSMC’s low yield rate has reportedly led Apple to commit to only paying for qualified wafer batches, instead of establishing a standard rate with TSMC.

Context: In the first quarter of 2023, the top three brands in terms of global smartphone chipset shipments were Mediatek with a 32% market share, Qualcomm with 28%, and Apple with 26%, according to market research firm Counterpoint.

TSMC is struggling with the efficiency of its new 3nm manufacturing yield, with the semiconductor giant currently hitting a yield rate of just 55%, far below the standard expected, according to a July 13 report in technology media outlet wccftech. The low yield rate has reportedly led Apple to only pay for qualified wafer batches instead of establishing a standard rate with TSMC. Apple occupies 90% of TSMC’s 3nm process production capacity for its A17 Bionic and M3 chips. 

Why it matters: The iPhone 15 Pro and iPhone 15 Pro Max are widely expected to become the first smartphones powered by TSMC’s 3nm process chipset. However, TSMC’s yield rate of 55% may cause it to lose customers to competitors such as Samsung, which has reported a 60% to 70% yield rate with its 3nm process.

Details: Brett Simpson, senior analyst at Arete Research, claimed that TSMC and Apple have reached a special deal, through which Apple will only pay for functional circuits, rather than paying standard pricing for the entire wafer. If the 3nm yield rate improves to a regular 70%, the deal may be adjusted so that Apple pays up to $17,000 per wafer in the second half of 2024.

• The monthly production of TSMC’s 3nm wafers is expected to reach 100,000 pieces by the end of 2023 to meet the demand for the iPhone 15 series smartphones. 
• In 2024, Apple may switch to TSMC’s N3E process technology instead of N3B process technology, due to the lower production cost and higher yield rate of the N3E, according to the wccftech report. However, the N3E process may reduce the processor performance of the A17 Bionic and M3, and a final decision has therefore not yet been made. N3B is the original 3nm node created in partnership with Apple, while N3E is the simpler version produced for the majority of TSMC’s customers.
• The iPhone 15 series will begin mass production in August, with the iPhone 15 Pro and iPhone 15 Pro Max using the A17 Bionic processor. As Apple’s first chip manufactured with a 3nm process, the A17 Bionic is expected to bring major performance and efficiency improvements over its predecessors the A14, A15, and A16 chips, which used a 5nm process.
• Apple plans to release a 13-inch MacBook Pro with its M3 chip, as well as 14-inch and 16-inch models of the MacBook Pro with M3 Pro and M3 Max chips, according to a report from Bloomberg.

Context: In May, Samsung said in its first quarterly earnings report that its 3nm chip process had an impressive 60% to 70% yield rate. Samsung previously struggled with its 4nm process, which caused Qualcomm to partner with TSMC for the Snapdragon 8 Plus Gen 1 and Snapdragon 8 Gen 2 over the Korean company.

• TSMC’s 4nm process yield rate was reported to be around 70% to 80%, while Samsung only achieved approximately 50%, according to Digitimes. As Samsung gradually improves its 3nm and 4nm process yield rates, the company may regain former customers it lost to TSMC.

Chip giant TSMC plans to construct a second chip plant in the Kumamoto Prefecture of Japan to manufacture 12nm chips by the end of 2026, Japanese media outlet Nikkan Kogyo Shimbun reported on Tuesday. TSMC will reportedly invest 1 trillion yen ($7.1 billion) for the second plant, which is expected to start construction in April 2024.

Why it matters: In recent years, the Japanese government has gradually realized the limitations of its own chip industry, especially with the world transitioning to EV and the automobile industry’s increasing demand for advanced chips. TSMC’s further expansion in Japan may make it eligible to receive huge subsidies from the local government, and improve the company’s production capacity by utilizing local water and power resources. 

Details: In June, TSMC’s chairman Mark Liu revealed that the company was evaluating the possibility of another plant aimed at producing mature-process chips in Kumamoto Prefecture, near the company’s first facility.

• On June 9, Yasutoshi Nishimura, the Minister of Economy, Trade and Industry of Japan, responded to the news by saying that the Japanese government would consider providing financial aid to a potential second TSMC plant in Japan.
• In June, Sony CEO Terushi Shimizu told a round-table conference that TSMC’s first plant in Japan had been unable to fulfill an order for his firm, after receiving a large order from electric vehicle makers such as Honda. He also said that Sony has not yet decided to invest in the second plant.
• On June 30, at a press conference held in Yokohama Japan, Kevin Zhang, TSMC’s Senior Vice President, said the company did not rule out the possibility of manufacturing advanced process chips in Japan in the future.
• Last year, TSMC and Sony invested approximately $7 billion to build the first semiconductor factory in Kumamoto Prefecture, while the Japanese government decided to provide 476 billion yen ($3.38 billion) in subsidies.
• TSMC has already started the construction of its first plant in Japan and is targeting local production in 2024, according to the Nikkan Kogyo Shimbun report. Japan Advanced Semiconductor Manufacturing, a joint venture with TSMC, is in charge of Japan’s business operations, with Sony, Honda, and Denso all investing. According to TSMC, the first factory will produce 55,000 wafers a month by the end of 2024, using 12nm, 16nm, 22nm, and 28nm process technologies.

Context: Last December, TSMC announced it would increase its planned investment of $12 billion to $40 billion for two new factories in Arizona, US. For its US factories, the company plans to start producing 4nm chips in 2024 and 3nm chips in 2026, respectively.

• The US passed the CHIPS and Science Act last August to offer around $52 billion in incentives for US-based chip manufacturing.

Apple’s orders for the iPhone 15 series’ 3nm chips may boost TMSC’s revenue in the third quarter of 2023 by 11%, with a company representative estimating that the firm’s second quarter revenue will reach approximately $17 billion, according to Economic Daily News. Apple is the largest customer for TSMC and the consumer tech giant’s chip orders accounted for 23% of TSMC’s revenue in 2022, according to its yearly financial report. This proportion may be even higher this year.

Why it matters: With Apple’s new iPhone 15 series set to be released in September, industry analysts are predicting that iPhone 15 series shipments may reach 85 million units, which is 9% higher than the 78 million units of the iPhone 14 series shipped last year. This marks a growth opportunity for TSMC, as the company is the exclusive manufacturer of Apple’s 3nm advanced processor.

Details: Apple is widely expected to switch to a 3nm process for its A17 Bionic chip in this year’s flagship iPhone 15 Pro and iPhone 15 Pro Max. TSMC’s 3nm process is expected to lead to a combination of performance and efficiency improvements.

• In order to meet the mass production requirements of the new iPhone 15 series, Foxconn has been stepping up its recruitment in Zhengzhou, the central Chinese city home to its largest facility. Currently, the number of recruits per day has reached around 1,000, according to Economic Daily News. The report suggested that the peak production period will run from July to September, by which time recruitment may reach 10,000 new workers per day.
• Compared to the current 4nm process used in Apple’s iPhone 14 Pro chips, the ‌3nm‌ process brings both speed and efficiency improvements. The ‌3nm‌ technology is predicted to achieve a 35% power efficiency improvement and 15% faster performance compared to 4nm. Additionally, Apple’s M3 chip for new Macs and iPads is expected to use the ‌3nm‌ process, according to MacRumors. 
• Apple has booked nearly 90% of chip supplier TSMC’s first-generation 3nm process capacity this year for future iPhones, Macs, and iPads, according to industry sources cited by DigiTimes.
• Due to the strong demand for the 3nm process, TSMC’s 3nm production capacity is in short supply, although the company has not announced many details about its monthly production capacity. The industry estimates that TSMC’s 3nm production capacity needs to increase to 100,000 pieces per month if they want to fully meet customer demand this year.

Context: On June 23, the US Department of Commerce announced the expansion of subsidies for the Chip Act, according to the Wall Street Journal. Originally, the subsidies were only for companies building new fabs in the US, but they now include support for supply chain manufacturers such as those working in chemicals, materials, and semiconductor equipment.

• By the end of 2022, TSMC’s new production base in the US had attracted dozens of chip-related suppliers to follow suit by building factories in the area, including Dutch ASML, US Applied Materials, US Lam Research, Tokyo Electron, and Sunlit Fluto & Chemical.

Senior executives from TSMC will gather in Shanghai this week for the company’s annual tech forum TSMC Technology Symposium on June 21, where the chip giant will share details of its forthcoming products and technologies, according to media outlet icsmart. The visiting group includes TSMC CEO C.C. Wei, vice president of business development Kevin Zhang, and deputy general manager of technology research Cliff Hou. As part of their trip, the trio plans to visit Chinese chip design companies such as Alibaba and Biren Technology, the report said.

Why it matters: This will be the first time that TSMC executives have been able to visit the company’s customers in mainland China in person since 2020. The company’s mainland China events were all held online during the last three years due to the Covid-19 pandemic.

Details: A number of significant customers for the chip maker are set to attend the TSMC Technology Symposium in Shanghai, which comes one month after similar events in Taiwan and Europe and a week before another symposium in Japan.

• TSMC representatives will visit Alibaba and Biren. Alibaba has a chip unit called T-Head, which specializes in designing chips for cloud computing and various other applications.  Biren is a fabless semiconductor design company founded in 2019 by Lingjie Xu and other former NVIDIA and Alibaba employees.
• Currently, the Chinese mainland market accounts for 10% to 15% of TSMC’s overall revenue, only second to its North American business, according to the firm’s first-quarter financial report. 
• In 2016, TSMC established a factory in Nanjing, the capital of eastern China’s Jiangsu province. The facility manages a 12-inch wafer fab and a design service center. The firm also operates a factory in Shanghai, which was established in 2002 and includes an 8-inch wafer fab.
• On Wednesday, in addition to providing a showcase of TSMC’s advanced chip process technology, the forum is expected to focus on how to reduce cost and increase efficiency, with prices for everything from building factories to purchasing equipment and even neon gas rising due to global inflation, according to media outlet Vocus.
• On April 26, TSMC held its 2023 North America Technology Symposium, introducing its latest technology developments including progress on 2nm technology and new products in its industry-leading 3nm technology range.

Context: Last October, TSMC secured a one-year license to continue ordering US chipmaking equipment for its expansion in China, allowing it to avoid the US’s export controls to China. Recently, senior officials from the US have reportedly indicated that the government may extend the one-year exemption for TSMC, which may enable the company to pursue its expansion plan in China.

• TSMC started pre-production operations on its 2nm process in June, and the company plans to start mass production of the advanced 2nm chip in 2025.
• TSMC claims that compared to the 3nm chip technology (N3 series), the speed of its 2nm chips will increase by 15% using the same power consumption and that power consumption will be reduced by 30% when used at the same speed.
• At a shareholders’ meeting in June, President of TSMC Mark Liu said that TSMC holds a key role in calming geopolitical tensions between China and the US.

On Monday, leading chip manufacturer TSMC started pre-production operations on its 2nm process, according to Taiwan-based media outlet Economic Daily News. Sources revealed that the chip maker will use an advanced AI system to improve energy efficiency and accelerate efficiency. Apple and Nvidia are expected to be among the first batch of customers for the Taiwan-headquartered company’s 2nm production, putting significant pressure on its competitors such as Samsung.

TSMC did not comment on specific details in response to the report, but stated that the development of 2nm technology is progressing well and aims to hit mass production by 2025.

Why it matters: TSMC’s 2nm plan could bring it into head on competition with Samsung. Samsung, which beat TSMC to be the first chip manufacturer to widely employ 3nm processes, also announced last year that it expects to have 2nm chips in mass production by 2025.

Details: According to the report, TSMC is estimated to begin test producing hundreds of 2nm chips this year, laying the foundation for mass production in 2025. The 2nm production base will be established at TSMC’s Fab 20 at Hsinchu Science Park, with subsequent expansion to Taichung Science Park, encompassing a total of six phases of engineering. 

• TSMC has already begun to dispatch engineers to the Hsinchu Science and Industrial Park for the 2nm process, building a research and development team of over 1,000 employees, according to Economic Daily News. 
• In the initial stages, TSMC will set up a small trial-production line at its Hsinchu headquarters, with a target of taping out around 1,000 2nm chip pieces by the end of this year, the report said. 
• On April 26, TSMC showcased its latest technology developments at its 2023 North America Technology Symposium, including in the fields of 3nm and 2nm technology. 
• The 2nm process will be the first process node at TSMC to employ gate-all-around (GAA) transistors, nanosheet transistors which TSMC says will boost performance, energy efficiency, and transistor densities. The company claims this will offer an improvement in speed of up to 15% over 3nm at the same power, and up to 30% power reduction at the same speed.
• Nvidia’s CEO Jensen Huang previously said at GTC 2023 that TSMC will bring the AI system that Nvidia and TSMC and other partners worked on into 2nm trial production this June. The system promises a computation time that is 1/40th of its predecessor.

Context: Samsung expects to have 2nm chips in mass production by 2025 and plans to deliver mass production using a 1.4nm process by 2027.

• TSMC reported record revenue for 2022 of NT$2.26 trillion ($74.25 billion), a rise of 42.6% from 2021. It was the first time the world’s largest contract chip manufacturer reached NT$2 trillion in revenue for a year.
• The Apple iPhone 15 Pro will be powered by the A17 Bionic chip based on TSMC’s 3nm technology, according to product review site Tom’s Guide. The chip is also expected to debut in this year’s upcoming MacBook models.

A lack of key semiconductor talent and the rising cost of such talent are hot topics in the industry in China right now.

Previously, it was difficult to attract the brightest talent into the industry. There were several reasons for this, with two key factors chief among them. First, semiconductors require an insane level of detail and accuracy and any part of the semiconductor design or manufacturing process requires years of study even to get to an acceptable level. Second, and perhaps most importantly, all this studying and effort doesn’t get the student a better-paid job than simply learning to code application-level software. 

The brightest talent, even those that studied semiconductor design, would therefore go to the big internet companies and get much better pay than China’s struggling semiconductor companies could ever afford.

However, in the past couple of years, we have seen a huge increase in semiconductor talent demand. Companies are becoming increasingly vertically integrated, launching their own semiconductor departments, and startups are appearing everywhere. Simply having a lot of investment and demand does not mean core talent appears overnight, however. Talent takes time, meaning the best workers right now can demand high wages.

The upward trend is a good thing for the industry in China, but it needs to be managed. Ensuring the new influx of talent doesn’t all fall into the design space to the detriment of other key parts of the value chain – especially chip fabrication plants and equipment manufacturers where the country faces the strongest pressure from foreign governments – is crucial.

Skyrocketing salaries for chip engineers

Semiconductor startups face a problem: they either increase operating costs and burn more money by attracting the best talent with high wages, or ignore this trend and risk recruiting less than ideal candidates. HR personnel in the industry, including people I have spoken to myself, are even saying that the best graduates may have multiple offers and play them against one another in an attempt to get the highest salary possible. 

The best graduates – those graduating at Masters or PhD level – can demand around RMB 400,000 per year ($62,000) per year; such a figure has been touted in the media as the graduate salary Oppo has been offering to semiconductor engineers. This is an extremely high wage for someone with no actual work experience. 

Regardless, salaries still seem to be rising, with Alibaba offering up to RMB 500,000-600,000 per year to newbie chip engineers. For comparison, the average annual salary for a semiconductor engineer in the US is around $110,000 (a little over RMB 700,000).

This upwards trend in salaries is putting huge pressure not just on startups but on all traditional semiconductor companies. It is simply too hard to compete with the internet firms that have moved into this space – and on top of that, smartphone companies are poaching employees too.

There is a double whammy of increased cost and competition for talent as well as a reduction in customers: Alibaba or Oppo may have been your customer before, but now they’ve taken your employees and are making their own chips.

Remember as well that these are graduate wages. Experienced semiconductor veterans can demand much more not just for their talent but also for the simple fact there are so few of them. This situation makes it easier for them to frequently switch companies to gain higher wages or at least threaten to move as a bargaining chip for a better deal. That’s not good for the long-term development of a semiconductor company and its products, where designs can take more than 18 months from start to finish.

Structural problems in the industry

It is worth pondering the effect all this will have on chip manufacturers like SMIC and semiconductor manufacturing equipment (SME) makers like AMEC – companies propelling the twin strategic priorities of China’s chip independence plan.

New talent is attracted into the semiconductor industry due to increasing wages, but these wages are mainly focused on the chip design industry. Internet companies and handset companies are pushing salaries up, but none of these companies are developing equipment or setting up fabrication plants. New talent will want to move into design potentially at the expense of China’s key chokepoints – fabs and equipment. 

Wages here will have to keep up as well if they are to make sure they attract all the new talent they require. Of course, this adds to costs, potentially causing Chinese fabs to face the same cost problems those in Western countries face compared to the likes of Taiwan. Indeed, Chinese fabs such as SMIC have been offering much higher wages to foreign employees in order to attract them away from Taiwan or South Korea. It’s unclear whether they are willing to increase wages for local employees as well.

Naturally, foreign semiconductor companies’ China operations will not be unaffected by such trends. While Chinese companies are receiving various forms of government backing, foreign companies with design centers in China aren’t. It is hard to retain the best talent in your China operations if a startup, internet company, or phone company next door suddenly offers double the salary. China is no longer the low-cost design center it once was.

High salary doesn’t mean high quality

Not all graduates are receiving such high wages though. Some people I talked to in the industry argue that so many new graduates are entering the semiconductor industry, especially digital design, that most of them can’t demand high salaries because companies can just choose a different graduate. Indeed, companies I have spoken with have admitted there is no lack of junior engineers. 

A small percentage who are postgraduates and have real-world experience can choose between 10 or 20 different offers. But most of the new graduates have taken self-study or a training class to switch to the semiconductor industry from other majors.

Semiconductor talent on paper has increased, but most of it has limited ability and experience. There aren’t enough quality graduates in the market, and 3-6 months of crash courses is not enough to create high-quality talent. 

Wages may have increased, but the difficulty hasn’t. Once a chip is taped out, you can’t edit it like you can a piece of software – the industry has a very low tolerance for errors. HR needs to be more aware of the actual abilities of these new semiconductor engineers and stipulate appropriate wages and positions for them.

Conclusions

There is no denying salary increases were needed if China was to attract talent into the industry, so from this perspective, this trend is a good thing for the country.

However, the money could be flowing to the wrong places and could harm many in the sector. Startups and traditional semiconductor companies are struggling to compete as their former customers start poaching talent, and to fill the talent gap the market is now flooded with new semiconductor engineers with little real-world experience or deep enough knowledge to make sure the final product is bug-free. 

What’s more important is this increase in talent and wages doesn’t seem to be heading to where China needs it most – essentially fabs and SME companies. The heightened interest and rush to learn semiconductor design is no bad thing for China, but right now it is unbalanced and potentially detrimental to some parts of the industry.

A global chip shortage will continue to hurt Chinese automakers in 2022, Chen Yudong, the China head of German auto supplier Bosch, said on Wednesday.

Why it matters: The ongoing global chip shortage has hit Chinese automakers hard. In September, the country’s auto sales fell 19.6% year-on-year to 2.06 million vehicles, the biggest monthly drop this year. Several Chinese electric car makers, including Nio and Li Auto, have slashed their quarterly production forecasts.

Details: Currently, Bosch China can only fulfill 50% of the market demand in China as a result of the chip shortage, an improvement from July when it could only meet 20% of the demand from clients, Chen said during a media briefing in Shanghai.

• Chen estimated that the firm’s supply in China will remain “very low” over the remaining three months of 2021, without providing further details. Chen added that although the chip supply situation may improve over time, Bosch China’s supply will still be 10% to 20% lower than the market demand by the end of next year.  
• The chip shortage has disrupted automakers’ production since the second half of last year, Chen said, pledging that the company will boost domestic chip manufacturing to mitigate the impact.

Context: Bosch is the world’s largest auto parts supplier. The company supplies 70% of China’s electronic brake control systems, Chinese media Yicai reported last month. 

• Chinese automakers have been hit by the supply chain constraint, with Li Auto recently cutting its delivery forecast from up to 26,000 vehicles to 24,500 units for the third quarter. Nio made a similar move in September, cutting the upper end of its Q3 delivery outlook by 1,500 vehicles to 23,500 units.
• Consulting firm AlixPartners estimated last month a loss of $210 billion in revenue in 2021 for the global auto industry due to the chip shortage, almost doubling its previous projection in May.

Let’s be clear: Arm China was created by SoftBank and Arm to make more money out of China by presenting itself as a local company as much as possible. It was always SoftBank’s plan to have Arm China create intellectual property (IP)  for the Chinese market. It wasn’t in the plan for Arm to lose the power to choose who runs Arm China or for Arm China CEO Allen Wu, 53, to run investment companies competing with Arm’s own, or for the renegade CEO to set up an “Open NPU Innovation Alliance” (ONIA) that potentially competes with Arm globally.

Given the geopolitical nature of the semiconductor industry right now, whether or not Wu had taken over the joint venture, Arm China would still have attempted to market itself as a Chinese company. With Arm’s architecture facing stiff competition from the open-source RISC-V architecture, marketing in China would not have been very different.

Arm China doesn’t go so far as to say it is independent now, but it claims it  is “independently operated and Chinese controlled.” No matter what it calls itself, Arm’s company in China is nonetheless still 49% owned by Arm Ltd. One Chinese investor in Arm China, Ningbo Meishan Bonded Port Area ARM Investment Management Partnership, has sued the company in a Shenzhen court over the standoff with Wu, but cases like this may take years to be resolved.

This whole situation is a red flag for any foreign tech company considering a JV in China. There are other ways of entering the market that might be more suitable for some companies. You should explore these before going the JV route, and safeguard your company chops! 

Perhaps most important of all, the conflict in China threatens the entire Nvidia-Arm acquisition deal. What can Nvidia offer China in order to get the deal through? Can Arm China still get access to its UK parent’s IP, notably the next-generation Arm v9 architecture?

With a Chinese face

Around 27% of Arm’s revenue originated from the Chinese market in 2020. From its launch in 2017, Arm China was intended by Arm and SoftBank to appear more Chinese and to allay any fears of its large Chinese customers that supplies from a foreign company could be abruptly cut off.  

Seeing the threat of RISC-V and self-developed instruction set architectures (ISAs) combined with sanctions on ZTE taking effect only months before, Arm in 2017 was making a move to cast itself as a local option and continue the China gravy train. At the time, it seemed like a shrewd move to maintain sales growth in China. So was appointing Wu, a China-born US citizen, educated at Michigan and Berkeley, who had worked for Arm in China since 2014.

June 2020:  Boardroom showdown

Arm discovered in 2019 that Wu had been attracting investments to Alphatecture, his own fund for investing in tech startups, when he should have been bringing them to the Hopu-Arm Innovation Fund. (Not surprisingly, Hopu Investment Management Company, one of the Chinese investors in Arm China, has been siding with the mother company). In June 2020 Arm China’s board of directors, four of whom were appointed by Arm Ltd., voted seven-to-one to oust Wu. He refused to leave, kept the registration documents and all-important company chops, and is alleged to be paying his own legal expenses from Arm China’s bank account. Over a year later, he remains in charge at Arm China, despite attempts by both foreign and Chinese owners to remove him and to appoint new executives. 

As long as Wu controls the company chops, the board members can’t get rid of him because company decisions need the chops to become official. Over a year ago, SoftBank and Hopu asked Shenzhen regulators for a replacement seal. Some observers have speculated that Wu has backing from high-level Chinese officials, but that cannot be verified. Arm China’s Chinese state investors include sovereign wealth fund Chinese Investment Corp. (CIC) and Shenzhen government-owned Shum Yip Group.  

In fact, Wu is suing the three executives the board tried to reinstate. In July 2020, Wu even wrote an open letter on Arm China’s WeChat account, asking the Chinese government to help him fight Arm. A year on, they still haven’t publicly come to the rescue. Arm China owners last year offered Wu tens of millions of dollars to leave but he still occupies Arm China’s head office in Shenzhen.

The chops are still in Wu’s hands, and he isn’t budging. I’ve witnessed first-hand the entourage of bodyguards he has at events. Could the mysterious chops actually be on his person at all times?

August 2021: From Arm China to Anmou Technologies

On Aug. 26, Arm China officially launched a new brand, Core Power (Hexin Dongli), to promote self-developed IP (CPU, GPU, XPU, SPU, VPU, ISP, NPU) and services. It vowed to continue the localization of Arm’s CPU architecture and to create products suitable for the Chinese market. Much emphasis was placed on self-development, how Arm China  is “independently operated and Chinese controlled”. Wu said at the event, “Since it was established in 2018, Anmou Technologies has not only inherited Arm’s CPU business in China, but also deployed new businesses for the digital age”. Rumor has it that Arm China employees used the words “peace and love” to describe the relationship between Arm China and Arm, but I can’t confirm this. The company was described, however, as “China’s largest CPU IP supplier.”

So, it is claiming to be Chinese: Chinese controlled, Chinese run, with Chinese IP and, even now, is not just licensing Arm IP but developing its own. From a marketing standpoint, its press releases no longer say “Arm China” but “Anmou Technologies,” the legal name in China. It is clearly trying to erase any indication it has foreign connections.

Arm China may now be an Arm rival

The most startling announcement at the Aug. 26 event concerned self-developed IP, especially the neural processing unit (NPU) microprocessor. 

Another interesting bit of news was that Arm China had created an “Open NPU Innovation Alliance” (ONIA) in June, with Wu as the alliance’s chairman. The alliance’s website says the NPU’s ISA is open source and will be promoted globally, following a business model that seems similar to RISC-V Alliance’s. While intended for worldwide participation, so far all alliance members are Chinese entities. Besides Arm China, the 54 members include AllWinner, Changan Auto, Rockchips, Sword7, Sanechips (ZTE), TCL, and Tsinghua University.

This alliance has the potential to compete directly with Arm’s own NPU cores. Surely, this was never the vision of Arm executives in Cambridge or of Arm’s owners in Tokyo. Having said this, the whole endeavour feels like a difficult undertaking, different NPUs may be good at different applications. I guess this group will need to decide on what their applications are rather than trying to have a solution for everything.

A cautionary tale

As stated above, this situation seriously puts in doubt the viability of any tech JV between Chinese and foreign partners. It isn’t a good look for China if Beijing wants to attract future foreign investment in this sector. 

Arm and SoftBank wanted to find ways to make more money out of China. Yes, China is a different kind of market. In other markets it is unlikely a JV would be considered by a chipmaker or designer, but Arm executives wanted as much access as possible, so pretended to be as Chinese as they could to curry favor. The strategy backfired in a spectacular way.

JVs are often touted as the best way to deal with the Chinese market but, all too often, the foreign partner is left with a husk of a company while local management runs off to set up a competitor,  taking all the well-trained staff with them. By not even bothering to set up a new company, Wu can be credited with an innovation in the decades-old scheme. Keep the chops and it’s all yours, baby. There are many other ways to be successful in China, don’t let anyone talk you into a JV without doing some homework on other options! Even if you have the most shares of any single party and on paper have control like Arm, you may find out the hard way how little you may have. 

How will this affect the Nvidia-Arm acquisition? Arm’s ownership shifting from Japan to the US will make it be subject to US sanctions. It certainly could erode the value of the deal. In my opinion, Nvidia, the world’s biggest maker of graphics and AI chips, will have to offer the Chinese government something big in order to get the deal through. 

As of now, Arm China can license Arm’s v9 architecture if it wants to, but it has so far chosen not to. It essentially acts as a distributor of the IP to Chinese companies but does not touch the IP, which goes directly from Arm to the Chinese licensee. Indeed there are several Chinese licensees of the v9 IP, including at least one architectural licensee. It is unclear why Arm China doesn’t want to license v9 and make modifications like what it does with v8. Either way, Arm, being a British firm, faces no restrictions on licensing to Chinese companies right now. But this could change with an Nvidia acquisition. With v9 already being in China, including architectural licensees, it is hard to see what Nvidia can offer to convince China to let the acquisition go ahead.

Correction: The last two paragraphs of this article have been updated to reflect the fact that Arm Ltd is still licensing the Arm v9 IP to Chinese companies. A previous version of the article incorrectly states that Chinese companies have no access to the IP.

Chip design companies have to plow a high proportion of revenue back into research and development (R&D) in order to catch up with competitors or to just stay ahead of them. The more a company spends attracting the best researchers and licensing the best tools, the more likely a company is able to innovate, keep up with Moore’s Law, stay ahead of the competition, and win the most market share. If a company doesn’t spend enough and falls a generation behind competitors, then it will end up either having to burn money to catch up — or find something new or niche to do.

Spending 18% of revenue on R&D for a long time has been considered a healthy share. For the semiconductor industry as a whole, this share may even be 22% now, perhaps making it the industry where the most is spent on R&D as a percentage of revenue. But are Chinese companies keeping up with this? Some state-backed chipmakers are attempting to help fulfill Beijing’s ambitious goals of replacing much of the nation’s imported semiconductors with homegrown products. Are they spending a larger proportion of their revenue to catch up with their international peers?

Looking at the numbers, we see that most Chinese chip companies are spending about 18% of their revenue on R&D. That’s on par with the global norm. But since their revenue tends to be smaller, you would expect they’d have to spend an even higher percentage to catch up.

US vs China fabless R&D spending

The US Semiconductor Industry Association estimates that US chip companies, on average, spent about 20% of their revenue on R&D in 2019. Some spend much more: Marvell spent around 40% in 2020, Nvidia 26%, and AMD 23%. Microchip Technology, however, spent only 16.6% in 2019.

Looking at Chinese fabless companies listed in Shanghai and Shenzhen, we can see the average is around 23% of revenue in 2020. Removing the one obvious outlier, Cambricon, which spends 167% of revenue on R&D (it’s in the burning-money-to-catch-up stage and should be counted as a startup in some ways, despite being listed), this percentage drops to 17.5%. That is almost the aforementioned healthy 18% share, but less than what we are seeing in the US.

But hang on a minute, if Chinese fabless companies are spending similar percentages or less than US counterparts, how does this compare in pure dollar terms? How large is the gap? Let’s compare a few similar US and Chinese companies. 

The largest disparity is between two designers of graphic processing units (GPUs): Nasdaq-listed Nvidia and Shenzhen-listed Jingjia Micro. While Jingjia, founded in 2006, clearly has no plans to replace Nvidia anytime soon, it does promote itself as the creator of a domestic GPU/domestic graphics card. It also spends a healthy 27% of revenue on R&D, slightly more than Nvidia’s 26%.

Jingjia and Guoxin 

As you can imagine, the two companies’ revenues are quite different. Jingjia’s revenue was $100 million (RMB 645.6 million) in 2020, while Nvidia’s was $10.92 billion. In other words, the $27 million Jingjia spent on R&D was equivalent to less than 1% of Nvidia’s R&D budget for the same year. Despite its best efforts and even adding in some government investment, it isn’t likely Jingjia is ever going to compete with Nvidia. Instead, it will likely maintain a niche within China and win some government-related business.

Guoxin Micro is a bit of a mixed bag. It designs microcontrollers, field-programmable gate array (FPGA) IP, and smart card chips, among other things. Let’s take Shenzhen-listed Guoxin as an example of a Chinese FPGA company—a company that makes chips that can be configured after they are produced. Guoxin provides the FPGA intellectual property (IP) for Pango Micro, a Tsinghua Unigroup company. It currently only spends around 11% of revenue on R&D and that is split between various products, not just FPGA IP. For the benefit of the doubt, let’s say all 11% is invested into FPGA R&D; that works out to $55 million. Xilinx invested 27% back into R&D in 2020; that works out to $195.2 million, meaning Guoxin’s investment is around 28% of Xilinx’s. In short: China’s FPGA efforts right now lag far behind and will struggle to catch up if this remains the case.

Okay, so maybe these are two extreme examples, but who seems to be doing better? Well, while Taiwan’s application-specific integrated circuit (ASIC) maker GUC is larger than China’s Verisilicon in terms of revenue ($475 million vs. $260 million), GUC is spending around $89 million, or 19% of its revenue on R&D, while Verisilicon is spending a whopping 35%, or $91 million. It seems as though Verisilicon wants to match GUC’s dollar R&D spend, a wise decision given GUC is essentially part of TSMC, the world’s largest contract chipmaker. Shenzhen-based Goodix, famous for its fingerprint sensor chips, is spending around 26% on R&D, which equates to $260 million, clearly world-leading in this area.

Conclusions: spend more

While R&D spend as a percentage of revenue and total R&D dollar spend are things we can look at to determine how innovative a company may be, they are not everything. Many of these companies will have other sources of money for R&D spending, such as VC investment or government funds that may not show up in these statistics. 

Also, a large proportion of any R&D budget is spent on salaries, and while we see headlines of huge salaries being handed out by some companies in the Chinese semiconductors industry, most companies cannot afford to pay them. On average, salaries are below those in US, European, and Taiwanese counterparks. This means some of these R&D dollars may go further in China than they might in other countries. Indeed, the majority of these companies are expanding their R&D teams quite significantly each year. Goodix added 578 people to its R&D team in 2020, for example, while Verisilicon added 168.

In conclusion, these listed Chinese companies are far behind international competitors when it comes to R&D spend. Only companies with considerable backing such as Cambricon can afford to run at a huge loss in order to reach world-beating status. Many will stay in their corner of the domestic market, largely because that’s all they ever intended. And that’s fine. Yet for Chinese companies that have higher aspirations to catch up with or even surpass foreign competitors, it is essential that they crank up their spending on R&D.

Chinese chipmaker Wingtech said on Monday that it had closed a deal to buy Newport Wafer Fab (NWF), the UK’s largest chip fabrication plant. The deal was closed after the UK government initially considered blocking it. 

Why it matters: The UK government’s clearance on the deal is a breakthrough for Wingtech, which quickly established its dominant position in China’s car chip industry through overseas acquisitions since 2018. But the single approval doesn’t mean Chinese chip firms looking to buy chip plants abroad will enjoy a smoother regulatory environment.

• NWF is a manufacturer of low-end chips. The plant mainly produces 180-nanometer (nm) wafers, while the industry’s bleeding edge is the 3-nm process by Taiwan’s TSMC and South Korea’s Samsung.

Details: The UK government gave Wingtech the green light to take over NWF’s parent company on Aug. 12, according to a Wingtech filing (in Chinese) to the Shanghai Stock Exchange.

• Wingtech said its acquisition of NWF had been closed as of Monday. It now fully owns the UK firm through Nexperia, Wingtech’s Dutch chip subsidiary. 
• NWF’s operation might be affected by domestic and overseas industry policies, said Wingtech’s filing, without elaborating.

Context: The NWF deal, conducted through Nexperia, was previously subject to a national security investigation by the British government following backlash from some UK lawmakers.

• Nexperia offered GBP 63 million (around $87.2) to buy NWF on July 5. The deal met with little regulatory pressure when it was first announced, but it soon met with more official scrutiny in the UK. 
• Some UK politicians have advocated taking a hard line on the deal. Tom Tugendhat, a UK parliament member and the chairman of the parliamentary Foreign Affairs Committee, told CNBC on July 5 that he would be “very surprised” if the deal was not being reviewed under the National Security and Investment Act, a November law passed to protect key UK assets from foreign takeovers.
• On July 7, UK Prime Minister Boris Johnson said he had ordered national security advisor Stephen Lovegrove to review the acquisition. Lovegrove had 30 days to complete his review.

For China’s chip companies with money in hand, acquiring foreign chip firms has always been a shortcut to obtaining talent and technology. However, acquisitions are facing more resistance overseas, as deals to buy NWF and Magnachip are likely to be blocked. 

Around 86% of the 57 semiconductor merger and acquisition (M&A) deals by Chinese firms between 2015 and 2019 targeted foreign firms, making the country the primary buyer of international chip companies, according to Deloitte China. Now, Western countries are increasing scrutiny of those deals.

Two blocked acquisitions: On July 7, British Prime Minister Boris Johnson said his government will review an offer by Nexperia, a Dutch firm wholly owned by China’s Wingtech, to buy the UK’s largest chipmaker, Newport Wafer Fab (NWF).

• The deal met with little regulatory pressure when it was announced in early July. At the time,  the UK government said it wouldn’t intervene in the deal.
• But some politicians have lobbied to take a harder line. On July 5, Tom Tugendhat, a conservative member of parliament and the chairman of the parliamentary Foreign Affairs Committee, said he would be “very surprised” if the deal was not being reviewed under the National Security and Investment Act, a November law brought in to protect key UK assets from foreign takeover.
• Hamza Mudassir, visiting fellow in Strategy at the Cambridge Judge Business School, argued in a commentary that NWF “is neither strategically nor financially significant enough for the UK government to justify an intervention” because of its outdated technology.
• NWF mainly produces 180-nanometer (nm) wafers, while the bleeding edge of the industry is the 3 nm process by Taiwan’s TSMC and South Korea’s Samsung.

In late June, the US government halted a Chinese investment firm’s acquisition of South Korean chipmaker Magnachip. Nevertheless, Chinese regulators subsequently gave the deal a  green light.

• Wise Road Capital, a Beijing-based private equity firm, announced the acquisition of Magnachip in March for $1.4 billion. 
• Magnachip is a manufacturer of driver chips in smartphone displays, producing circuits controlling other components like organic light-emitting diode (OLED) displays.
• The Committee on Foreign Investment in the United States (CFIUS), a panel headed by the Secretary of Treasury and consisting of nine other US cabinet members, blocked the deal on June 15 through an interim order. According to a June 17 filing by Magnachip, CFIUS also blocked the company from delisting from the US stock market, which Wise Road Capital reportedly said it planned to do after the acquisition.
• On June 10, Business Korea reported that South Korea’s  Ministry of Trade, Industry and Energy had proclaimed Magnachip a “national core technology,” making the deal subject to the South Korean government’s approval.

Change of attitude: Neither the UK’s NWF nor South Korea’s Magnachip is a leading player in the semiconductor industry, and it’s likely both deals would have gone through easily a few years ago. The investigations are clear signs that Western governments are changing their view of Chinese firms buying their chipmakers.

• When Netherlands-based Nexperia was acquired by Chinese contract smartphone maker Wingtech in 2018, the transaction was completed smoothly despite being subject to review by both the US and Dutch regulators.
• Chris Miller, an assistant professor at Tufts University’s Fletcher School of Law and Diplomacy, wrote that by stopping Chinese firms from taking insignificant chip firms like Magnachip, the Biden administration had “de facto decided that all chip firms—even if small, seemingly innocuous, and barely linked to the United States—are off limits to Chinese buyers.”
• “If Magnachip isn’t allowed to couple up with a Chinese private equity fund, it is hard to imagine anyone else will be allowed to, either,” Miller wrote in a commentary in June.

Also in the news

A spree in STAR listing of chip firms: In what Chinese media called a “sprint” of chip listings, Shanghai’s STAR Market accepted a record 13 semiconductor companies in June and July out of the 34 companies it approved in the two months.

• These companies include Shanghai-based Puya Semiconductors, which makes storage chips, and Jiangsu-based Macmic, a designer and manufacturer of radio-frequency semiconductors.
• The registration-based high-tech board now has a total of 50 semiconductor shares as of Tuesday, more than 15% of its total listed companies.

China chip production hits a record high: On July 15, the South China Morning Post reported that China produced 30.8 billion wafers in June, citing government data.

• The number beat the previous single-month record of 29.9 billion units in May.
• For the first half of the year, China’s semiconductor production reached 171.2 billion units, up 48.1% from the same period last year.
• Still, the production is insufficient to meet domestic chip demand. The country imported more than 310 billion integrated circuits in the first half of the year, said the report, citing customs data.

No bailout for troubled chip champion: A major semiconductor conglomerate that owns many of China’s leading chip companies was forced into bankruptcy proceedings. On July 9, Tsinghua Unigroup, a state-backed chipmaker, said a creditor of the company has proposed bankruptcy proceedings for the company over bond defaults. It’s a sign that Beijing is willing to let national champions fail, even if they’re working on semiconductors.

• The company didn’t disclose the total amount of its unpaid debts. The Wall Street Journal reported in December that the group had defaulted on nearly $2.5 billion of international bonds.
• The bankruptcy proceedings are still subject to rulings of a Beijing court, which accepted the case on July 16, Chinese media reported. 
• Tsinghua Unigroup, backed by the prestigious Tsinghua University, is among China’s largest chip conglomerates. The company is also notable for owning China’s first 128-layer NAND and its blocked bid for Micron.
• Chinese e-commerce giant Alibaba is considering bailing out Tsinghua Unigroup. Reuters reported on July 13 that Alibaba and several Chinese state-backed firms were weighing bids for a stake in a subsidiary of Tsinghua Unigroup, potentially providing it with funds to settle the debt dispute.

China’s biggest chipmaker, Semiconductor Manufacturing International Corp (SMIC), posted strong revenue and profit growth in earnings released on Thursday.

Why it matters: SMIC posted robust growth despite being banned from importing US technology. The company attributed the growth to strong domestic demand and rising chips prices due to a global semiconductor shortage that began early this year. 

Details: SMIC’s net profit jumped 63% year on year to $405 million in the quarter ending in June, according to a Thursday earnings report (in Chinese). Revenue grew 43% year on year to $1.34 billion. On Friday, SMIC’s share price opened 8.6% higher than the previous day’s close price and soon lost most of its gain. At the time of writing, the stock was up 0.9%.

• SMIC raised its full-year growth forecast to 30%, up from “less than 10%” forecast in February.
• SMIC’s profit margin was 30% in the quarter, up from last year’s 27%. 
• Zhao Haijun, SMIC co-CEO, said in a Friday earnings call that growth in the second quarter was mainly driven by strong domestic demand for consumer electronics and electric vehicles chips.
• Zhao said being added to the US export blacklist has hurt the company’s ability to develop advanced chip-making technology. In December, the Trump administration placed SMIC on the Department of Commerce entity list, which bars the company from importing US technology without a government license.
• Zhao said SMIC has faced difficulties importing US equipment to make advanced 14-nanometer and 28-nanometer chips. He added that the company is communicating with the US government and suppliers to address the issue.

Context: Shanghai-based SMIC is backed by the Chinese government and state-owned investment firms. The company is China’s largest contract chipmaker, manufacturing chip designs for companies including Huawei and Qualcomm.

China approved a Chinese firm to acquire South Korean chipmaker Magnachip in late June, a week after the US government paused the acquisition for review and the South Korean government initiated a deal review. Wise Road Capital, a Beijing-based private equity firm, received approval from Chinese regulators to acquire Magnachip on June 21.

Why it matters: Magnachip is a world-leading manufacturer of driver chips in smartphone displays, producing circuits controlling other components like organic light-emitting diode (OLED) displays. The acquisition has raised concerns in South Korea that the country may lose its chipmaking advantage to China.

• China’s approval alone won’t close the deal, which needs approvals from the US and South Korean governments.

China’s approval: The antitrust bureau of China’s State Administration for Market Regulation said in a Wednesday statement (in Chinese) that it had “unconditionally approved” the deal between Wise Road Capital and Magnachip.

• China approved the deal on June 21, but only revealed it to the public on June 30. 
• Magnachip announced in March that it would sell to Wise Road Capital for $1.4 billion. 

US and South Korean reaction: The US blocked the deal on June 15. In South Korea, the deal was met with public pushback, prompting a review from the government.

• The Committee on Foreign Investment in the United States (CFIUS), a panel headed by the Secretary of Treasury and consists of nine other US cabinet members, blocked the deal on June 15 through an interim order. According to a June 17 filing by Magnachip, CFIUS also blocked Magnachip from delisting in the US stock market, which the Chinese firm reportedly said it planned to do after the acquisition.
• Magnachip is incorporated in Delaware, and listed on the New York Stock Exchange. Despite having little presence in the US market, Magnachip is considered a “US business” by US law. According to the Code of Federal Regulations, a “US business” refers to any entity engaged in interstate commerce in the United States, regardless of the nationality of the company or the person who controls it.
• On April 8, unionized workers of Magnachip staged a sit-in at the company’s campus in Gumi, South Korea, expressing opposition to the deal, according to local media Business Korea.
• On June 10, Business Korea reported that the Ministry of Trade, Industry and Energy of South Korea had proclaimed Magnachip as a “national core technology,” making the deal subject to the South Korean government’s approval.

Context: In 2004, Magnachip was spun off from South Korean memory semiconductor company SK Hynix and purchased by US firm Citi Venture. The company went public on the New York Stock Exchange in 2011.

• Despite being listed and incorporated in the US, Magnachip is based in South Korea. Most employees are South Korean, and most factories and offices are in South Korea, according to South Korean national news agency Yonhap (in Chinese). The agency added that it has always considered Magnachip a South Korean company.

On June 21, Nuclei System Technology, a Shanghai-based RISC-V chip designer, closed a Series B of more than RMB 100 million (around $15.5 million). The financing round was the firm’s third  in the past year, according to local media reports. Backers of the company included state-owned China Electronics Technology Group and smartphone maker Xiaomi.

Founded in 2018, Nuclei System Technology is one of the largest Chinese companies designing chips using RISC-V, an open-source chip architecture that is gaining popularity among Chinese companies. While the basic RISC-V architecture is free to use, Nuclei’s designs are customized based on real-world needs and are ready to be manufactured. The company’s products are already being used by some of the country’s most popular payment systems, like Alipay and UnionPay.

Nuclei is just the latest example of a rush into the RISC-V space in China. RISC-V is an  alternative to mainstream architectures like x86 and Arm, which are proprietary.  It was long considered a “hobbyist architecture.” Now, China’s semiconductor industry is taking RISC-V seriously. Alibaba and some of the country’s largest chipmakers are joining the bandwagon, rolling out RISC-V-based processors. 

That’s because RISC-V has given Chinese chip designers an alternative to the two dominant architectures:  US chipmaker Intel owns x86, and Japan’s SoftBank owns Arm Holdings, Ltd.. An open-source architecture could free chipmakers from relying on other architecture designers and spending high licensing fees.  

For now, RISC-V remains something  of a hipster architecture. But major companies are already experimenting with it for smartphones, and experts say it could be mature within a decade.

A lightweight architecture, RISC-V is expected to appear first in devices on the internet of things (IoT). It also has potential in data centers, especially those for the purpose of machine learning (ML) and artificial intelligence (AI), because of its ability to modify source code.  Chinese e-commerce giant Alibaba has made a phone prototype based on RISC-V that can execute simple tasks, though it is still an experiment. 

But most importantly, China’s chip industry is embracing RISC-V due to fear that its access to foreign-owned architecture might be blocked in geopolitical conflicts. The move coincides with the Chinese government’s push to replace foreign-made software, operating systems, and infrastructure for the public services and key industries(notably banking) , with homemade solutions—which are often based on open-source projects.

Nuclei said in a marketing blurb on its website that one of its advantages is that it’s “homegrown and self-reliant.”

“At present, the copyrights of mainstream architectures like x86 and Arm belong to US company Intel and Japanese company SoftBank, respectively,” said Wu Di, an analyst at Changsha-based brokerage Chasing Securities. “There is a growing risk of being restricted from using the architectures as the US strengthens its grip on Chinese tech companies.”

Sanction free

Another feature that distinguishes RISC-V from Arm and x86 is its business model. RISC-V’s open-source license is called Creative Commons Attribution 4.0 International. That means anyone can put it into commercial use, modify its code, and distribute copies without cost.

By comparison, both x86 and Arm are proprietary architectures. Currently, there are only three companies licensed to manufacture x86-architecture processors: US companies Intel and AMD and Taiwanese chipmaker VIA. UK-based Arm Ltd. has adopted a looser commercial license system, giving chipmakers worldwide the ability to design processors based on the architecture. As of September 2020, Arm had issued licenses to more than 150 Chinese chipmakers, including Chinese telecommunications equipment giant Huawei, according to local media reports (in Chinese). 

Being open-source also means that RISC-V is not subject to export controls. In May 2019, Arm told staff to stop working with Huawei after the Chinese firm was hit by a US sanction. In March, Arm said it will “potentially” be able to license its latest generation of the Arm architecture to Huawei. 

Huawei’s two-year-long drama with the US government leaves Chinese companies feeling that they can’t count on access to foreign-owned proprietary ISAs. 

Major players

RISC-V is still new to China’s chip industry and most companies in the sector are startups. Here are four Chinese semiconductor companies that are working with the architecture.

Nuclei System Technology is a semiconductor design company and provider of commercial RISC-V processor IP.

• Nuclei was founded in 2018 by Synopsys and Marvell veteran Hu Zhenbo. Hu told a forum (in Chinese) in 2018 that China had realized “self-sufficiency” in chip design, and the real problem that dogged China’s semiconductor industry was “the lack of ISAs.”
• “RISC-V offers a new opportunity for China. RISC-V is likely to become a new mainstream architecture worldwide in the future and it is completely open. It will enable China to truly achieve the production of a mainstream and homegrown processor core,” he said at the time.
• Nuclei has rolled out several generations of chip designs that can be used in IoT and manufacturing, according to its website. The company said its designs have been used to build trusted execution environments (TEE) for fintech giant Ant Group’s payment platform Alipay and financial services corporation UnionPay.

GigaDevice, one of China’s largest manufacturers of nonvolatile memory (NVM), in 2019 launched a general-purpose microcontroller based on RISC-V. A microcontroller is a device that is widely used in IoT.

• The company is China’s largest maker of microcontrollers for IoT devices. It shipped (in Chinese) more than 200 million microcontrollers in 2020. Not all of the company’s microcontrollers are based on RISC-V.

Rivai, a Shenzhen-based startup, is a fabless chipmaker that designs RISC-V processors for IoT devices and artificial intelligence applications like robots and smart speakers.

• The company said on its website (in Chinese) that it is backed by Chinese search engine Baidu and Kai-Fu Lee’s Sinovation Ventures, but it didn’t specify the amount or time of the investment.
• Rivai was founded in 2018 by Tan Zhangxi. Tan is also the co-director of the RISC-V International Open Source Laboratory (RIOS Lab) at Tsinghua-Berkeley Shenzhen Institute.
• Tan told Chinese media in an interview in January that RISC-V is “not a cheap alternative to Arm” because it can do a lot of things that can’t be done by Arm. “As the demand for customization increases, RISC-V is expected to generate a market for high-end IP customization that is different from the Arm era,” he said.

E-commerce giant Alibaba’s chip unit, T-Head, in July 2019 released its first RISC-V-based processor design, Xuantie 910. The company said it can be applied to the design of chips for fifth-generation (5G) wireless networks, artificial intelligence, as well as autonomous driving.

• In May, the company announced (in Chinese) its second RISC-V-based processor, Xuantie 907. The company said at the launch that its Xuantie-series processors had cumulatively shipped more than 200 million units by the end of 2020. Most of T-Head’s Xuantie-series processors are based on architectures other than RISC-V.

State of play

Despite the promise, only a few Chinese companies have so far mass-produced processors based on RISC-V. Most of those processors are used in IoT devices, like surveillance cameras and smart refrigerators, rather than more sophisticated devices like smartphones and personal computers.

GigaDevice, a Chinese memory chipmaker, in 2019 launched its GD32V-series processors based on RISC-V. The company said the processors are mainly for devices like vehicular Global Positioning System (GPS) trackers, alarm systems, and point of sale (POS) devices, according to its website (in Chinese).

In January, T-Head, Alibaba’s chip unit, said it had  tested the Android mobile operating system on its RISC-V-based processor. However, the prototype system could only run simple apps like the clock and mail apps, but not complex operations like games.

RISC-V’s future in China

RISC-V is not coming to smartphones and laptops any time soon, but Chinese experts say RISC-V could emerge as a major ISA within the next decade.

One of the biggest problems for the 11-year-old architecture is the lack of an ecosystem, both in hardware and software. That includes systems on a chip (SoCs), developer boards, design tools, and the operating systems running on the chips.

Wu, the analyst at Chasing Securities, used the Android operating system as an analogy to argue that an ecosystem will not be a problem for RISC-V. 

“The RISC-V architecture is simple, efficient, free, and open, which also gives it a competitive advantage. In the face of the proprietary Symbian operating system, Android became one of the major OSs for mobile devices in the following decade by taking advantage of its open-source features,” he said, referring to a once-might mobile operating system on Nokia phones.

However, RISC-V is still a niche in China’s semiconductor market. Around 95% of Chinese-designed chips were based on the Arm architecture as of September 2020, according to a local media report.

Even if a RISC-V ecosystem readily arises for IoT devices, there are bigger obstacles to widespread RISC-V adoption.  “The hardest market to establish an ecosystem for is actually mobile, followed by desktop and server,” Allan He, vice chairman of China Software Industry Association’s Embedded Systems Association, told local media in 2019.

It will take a concerted effort (in Chinese) by chip designers to build up RISC-V’s ecosystem, said Hu Kangqiao, chief executive of Hexin Hulian, a Beijing-based company that designs home appliance chips based on RISC-V. “When the number of manufacturers designing RISC-V chips is in the same order of magnitude as ARM, it means that the RISC-V’s ecosystem is mature,” Hu said in 2020.

“That will take approximately five to 10 years,” he predicted. 

In 1965, American engineer Gordon Moore predicted that the number of transistors on a microchip doubles approximately every two years. This rule of thumb has largely held, and defined the state of the art of computer technology for decades. But as increasingly microscopic transistors run into fundamental physical difficulties and increasing costs, people have started to talk about a “post-Moore” industry.

For the semiconductor world, this is a huge challenge. But senior Chinese officials see opportunities. 

Moore’s law has been a sore spot for China’s semiconductor industry. The country has plenty of good chip design and “packaging” companies. But as chips grow smaller, Chinese-owned chip fabrication plants are a consistent generation or two behind the cutting edge. 

Over the past month, the concept of the post-Moore era has been a major talking point, permeating the highest levels of China’s government and the chip industry.

“In the post-Moore era, we have a great room for innovation and catching up,” Wu Hanming, academician of the Chinese Academy of Engineering and a former vice president of Semiconductors Manufacturing International Corporation, told an industrial forum on May 12.

On May 14, a Chinese State Council technology commission led by Vice Premier Liu He discussed what it called “potential disruptive technologies in integrated circuits (IC)” in a post-Moore world, according to a statement (in Chinese) published on China’s central government website.

Beijing has bet on a wide range of technologies that it hopes will make the country a leader in some of the cutting-edge areas of semiconductors. But experts say it is an open question whether Moore’s Law is really coming to an end soon, and whether China will have any advantages in a post-Moore world.

Is Moore’s Law really ending?

Quantum limits or no, components are still getting smaller. The size of transistors in microchips has dropped as the law predicts—the most advanced chips mass-produced by TSMC now have minimum feature sizes of 5 nanometers. On May 6, American tech company IBM said it is developing 2-nanometer chip technology which would fit “up to 50 billion transistors on a chip the size of a fingernail.”

However, the process of cramming more transistors into chips is facing physical roadblocks. One of the most critical problems is electrical leakage, which makes chips less energy-efficient and generates more heat as transistors get smaller than 10 nanometers.

There are also economic limits. New processor technologies often require new machinery, and the price increases as the transistors get smaller. 

The cost of setting up a 3-nm chip production line is around $31.4 billion, which is more than twice that of a 5-nm chip production line and four times of a 14-nm one, according to a report (in Chinese) by brokerage Kaiyuan Securities.

Moore’s Law “is coming to an end for industries that do not have the necessary volumes to be able to afford the skyrocketing costs of cutting-edge chip design and manufacturing,” Jan-Peter Kleinhans, a global semiconductor value chain expert at Berlin-based Stiftung Neue Verantwortung (SNV), told TechNode.

The cost of developing a cutting-edge 5-nm chipset is “only economically viable in markets with high volumes, such as consumer electronics,” he said. 

Kleinhans expects the trajectory of scaling the number of transistors may continue for another 10 years. “But most companies will not be able to afford it if they don’t have the necessary high volumes,” he added.

What’s beyond Moore?

In the post-Moore world, semiconductor industry experts have discussed three potential routes that industry insiders call “more Moore,”  “beyond silicon,” and “more than Moore.”

More Moore suggests that the shrinking predicted Moore’s Law will continue, just slower, with fab advances continuing to drive the industry.

“Beyond silicon” seeks breakthroughs to continue the Moore’s Law trend, looking at non-silicon materials such as gallium nitride (GaN) and silicon carbide (SiC). A shift from silicon might be crucial for the chip-making industry so it can build smaller devices, Intel’s former director of technology strategy, Paolo Gargini, said back in 2006.

“With innovations on the material level, these compound semiconductors can be significantly more performant and efficient than purely Silicon-based chips—especially for power and radio frequency semiconductors,” said Kleinhans.

Finally, the “more than Moore” approach focuses on increasing the computing power of microchips by improving chip design and the performance of software running on the system.

“Chip design is increasingly important to develop application-specific processors such as artificial intelligence accelerators that are significantly more power-efficient than general-purpose processors for machine learning tasks,” said Kleinhans.

Other possible breakthroughs in a post-Moore world include novel ways to make chips at current sizes, such as stacked ICs, which stack silicon wafers so that they behave as a single device to improve performance. 

What is China doing?

China’s showiest post-Moore plan is quantum computing technology, which seeks to harness the principles of quantum mechanics to supercharge processing power. Quantum computers are made of quantum circuits that run quantum bits, or qubits, which are similar to the bits in traditional silicon-based wafers.

In October 2020, China’s top leaders held a “study session” exploring quantum technology, during which Chinese President Xi Jinping said that “developing quantum science and technology is of great scientific and strategic significance.” China is about as close to widespread use of this technology as other major countries: not close.

The government is also supporting research into closer-range technologies, such as new materials and design techniques. On Jan. 28, the National Natural Science Foundation of China, an affiliate of the State Council, published a list (in Chinese) of technologies that it would fund in the “post-Moore Era.” They include new semiconductor materials, new design techniques and architectures, and high-density stacking IC packaging.

The funding project aims to “develop revolutionary basic devices, integration methods and computing architectures … and enhance China’s independent innovation capability and international status in the semiconductor field,” the foundation said.

Is post-Moore a ‘fresh start’?

Commentators regularly predict that China’s semiconductor industry will get a “fresh start” as Moore’s Law comes to an end. 

“The Post-Moore Era is a great opportunity for China to outdo the world’s cutting edge in semiconductors,” Kaiyuan Securities analyst Liu Xiang wrote in an investment note.

China can focus on what is beyond the current trajectory of semiconductor development, rather than play catch-up in current tracks of technology, Stewart Randall, Head of Electronics and Embedded Software at consultancy Intralink, told TechNode.

Randall agrees there will be a “fresh start” in a post-Moore world, and “everyone is starting from the same start line.”

But “I don’t think there is any specific area China has an advantage,” he said.

Peng Lianmao, an academician of the Chinese Academy of Science, told Chinese media in April that China could “overtake on a bend” by developing carbon-based semiconductor materials.

Peng said that China had “basically solved challenges faced by carbon-based integrated circuits” and commanded “a full set of carbon-based IC manufacturing technologies.”

Peng, who is also a director of Peking University’s Institute of Microelectronics, led a team studying carbon-based semiconductor materials, Chinese media reported in 2020. He said then that his team was developing a 90-nm carbon-based chipset that will have the equivalent capability of a 28-nm silicon-based chipset.

But Kleinhans of SNV doesn’t reckon that it would be easier for China to make more advanced chips, because “it needs even more collaboration across the three production steps: design, fabrication, and packaging.”

“It’s all about path-dependencies, so no one has a ‘fresh start,’” he said. “‘Post-Moore simply means that all other process steps besides fabrication have to step up their game to increase the performance and efficiency of chips. The slow-down of Moore’s Law is not a silver bullet to leap-frog to the top.”

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts.

In this episode, James and Elliott are joined by Stewart Randall, Director of Operations at Intralink Shanghai and a regular TechNode contributor. Stew talks about the current semiconductor frenzy in China, what are the factors fueling it, and how investors can differentiate the contenders from the pretenders.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:                   

• Stewart Randall – @stewrandall

Editor:

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

The Labor Ministry of Taiwan has told local recruiters to remove all listings for jobs in mainland China, especially those in critical industries such as semiconductors, Nikkei Asia reported on Friday.

Why it matters: The island is a hot destination for Chinese firms to hire chip talent. Taiwan is home to companies like Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker; and smartphone chip designer MediaTek, a major rival to Qualcomm.

• As China’s semiconductor industry races to catch up with international standards, talent is one of its highest hurdles. The China Semiconductor Industry Association (CSIA), an industry body backed by China’s Ministry of Industry and Information Technology, estimated that the industry faces a shortfall of around 220,000 skilled workers as of the end of 2020.

READ MORE: Where firms are looking to fill China’s chip talent gap

Details: The labor ministry banned recruitment platforms and headhunters from helping or representing any company hire individuals for work in mainland China, according to Nikkei, citing a government notice. The regulation is effective as of Wednesday, according to the report, which cited a local recruiter who informed clients of the new rules.

• “Due to geopolitical tension between the US and China, China’s semiconductor development has suffered some setbacks and as a result, China has become more aggressive in poaching and targeting top Taiwanese chip talent to help build a self-sufficient supply chain,” said the ministry in the notice.
• The ministry said headhunters may face fines if they violate the regulation. “If the recruitment involves semiconductors and integrated circuits, the penalty will be even higher,” the notice said.
• Taiwanese workers are still allowed to work on the mainland, including in the semiconductor industry.

Context: On March 9, Taiwanese prosecutors raided two local recruiters who allegedly broke the law by recruiting semiconductor workers from the island to work for a Chinese chipmaker, according to local media reports.

• Previously, there were no government bans on the hires of local workers for Chinese firms. A 1992 local law which forbids Chinese firms from doing business on the island without government approval has been used to restrict recruiting on the island previously.
• In August, Nikkei Asia reported two Chinese government-backed chip firms had together hired more than 100 veteran engineers and managers from TSMC. One of the firms was the now-notorious failure Hongxin Semiconductor Manufacturing Company (HSMC), which also hired former TSMC vice president for research and development vice president Chiang Shang-Yi as its chief executive.

China has become a huge magnet for foreign capital. In 2020, despite the COVID-19 pandemic, China passed the United States as the world’s largest recipient of foreign direct investment, while its exchanges hosted half of the world’s 10 largest IPOs and four of the top five. Meanwhile, US pension funds continue to pour money into big Chinese private equity deals—$13 billion between 2010 and 2019—despite geopolitical tensions and disappointment over the sudden halt of the IPO of fintech juggernaut Ant Group.

But for all the inflow of capital, very little of it has gone into Chinese science- and engineering-based startups, especially those working in advanced materials and manufacturing, industrial digitization, AI and IoT innovations, and climate tech. Such companies, often referred to collectively as those in the “deep tech” space (or, more commonly in China, “hard technology”), are where some of the most intriguing developments are underway.

While global private investment in Chinese deep-tech companies totaled $14.6 billion from 2015-2018, according to BCG and Hello Tomorrow, it represented less than 2% of the total private equity funds raised for the China market in that period, based on data from CVInfo.

I see the same lack of interest as a venture capital investor. It’s surprising. The hard-tech space is on a roll: Hard-tech investments in China have had a compound annual growth rate of more than 20% in recent years, with companies benefiting from government policy, an educated workforce, and sheer market size. And the outlook is bright. China’s spending on research and development jumped more than 10% last year, to a record $378 billion. Last month the government announced, as a key new target in the five-year plan, to increase by 7% or more a year its R&D expenditures for 5G, quantum computing, and other initiatives.

There are other reasons the hard-tech space should be attractive to foreign investors. Previously, when foreign interests expanded to China, they brought their own goods and methods. Today’s Chinese market is more dynamic and competent, bringing homegrown innovation to both the domestic market and overseas partners. Tech startups in this space have both the talent and government support to make innovative leaps more quickly than other countries. The size of the Chinese market alone suggests that, if these startups can scale, they will produce returns consistent with those sought by venture capitalists.

That China has both the means and determination to innovate and compete globally in technology and other sectors is increasingly clear—not that it comes without complications. Yes, geopolitical tensions complicate the picture, but there is still opportunity for savvy investors.

Consider the climate space: A recent Goldman Sachs report regarding China’s goal of becoming carbon neutral by 2060 projects $16 trillion in Chinese investment in that sector, creating 40 million new jobs. Plans for IT and cloud infrastructure are similarly ambitious. The technology for much of that is being developed in China and represents a huge opportunity for Chinese industrial startups and foreign investors who choose to back them. Advances in medical devices and solutions are of interest to many investors as well.

READ MORE: Tech in the five-year plan

China’s entrepreneurial climate is strong. The profile of CEOs for industrial startups is increasingly one of experience and sophistication. An earlier generation of young B2C entrepreneurs, such as Jack Ma, who started companies based on little more than a vision. Many of today’s entrepreneurs in hard tech are seasoned business leaders with technical expertise and, in some cases, experience working for multinational corporations. Some have even led public companies. These executives and their companies are geared to a venture-capital model and built for public listing or an M&A exit. In fact, a 2019 survey by Silicon Valley Bank found that more than half of Chinese startups expected their next source of funding to come from venture capital.

Also, the Chinese workforce is (as we have seen earlier in countries such as the United States) increasingly drawn to the startup world, where there is less bureaucracy and things move faster. China has made a huge bet on education. More than 10% of Chinese citizens are now considered scientifically literate by internationally accepted metrics, according to a survey conducted by the China Association for Science and Technology. All of these factors point to an era of rapid innovation and industrialization.

It’s difficult to predict what’s next concerning international trade relations, yet it’s worth noting that tensions tend to reinforce China’s commitment to developing its own hard-tech solutions. The “In China, for China” mindset, fueled by policy and enabled by educational strides, is producing hard-tech innovation that is increasingly competitive globally. China offers an entrepreneurial opportunity that foreign venture-capital investors would do well to explore.

China imported $350 billion worth of semiconductors in 2020—more than the value of the crude oil it imported the same year, according to the country’s customs data. Importing semiconductors also accounts for the country’s largest categorical trade deficit, where the difference between what China imports and exports for this particular type of goods is the widest.

China has been the world’s largest importer of chips since 2005. As a result, global chipmakers and the governments in their home countries have grown obsessed with its plan to pursue independence on semiconductors for the past few years. They fear that China is looking to build a domestic chip supply chain and decrease its reliance on imports that have proved profitable for certain economies, most notably South Korea, Taiwan, and the United States. 

It is true that China is determined to increase its domestic chip production. But the goal is not to make China a silicon locavore, entirely independent from global supply chains. Making a chip is a hugely complicated process involving hundreds of companies that specialize in different steps, and no country does it all. China is trying to bring the highest value-added steps in the process, like chip design and manufacturing, on shore, but no matter how well this goes the country will remain dependent on the industrys’ global supply chains.

The actual source of the 70% figure is hazy—in fact, it may have been invented for television. It was first mentioned by China Central Television in August. Citing “relevant data from the State Council,” the state broadcaster said that China will realize a “self-sufficiency rate of 70%” in semiconductors by 2025. But there is no support for such a claim in any Chinese official document. Media reports cite the country’s Made in China 2025 initiative, first released in 2015, as the source of the 70% goal, which is misleading. The plan did call for improving domestic chip-designing ability, but it did not set a specific timeline for self sufficiency or a figure.

Beijing certainly wants to bring more semiconductor manufacturing on shore—but its goals appear to be relatively realistic. 

Chips are China’s biggest imports

China’s semiconductor imports surged to an all-time high in March to stockpile against the threat of a global chip shortage. That month, the country imported 58.9 billion semiconductor units worth $35.9 billion, according to data released by China’s General Administration of Customs, the South China Morning Post reported.

In 2020, China spent more money on semiconductors than on crude oil, according to the data. In fact, semiconductors were China’s largest imports last year as well as the country’s largest categorical trade deficit. In 2020, China booked an overall trade surplus of $570.4 billion, while semiconductors ran at a trade deficit of $233.4 billion. By comparison, the trade deficit within crude oil was $185.6 billion in 2020.

China’s trade deficit in semiconductors is getting deeper, increasing 15.3% in 2020 from the previous year and surging nearly 150% compared with 2014.

One of the reasons for China’s push for self-reliance on semiconductors is to “develop high value-added manufacturing and service industries and help reduce the country’s largest source of trade deficit,“ wrote insurance firm Euler Hermes in a report (in Chinese) in February. 

And China is chips’ largest importer

China needs chips, but chip makers around the world also need China. The country accounts for a huge part of their revenue—56% for Qualcomm and 26% for Intel. Numbers for the industry as a whole were not available. The US-China decoupling on technology has been bad news for them and we’ve seen they have lobbied for less restrictions on chips exports to China.

The bottom of the semiconductor value chain

China is the world’s largest buyer of semiconductors, but most of what China buys isn’t consumed at home. Instead, chips are used to make other products and then exported. The chips are incorporated into end products like smartphones, personal computers, and telecommunications equipment, which are then exported to other markets.

Market research firm IC Insights estimated that 60% of semiconductors sold in China in 2020 were components for export products.Making gadgets out of imported semiconductors is a low-margin business. Semiconductor revenue earned by companies headquartered in China only accounted for 5% of global semiconductor sales in 2019, according to data from the Semiconductor Industry Association, a US-based industry body.

China has been involved in the global semiconductor supply chain for a few decades, allowing companies to nurture the talent and skills to move up the value chain and reap greater economic benefits.

China has seen Taiwan improve its standing in the semiconductor industry over the past 60 years. The island has moved steadily up the value chain since the 1960s when American companies began setting up assembly plants there. Today, the island is the world’s second-largest semiconductor manufacturer behind South Korea, and home to Taiwan Semiconductor Manufacturing Company, the world’s largest contract chipmaker. Chip manufacturing now contributes to more than 56% of Taiwan’s semiconductor industry.

For China, the push for self-reliance in semiconductors is not only about making semiconductors at home. It is about pushing the industry upstream on the value chain—making chips rather than using chips, designing chips rather than packaging chips.

While this has already been in process over the past two decades, Beijing’s call for self-reliance on semiconductors is likely to accelerate the pace. The following chart shows the decrease in low-value activities for China and an increase in activities higher up the value chain, specifically chip design.

Rational growth

China’s ambitious semiconductor autonomy plan is about improving the proportions of chip designing and chip manufacturing in the industry, the Euler Hermes report said. 

By doing so, the country has increased investment in the segment. This newsletter mentioned in March that cash flowing into China’s semiconductor firms surged more than fourfold in 2020 compared with the previous year. One of the biggest underwriters is the state. 

The country’s National Integrated Circuit Industry Investment Fund, known as the Big Fund, manages more than RMB 340 billion ($52.5 billion). Around 84% of the Big Fund’s investment went into chip manufacturing and design firms. The rest went mostly into chip packing and testing firms, lower-value inputs necessary to the ecosystem.

Meanwhile, provincial governments have set up guidance funds totaling more than RMB 300 billion to support local semiconductor industries. 

The numbers seem massive, but the state is not throwing its support behind chip firms at any cost, support that some of China’s biggest firms have enjoyed in the past. In November, the government allowed Tsinghua Unigroup, a major state-owned semiconductor manufacturer, to default on a RMB 1.3 billion bond.

“Tsinghua Unigroup is one of China’s largest and most advanced semiconductor firms,” wrote Euler Hermes. “Tsinghua Unigroup’s default sends a signal that China probably won’t provide funds to its leading companies at all costs.”

Last week, Chinese processor company Loongson announced plans to release a new instruction set architecture. Loongson is known for processors based on the MIPS architecture, and is linked to the Chinese Academy of Sciences.

The company said that the architecture has done away with “outdated content” found in traditional instruction sets and is more suitable for high-performance, low-power design. The new architecture, it claimed, makes it easier to compile software and develop operating systems or virtual machines. It is also compatible with mainstream instruction sets, so software designed for x86 or Arm should be able to run on LoongArch.

China’s quest for a homegrown CPU

The global CPU market has been dominated by the x86 architecture for years, essentially controlled by two companies, Intel and AMD.

For several years now Chinese companies have been trying to break this duopoly, with some success domestically but definitely not globally. Huawei and Phytium both used the Arm v8 architecture to create powerful 64-core server chips used in data centers and supercomputing. Under US pressure, it is difficult for either company to continue creating such chips.

Hygon and Zhaoxin design x86 processors through joint ventures with AMD and VIA, although Hygon fell into geopolitical trouble as well. Another company, Sunway, has always used the lesser-known, US-designed Alpha architecture, but as far as I know Sunway processors were only ever used within the government.

A few companies, most notably C-Sky and China Core, tried to promote their own architectures or variants of older ones like PowerPC into the commercial market. Both more or less failed and have since latched onto the much talked-about open-source RISC-V architecture. Alibaba acquired C-Sky in 2018. It’s now a leading RISC-V processor company under the name T-Head.

Loongson has always used the MIPS architecture. MIPS ISA has an interesting history, but it is going out of fashion—even its owner, MIPS Technologies, has ditched it in favor of RISC-V.

There has never been a successful Chinese architecture. C-Sky failed to scale and moved to RISC-V. Other companies that claim to be “made in China” have used or use existing open-source or licensable architectures.

Starting from scratch to build an ISA is a big challenge. It’s faster to design your CPU based on a mature architecture, because there is an existing hardware and software ecosystem to latch onto.

However, with Huawei, Phytium, Hygon, and Shenwei on the US entity list, China is worried that it doesn’t have a completely independent architecture. RISC-V may be a great platform for Chinese companies to go overseas with their designs, but it is a global initiative, and in some cases, China may want something that is totally its own.

READ MORE: China’s chipmakers could use RISC-V to reduce impact of US sanctions

No patent infringements

You may be wondering if LoongArch infringes on patents from other architectures. To allay such fears, Loongson paid for a third-party IP agency last year to analyze whether LoongArch infringed on other architectures including Arm, x86, RISC-V, and MIPS. They concluded that the design is unique and independent, that its manual was clearly different to others’, and that it didn’t infringe on Chinese patents for any of the major international architectures.

Perhaps the key phrase here is Chinese patents, rather than global. This may be something to keep an eye on. Loongson says they will analyze international patents as well but have so far concluded that the architecture is completely independent and controllable.

It seems to me that in order to avoid patent infringements and at the same time support emulation of other architectures they have ended up increasing the complexity of their instruction-set: 2,000 instructions is more than other mainstream architectures.

Loongson 3A5000

The Loongson 3A5000 CPU, announced last month, is already using this new architecture and has already been successfully “taped out,” and sent to a fabrication plant for production, at 12nm.

This CPU is aimed at the PC market. The interesting thing here is the process node. Loongson has always used GlobalFoundries to tape out chips based on ST-Micro’s FD-SOI process. One might presume they would continue to use GlobalFoundries for the new generation chip, but they have not announced what process it uses.

Some have said it will use the TSMC 12nm process, while others suggested it could be using SMIC, which now boasts the ability to tape out 12nm. SMIC may be not be ready for mass production yet, but for a test chip, this should not be a problem. This could be a Chinese architecture manufactured at a Chinese fab—just hearsay right now, but something to consider. TSMC or GlobalFoundries are still more likely, as SMIC 12nm would be new to the company, and SMIC has recently come under more restrictions from the US.

It’s also worth noting that Loongson moving from 28nm in previous chips up to 12nm shows development in its design capabilities. It also has a new server chip 3C5000 using the same process but it is said to be much more powerful.

Why not RISC-V?

Since Wave Computing became MIPS Technologies and ditched the MIPS architecture in December, there have been rumors that Loongson would follow. Most in the industry surmised the company would move to RISC-V like many others have. 

RISC-V seems to be the easiest route for a company like Loongson, but there are some reasons why it might have chosen not to. First, there are other companies doing this, so it would be difficult to differentiate. Secondly, it’s clear Loongson wanted something 100% Chinese, not reliant on an international architecture. Finally, Loongson might be planning to follow the RISC-V model and actually open the architecture.

According to its press release, once the IP patent situation is confirmed globally, they plan on creating a LoongArch Alliance where members can access the architecture and Loongson IP cores for free. While the company did not say the instruction set will be open to members, it is certainly possible.

It is rumored though that the company will join the RISC-V consortium. Prior to the LoongArch announcement, executives have said they are “looking forward to join the open-source instruction consortium.” Most thought this meant RISC-V, but they could have been alluding to their own alliance.

I wouldn’t be surprised if the company joined RISC-V. Its own architecture could be used within China for military or government applications, while RISC-V would be a better platform for Loongson to finally go global.

Time will tell

“Only by achieving independence in the root of the instruction system can the software ecosystem chains be broken,” Loongsoon management said in its press release. Such statements make it clear that the main purpose of LoongArch is for China to have its own fully independent instruction-set architecture.

Since C-Sky moved to RISC-V, this hasn’t been the case. While I do not see LoongArch becoming a globally competitive architecture, as ecosystems are difficult to build up, it could be another string in China’s self-reliance bow.

It will also be interesting to see how the LoongArch Alliance develops. Will it open the instruction-set architecture? If cores designs are free, is that just for research or for commercial use as well?

This whole initiative definitely has government support. Loongson came out of the Institute of Computing Technology, China Academy of Sciences, which is still a major shareholder, and a RISC-V consortium member, with one person on its board.

I will be keeping an eye on whether LoongArch infringes on any global patents, any processor benchmarks out there, how its alliance develops, and whether it does make a move to RISC-V in the end as well. It will likely be used in government and military PC and server applications, but can it move beyond that? Time will tell.

Last week, UK-based semiconductor design company Arm announced plans for the next generation of chips. The v9 architecture comes ten years after the release of v8, which is currently the standard used for mobile phone central processing units (CPUs) and many other processors.

There are some good articles on the new features v9 brings to the table, most notably the Realms feature, which promises to increase security by running applications while data is protected from inspection or intrusion by the host or any other software running on that host. The new architecture will also bring AI/ML extensions for AI support across its CPUs, network processing units (NPUs), and graphics processing units (GPUs), and the ability to improve performance by accelerating workloads in a CPU environment in ways that previously required external hard accelerators.

Licensing architecture

I’ve written an overview of major architectures in China elsewhere, but here’s a brief recap: Many Chinese companies design Arm-based chips, but most will license complete Arm cores on a single-use or multi-use basis, so they don’t have to design a core themselves.

More ambitious chip design companies may get an architecture license, which allows the licensee to change the design itself. This is what you need to create a customized core like the Kirin line of phone CPUs, designed by Huawei’s HiSilicon for use in its phones. But it’s difficult to build a core from scratch, so you have to be highly skilled.

Currently, only two companies in China have an architecture license for v8: Huawei and Phytium Technology, a fabless chip design company focused on Arm server chips..

Notably absent

Arm’s press release included several quotes from high-profile partners around the world, including representatives of three major Chinese smartphone brands; Xiaomi CEO Lei Jun, Vivo CTO Shi Yujian, and Oppo Head of Research Levin Liu. Notably absent were Huawei and Phytium Technology.

Both Huawei and Phytium previously bought architectural licenses from Arm, in part as a way to advertise their independence and control. To help them sell such a message Arm also created Arm China, a separate company that has its own issues.

The smartphone makers that did make the press release, have never been architectural licensees of Arm v8. This could change as they look to develop their own chips. All these companies have been investing heavily in building their own internal chip design capabilities.

However, I think for the time being they will stick with application processors from Qualcomm or MediaTek. As part of Arm’s presentation MediaTek announced that its first smartphone chip using the v9 architecture will be available by the end of 2021, sooner than any Chinese handset OEM would be able to design their own. That’s a lot sooner than they’re likely to be able to make their own.

Chinese handset companies will likely license Arm cores for individual designs, such as Xiaomi’s recent image signal processor design. Xiaomi’s previous attempt at an application processor was somewhat of a failure, and it makes sense for the company and others like Oppo and Vivo to focus first on simpler designs that can help them differentiate their products and also help them gain valuable real-world chip design experience.

So what are we to make of the absence of current licensees Huawei and Phytium? Are they not considered key partners, can they license v9 architecture, and does it even make sense for them to?

Can Huawei buy the v9 architecture?

Huawei has struggled to access semiconductors and IP since the US placed it on a list of companies which require licenses to buy US or US-linked technology. The absence of either company in Arm’s presser could imply that one or both won’t be able to upgrade to v9.

In response to such speculation, Arm has said that it can continue to license its IP to China including Huawei, concluding that its IP is of UK-origin and so not subject to the US ban. Ian Smythe, vice-president of solutions marketing at Arm said, “Following a comprehensive review, Arm has determined that its Arm v9 architecture is not subject to the US Export Administration Regulations,” adding that Arm had informed US government agencies of this conclusion.

That might not be the last word for Huawei. Ultimately, the US government may conclude that Arm’s Austin facility, which contributes to a lot of its high-performance architectures, means that Arm’s IP is sufficiently of US-origin to face export restrictions.

Phytium on thin ice

Phytium is not on the export ban list, and as such does not face the same restrictions as Huawei. However, it is on a list of “military-linked” companies that face restrictions on cross-border investments.

Also, the Washington Post reported today that that the Trump administration was planning to put Phytium on an export blacklist, but “ran out of time”. The article also reported Phytium chips are used at supercomputing centers that design advanced weapons systems for the People’s Liberation Army. This could heighten Washington’s scrutiny of the company, potentially leading to sanctions.

My best guess is that they will go ahead and secure a v9 license without much trouble, but they may be trying to keep a low profile in the hope that the US will not decide to target them. Watch this space.

Now or never

An architectural license gives Huawei and Phytium a certain amount of security: Once granted, the license is permanent, meaning Huawei would be able to continue designing new v9 chips indefinitely whatever actions Washington takes. But under present circumstances it might not be too useful.

An architectural license does not mean the licensee is licensing a specific core. They receive a set of specs for Arm’s cores and a testing suite. This allows the licensee to customize their own processor to fit their application. They can make cores that are faster, smaller, or less power hungry than standard Arm cores, or otherwise differentiated from standard Arm licensees.

Qualcomm and Apple rely on such licenses to create their chips, as did Huawei for its Kirin series. There are only a handful of such licensees globally, mainly because it costs a lot and requires a lot of time and internal expertise to create your own custom Arm core, while there are perfectly good cores available to license at a much cheaper price.

A license alone isn’t enough to make chips. If Huawei is able to buy an architectural license and does so, it still has no access to the EDA tools it needs and the fabs to actually manufacture a high-end Arm-based chip.

But it could be now or never. As competing companies move to v9, Huawei’s v8 license will soon be obsolete. It could actually make sense for the company to go in on an architectural license it can’t use for now in the hope that further down the line either restrictions on the company are removed or domestic self-sufficiency gets to a point where Huawei can get back into the high-end chip game.

With Nvidia’s acquisition of Arm also on the horizon, Arm could soon become a US-owned company. It could make sense for Huawei to lock in access to its IP now, although the same concerns could also motivate China to block the deal.

Conclusions

Access to IP is a chokepoint for semiconductors in China. As I’ve written before, RISC-V may help with this to some extent, but it isn’t as mature as Arm yet, and processor cores are just one of many different types of IP within a chip.

Despite RISC-V’s growth, Arm’s v9 architecture will be a core component for handset, server, IoT and automotive chips for the coming decade. For Huawei it may make sense to get in now, while it still can.

For its part, Arm will want to be free to license to Chinese companies and will be happy to take Huawei’s money. However, the reach of the US government can be long and if the Nvidia acquisition goes through I struggle to see companies on the entity list being allowed access. 

Some domestic analysts argue that Huawei should not rely on architectural licenses. “You may get a v9 license this time, but what about v10 or v11, etc? Does endlessly licensing foreign IP mean independence?” (my translation).

It would be strange to see China without any Arm architectural licensees, but that is a prospect.

We may also see new Arm licensees. Perhaps the likes of Oppo or Vivo will decide it makes sense for them. We all know they are investing huge sums into their own IC design capabilities.

On March 9, Taiwanese prosecutors raided two local recruiters that allegedly broke the law by recruiting semiconductor workers from the island to work for a Chinese chipmaker. 

The New Taipei Prosecutors Office said the two firms, WiseCore Technology and IC Link, had illegally hired “hundreds of Taiwanese engineers” through a joint venture set up with a Chinese chip design company over the past three years, according to local media reports. A 1992 Taiwanese law forbids Chinese firms from doing business on the island without government approval.

The action by the Taiwanese government is a response to a long-term trend of deep-pocketed Chinese firms coming to the island for semiconductor engineers. 

China’s semiconductor firms are hunting everywhere to fill a talent gap. That includes recruiting graduates, paying over market rates for overseas talent, and buying companies to get their experienced workers.

In 2020, cash flowing into China’s semiconductor firms amounted to RMB 227.6 billion (around $34.8 billion) through the capital market, a 407% increase from the previous year, as we saw last month.

Where did graduates go?

Every year, millions of Chinese young people graduate from universities and join the country’s growing educated workforce. The number of workforce entrants (including BA, MA, and PhD graduates) was 8.4 million and 8.2 million in 2020 and 2019, respectively.

158,000 graduates of all levels majored in microelectronics in 2018, a field that teaches the “design, manufacturing, packaging, and application” of integrated circuits, according to Shanghai University (in Chinese). Of these, only 30,000 graduates joined the semiconductor industry in 2018, representing only 19% of 158,000 microelectronics graduates that year, according to CSIA. In 2019, the ratio dropped to 13%. 

Semiconductor companies are finding it difficult to hire fresh graduates around the world. A 2018 Deloitte report found that “attracting millennials and recent graduates” was the top recruiting challenge for US semiconductor firms.

For more detail, we looked at the graduation report (in Chinese) released by the University of Electronic Science and Technology of China (UESTC), one of the country’s most prestigious universities for semiconductor training.

In 2020, 5,280 graduates of UESTC joined the workforce after finishing programs from undergraduate to doctoral level. Some 1,991 of those graduates studied semiconductors-related majors such as microelectronics; materials science and engineering; and optoelectronic engineering. 15.3% of UESTC’s graduates, or around 808 people, entered the semiconductor industry in 2020, while more than 50% of the university’s students end up working for “information technology and software” companies—think China Mobile or Alibaba—according to the report.

Huawei is one of the top employers of UESTC graduates, according to the report. The company has a chip-designing subsidiary called HiSilicon, but is best known as a manufacturer of telecommunications equipment and consumer gadgets. It’s not clear how Huawei hires were counted for purposes of the semiconductor total mentioned above. 

Other top employers of UESTC students include internet giants Tencent and Meituan, smartphone maker Oppo, and state-owned telecom company China Mobile. Only a few among them are semiconductor-focused firms, such as Chengdu-based Verisilicon Microelectronics, a chip designer; and Shenzhen-based Goodix Technology, a manufacturer of sensor chips.

Can study fill the talent gap?

The government is taking steps to encourage more people to study semiconductor engineering.

In January, China’s Ministry of Education decided to upgrade the “integrated circuit major” into the nation’s “first-level discipline,” meaning institutions teaching the major will receive better funding and more teachers, state-owned news agency Xinhua (in Chinese) reported.

The policy may fix the “bottleneck” problem that restricts the development of China’s semiconductor industry, Xinhua predicted.

The policy is part of China’s broader plan to push for the development of its semiconductor industry laid out in a central government initiative announced (in Chinese) in July 2020. The initiative also pledged to cut taxes for semiconductors educational institutions by up to 30%.

But more graduates won’t help much with a key dimension of the talent gap: experienced engineers.

Around 32.1% of semiconductor companies’ job postings demand three to five years’ experience, while postings that require less than one year’s experience are “on the decline,” according to the CSIA report.

Some recruiters say better training could make fresh graduates more employable. “China’s education used to be more focused on teaching the theories, lacking the training of collaboration and practical skills,” said Chen Lei, a semiconductor consultant at a headhunting agency. “Because the integrated circuit industry requires lots of collaboration and practice in the production environment, schools need to improve and strengthen those areas in the future training of talents.”

But Jodi Shelton, chief executive officer of Global Semiconductor Alliance (GSA), says the talent gap is a “worldwide problem.” “All countries are concerned about the lack of students focused on STEM [Science, technology, engineering, and mathematics] that are necessary to produce the next generation of innovation,” she told TechNode.

“The recent government plans and investment will help China become more competitive, but it will take time to catch up.”

Looking overseas

With limited options at home, Chinese semiconductor firms often turn to overseas markets. Taiwan, which shares a language with mainland China, has long been one of the most popular sources of talent for mainland chip firms. South Korea and the US are also popular destinations.

Taiwan is home to companies like Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker; and smartphone chip designer MediaTek, a major rival to Qualcomm.

Ahead of Taiwan’s crackdown on illegal hiring, Taiwanese DRAM maker Nanya Technology’s president Lee Pei-ing said in 2018 that his company had lost more than 500 engineers over the previous two years to Chinese competitors. He said that some of his engineers were being offered three to five times their current salaries by Chinese firms. Taiwanese engineers are not forbidden to take jobs in China.

In August, Nikkei Asia reported that two Chinese government-backed chip firms had together hired more than 100 veteran engineers and managers from TSMC. One of the firms was the later failed Hongxin Semiconductor Manufacturing Company (HSMC), which also hired the former research and development vice president at TSMC Chiang Shang-Yi as its chief executive.

In addition to headhunting talent from neighbors, Chinese companies have paid top dollar for acquisition and merger (M&A) deals targeting foreign semiconductor firms. 

In June 2020, Chinese contract smartphone maker Wingtech Technology completed its acquisition of Dutch semiconductor firm Nexperia Holding, paying almost the amount of the company’s market cap. The RMB 25.2 billion acquisition is the largest M&A deal in China’s semiconductor industry to date.

Analysts said the acquisition had turned the low-tech manufacturer into a “semiconductor leader” in China overnight. Wingtech said in a filing (in Chinese) to the Shanghai bourse that one of the reasons it wanted to buy Nexperia was that the company needed “high-end semiconductor talent” from overseas. The acquisition more than quadrupled the company’s share price from 2019 to a historical high in June, highlighting the value of semiconductor talent and technology. 

Of the 57 semiconductor M&A deals conducted by Chinese firms between 2015 and 2019, around 86%, or 49 deals, were outbound, or targeting foreign firms. By comparison, the ratio is 56.5% in Japan and 43.5% in Taiwan, according to a report (in Chinese) by Deloitte China.

The competition of talent

The talent gap is a problem worldwide: Global Semiconductor Industry Outlook report by GSA and KPMG ranks talent risk as a top-three industry issue, only behind territorialism and supply chain disruption. 

But for China, it’s especially grating. China is trying to scale up its industry in a hurry to achieve semiconductor independence and overcome US technological sanctions. “The competition between China and the US is essentially the competition of talent,” Zhou Zucheng, a microelectronics professor at the prestigious Tsinghua University, told Chinese media. If China is going to build this industry quickly, it’s going to need a lot more people to run it.

As China’s legislature prepares to meet tomorrow, we’re bringing you a special edition of our Insights column: a preview of tech in the 14th Five-Year Plan. We’ve looked through the last plan, and the documents describing priorities for the new one, to give you our baseline expectations for key tech areas in the new plan.

Greetings from Beijing, where the weather is just turning to spring, the air this week feels like taking a bath in an ashtray, and, across town, about 3,000 people are getting together Friday to kick off the annual meeting of China’s national legislature.

This is one of the big meetings: This year, the National People’s Congress will approve China’s 14th Five-Year Plan, which will set out the government’s economic priorities for the next half-decade. The meeting lasts from March 5 to March 11, and in previous years the plan has come toward the end of the session.

Technology and innovation are sure to play a leading role. “Innovation-driven development” was one of the first topics addressed in the 13th Five-Year Plan, issued in 2016, and the phrase is equally prominent in previews of the new plan.

What is (likely) new is emphasis on another key phrase: “self-sufficiency.” As the US has used its control of key technologies as a weapon, China’s efforts to produce its own have a new urgency.

For people with tech projects, the start of a new plan period means opportunity. The “money spigot” for homegrown tech and innovation is likely to get even more generous, said Uny Cao, vice president at the Zhejiang University Intellectual Property Exchange Center and friend of TechNode.

What are we looking for when the new plan is published next week? What’s likely to get the most attention—and which will get less? Below, you’ll find TechNode’s roundup of key mentions of technologies we expect to see highlighted in the 14th Five-Year Plan.

Data

A new approach to data management will reverberate across tech industries. The next stage of China’s tech policy will shift from an emphasis on developing cybersecurity and big data, to building up the data economy.

Mentions in the 13th Five-Year Plan: The last five-year development plan focused on building up cybersecurity and control over data. But it also set goals to get government offices to share data with each other and industry.

• The 13th plan promised crackdowns on black markets for personal data, and strengthened privacy protection for big datasets, including government credit information systems. The government also aimed at opening up government big data to the public through a digital platform.
• The 2017 Cybersecurity Law was the first big step for reform of China’s information security. Implementation of the Multi-Level Protection Scheme, a key part of the CSL, picked up in the summer of 2020, Carly Ramsey, who leads regulatory and political risk consulting at Control Risks in Shanghai, told TechNode. 

READ MORE: Dust has yet to settle two years after China’s landmark cybersecurity law

Expectations in the 14th Five-Year Plan: In the Fifth Plenum guidelines, data has joined an impressive new crowd: “[We will] advance the marketization and reform of the economic factors of land, labor, capital, technology, and data.” When a Communist Party puts you on the same level as labor and capital, you know you’ve made it big.

The Fifth Plenum guidelines call for the development of a rules-based data economy. Or as they put it: Establish basic systems and standards for data property rights, transactions and circulation, cross-border transmission, and security protection to promote the development and utilization of data resources.

“Ensuring the fluid circulation of data is now an economic imperative,” said Kendra Schaefer, head of tech policy research at Beijing-based strategic advisory firm Trivium. “In practical terms, that means that the overarching theme of China’s data policy over the next five years will focus on allowing data to be shared, transferred, bought, sold, and utilized,” Schaefer said. The plenum’s recommendations called for “systems and standards” in data property rights, market mechanisms for data, as well as cross-border data transfers.

READ MORE: China sets the rules for its new data economy

So what? “The 14th Five-Year Plan will mark the beginning of a new era in China’s approach to data policy,” Schaefer said. China is stepping up from the securitization of data resources to developing a system in which data can be exploited as a resource. In the upcoming plan period, we can expect more support for trade in data alongside a continued crackdown on bad cybersecurity practices and insufficient privacy protections.

Environment

One of the biggest components of the 14th five-year plan deals with action to combat the environmental damage that followed years of rapid industrialization and economic growth. In the wake of a vow to set China on a path to carbon neutrality by 2060, economic planners will be under pressure to come up with big changes. China’s tech sector stands to benefit: To reach the country’s emissions goals, investment in clean technology could reach $16 trillion in the next 40 years.

In the 13th Five-Year Plan: The 2016 plan laid out targets to reduce carbon emissions by cutting the country’s carbon intensity—the amount of carbon dioxide produced for every unit of GDP. Through subsidies, state planners pushed prices in the solar industry so low that it effectively went from being a high-tech sector to a commodity business.

• The document laid out action plans to combat air, water, and soil pollution. By last year, Chinese cities were expected to meet “good” air quality standards for more than 80% of the year. 
• The plan sought to reduce the country’s reliance on coal-fired power plants, and promote environmentally friendly construction and mining. 
• Also included were “improvements in supportive policies” for renewable energy sources.

Expectations: The new plan will likely clarify how China will reach peak carbon emissions by 2030 and carbon net zero by 2060, goals laid out to the UN General Assembly by President Xi Jinping in September.

• The thrust of Xi’s speech has been factored into energy and environmental planning in the new five-year plan.
• The new plan will likely outline ambitious capacity and consumption targets for wind and solar energy production, while placing further caps on coal-fired power plants. 
• Energy storage is also expected to play an important role in the new plan, as China seeks to improve grid and power security. 
• It is unlikely that there will be a move away from carbon intensity caps to hard carbon caps, as the country attempts to balance economic growth and cutting emissions, analysts said. 
• While the last five-year plan placed emphasis on reducing emissions from energy production, the new plan will place increased focus on minimizing pollution from industry, including steel and transportation. 
• Further integration between China tech and energy industries is expected, a goal laid out in the 13th five-year plan. 

So what? The world is waiting to see how China plans to reach its emissions targets by 2060. We expect the plan to create more targets and pressure on local governments to improve carbon emissions, but details on how these will be implemented—and how cleantech investment will be affected—will likely be spelled out in lower-level plans.

Autos

A pillar of China’s economic growth, the automotive sector has long been dominated by well-established foreign brands, which hold more than 60% of the market share, while domestic automakers are concentrated in the low-end segment. But that is changing as China’s strength in electric vehicles is boosting its position on the global industry value chain, thanks to strong policy support over the past five years.

In the 13th Five-Year Plan: When China’s cabinet in 2010 initiated a development plan (in Chinese) for seven strategic emerging industries, new energy vehicles (NEVs) was one of them. In 2016, Beijing set an ambitious target of 5 million sales of NEVs in the coming five years, a number which would mark the beginning of mass adoption. This initiative became part of Beijing’s larger goal of becoming the world’s next innovation powerhouse.

• The central government carried out a series of stimuli to foster a new source of economic growth—by offering subsidies for NEV purchases, especially for all-electrics and plug-in hybrids—in both public and private transport sectors.
• China’s top policymakers also vowed to achieve major breakthroughs in battery technologies, such as a higher energy-density level, which enables a longer driving range as well as better resistance to extreme temperatures.

Expectations: NEVs were briefly mentioned as one of the strategic emerging industries in the fifth plenum guidelines, but with no detail about the growth outlook.

• However, according to a policy paper released by the State Council in November, NEV sales were projected to account for 20% of total new car sales by 2025, up from the 2020 level of just 5.4%.
• Beijing also expected “significant improvement in the competitiveness” of its homegrown players in the fields of battery safety and in-car operating systems, among others, while promoting highly autonomous vehicles for commercial use cases in pilot programs. 

So what? China’s electric vehicle market staged a strong rebound after disruptions caused by the Covid-19 pandemic last year and has remained the world’s biggest market since 2014. However, there have been bumps on the road, including electric car fires and the ongoing auto chip shortages.

China also lags the US in the vehicle autonomy competition, raising calls for more effort put toward core technology advancement. Pledging for quality growth amid rising superpower tensions in the next five years, Beijing would have to stay the course in boosting the sector, while realizing little near-term profit.

Semiconductors

Chinese leaders have long vowed to achieve “self-reliance” in strategic technologies, and semiconductors are one of the priorities. The sector is expected to get major attention as China issues its development blueprint for the next five years.

In the 13th Five-Year Plan: The five-year plan ending in 2020 saw semiconductors, along with other high-tech sectors like robotics, smart transportation, and virtual reality, as “new areas of growth” for the nation’s economy, but didn’t make production of semiconductors a strategic priority.

• Priorities certainly have changed over the past five years as Chinese leaders realized how troublesome it is to rely on foreign imports of semiconductors. Huawei is a brutal example.

Expectations: In 2015, China set a goal to make 70% of the chips it uses by 2025 as part of its “Made in China 2025” initiative. Now the question is how China will achieve that goal. The country only produced 6% of the semiconductors it consumed in 2020.

• The fifth plenum vowed to implement a series of “foresightful and strategic” technology research projects including integrated circuits, quantum information, AI, and neural science.
• Despite the industry’s importance, the National Development and Reform Commission didn’t include semiconductors on a list published last September of “strategic emerging industries.” Electric vehicles and artificial intelligence were on the list.
• The central government will increase investment in the domestic semiconductors industry through vehicles like the National Integrated Circuit Industry Investment Fund.
• More favorable policies towards domestic chip companies are likely such as tax breaks and heavier tariffs on imported electronic components.
• Bloomberg cited sources as saying that Beijing has added in a draft of the 14th five-year plan “a suite of measures to bolster research, education, and financing” for the semiconductors industry. 

E-commerce

E-commerce falls under the broader concept of the digital economy, a major theme in the plan that also covers 5G, artificial intelligence, and big data. E-commerce is expected to play a greater role in driving China’s economic growth in the next plan period.

In the 13th Five-Year Plan: The development plan that ended in 2020 set out to expand the e-commerce sector by facilitating its deep integration with traditional industries and prioritizing its governance. China sought to integrate e-commerce into various areas including education, healthcare, culture, and tourism to drive innovation.

• The 13th five-year plan set out expectations for China’s e-commerce transactions to exceed RMB 40 trillion ($6.19 trillion) in 2020, the last year of the plan—double the transaction value in 2015. The figure includes RMB 10 trillion from online retail businesses. The sector was projected to employ more than 50 million people by the end of 2020.
• The period of the 13th plan showed mixed results for e-commerce. The country missed the plan’s goal of RMB 37.21 trillion in e-commerce transactions in 2020. Online retail sales hit their target, however, totaling RMB 11.76 trillion in 2020, data from the National Bureau of Statistics showed.

Expectations: China expects online commerce to continue supporting its macro strategies, notably poverty alleviation and the One Belt One Road initiative. E-commerce has become an important means for China’s rural dwellers to sell their agricultural products. With more free trade zones on the horizon, China looks to expand its cross-border e-commerce market in the next five years.

• As a booster for both domestic and international commerce, the industry plays a central role in goals set for the “dual circulation” concept, which refers to spurring domestic as well as global demand, creating circumstances where the two boost each other’s growth. The idea featured predominantly in recent policy statements, although the term has been a policy meme for several years.
• Chinese regulators are stepping up monitoring for unfair competition and monopolistic practices.
• Consulting agency Jiuhou Zongheng has forecast that China’s e-commerce transactions will reach RMB 50 trillion by 2024.

Blockchain

Blockchain could be a new item in the 14th plan. It’s had plenty of attention at top levels in the past year.

In the 13th Five-Year Plan: Zilch. Blockchain was not on top policymakers’ agenda back in 2016.

Push from the top: The technology had its breakout moment in Chinese policy in October 2019, when President Xi Jinping praised the technology at a Politburo study session.

• Since then, local governments have embraced blockchain governance projects and tried to spur innovation in the field.
• The National Development and Reform Commission is supporting the development of the Blockchain Services Network, an “internet of blockchains.”

No crypto: Chinese regulators are not big fans of one of the technology’s most popular applications: cryptocurrencies. The past year’s clampdown on unregulated cryptocurrencies “is meant to clear a path to regulated forms of digital assets, starting first with DCEP [the central bank’s R&D project that includes the digital RMB],” said Michael Sung, co-director of the Fintech Research Center at the Fanhai International School of Finance at Fudan University, told TechNode.

Expectations: The technology was not mentioned in the 14th plan guidelines issued after the Fifth Plenum.

• The cryptocurrency mining industry might be negatively affected by financial de-risking campaigns and sustainability goals. The industry consumes vast amounts of electricity and is dependent on volatile crypto assets. 

READ MORE: Inner Mongolia may ban crypto mining: Blockheads

So what? China is already very interested in blockchain, but has not given the technology the same level of support as, say, electric vehicles. A name-check in the 14th plan would seal its status as a key technology and could pave the way for a national blockchain roadmap.

Antitrust

China has recently tightened antitrust regulations on tech companies. Regulators started at the end of last year to look at tech giants’ market dominance and to use anti-monopoly tools to limit them. The country also changed antitrust laws and rules to better rein in big tech. As top leaders of China repeatedly vow to “strengthen anti-monopoly” and “rein in disorderly capital expansion,” what has affected tech companies so far seems to be just the start of severer crackdowns.

In the 13th Five-Year Plan: The 13th development plan mentioned breaking industry monopolies and rooting out market barriers. It also intended to establish an “efficient antitrust law enforcement system,” deepen international antitrust law enforcement cooperation, and check administrative monopolies.

• In 2018, China created the State Administration for Market Regulation (SAMR), a  trustbuster that centralized antitrust power previously dispersed among  four market regulators.

Expectations: China is already on the move to rein in big tech with anti-monopoly tools. If the new plan pushes government agencies to impose stricter antitrust regulations and break monopolies, tech giants like Tencent, Alibaba, and Bytedance may feel a lot more pain.

• China’s antitrust regulator drafted an amendment to the Anti-Monopoly Law in January 2020; China may push to finalize the law during the period of the 14th five-year plan.
• The fifth plenum also called for the establishment of an “efficient antitrust law enforcement system” and to “break industry monopoly.”
• SAMR has said tightening antitrust regulations leads the 2021 agenda for the agency.
• While companies like Tencent and Alibaba are already under the spotlight, SAMR may launch more antitrust investigations into big tech companies. 
• A few antitrust lawsuits between tech companies are set for court hearings this year. Among them are the Douyin vs. WeChat, and JD.com vs. Alibaba cases. The results of cases will provide precedents for how the antitrust rules that took effect in February will be interpreted by the courts.

Rural areas and agriculture

Agriculture, the foundation for feeding China’s 1.4 billion population, is facing a new round of restructuring and modernization. The countryside is a growing focus for tech companies because it is home to a group of maturing consumers as well as being a lower-cost manufacturing hub. That makes aligning with rural developments a big goal for these internet firms.

In the 13th Five-Year Plan: The last plan placed a high priority on continuous modernization of rural areas and the agricultural sector. The plan promoted integration of agriculture and e-commerce and encouraged the application of big data and internet of things tech in agriculture.

• President Xi Jinping announced China’s “complete victory” in eliminating “absolute poverty” at a grand gathering held February 25 in Beijing. In the past eight years, nearly 100 million rural residents were lifted from poverty, Xi says.
• Tech giants including Alibaba, Pinduoduo, and Didi Chuxing were rewarded for contributions in the poverty alleviation initiative.

Expectations: China is expected to continue to focus on improving the quality, safety, and profitability of the sector, goals that require technological assistance.

• The focus of China’s agricultural development will shift from increasing production to improving quality, according to The China Agriculture Outlook (2020-2019) released this past April.

Policymakers are counting on tech in a plan to improve both farmers’ output and their incomes, said Even Pay, an associate director at Trivium:

“Policymakers are preparing for a future where there are fewer farmers. Some of them may be older, and in need of equipment to make their jobs easier. They also hope to attract some young people back into farming by making the work easier and more interesting—like operating ag machinery or flying drones.”

“Another big reason the government is supporting agtech is the “dual circulation strategy”—which looks to make domestic consumption the main driver of China’s macroeconomic growth. Right now China’s rural areas have the greatest growth potential of anywhere in the country—provided farmers’ incomes go up.”

Fintech + digital yuan

Fintech and the digital yuan might get a direct mention in the 14th plan.

In the 13th Five-Year Plan: Fintech was directly mentioned only once in the last plan. That plan called for a risk monitoring and crisis management system for all financial activity, including “internet finance.”

• “Microfinance,” “inclusive finance,” and “green finance” were included in the plan, but these categories also refer to traditional financial tools, said Jonas Short, head of the Beijing office at Everbright Sun Hung Kai.
• The plan called for microfinance to be made more “transparent” and regulated, while “Internet+inclusive finance” was to be promoted, and a green finance system was to be set up.
• The 13th plan also mentioned the development of “multilayered” and “non-cash” “payment systems,” although it didn’t mention digital payments specifically.

Fintech development: Since the release of the 2016-2020 plan, the use of fintech has skyrocketed, and an overwhelming majority of Chinese citizens now make use of some sort of digital finance, whether that’s for lending, investment, or insurance.

• The Ministry of Commerce released a fintech development plan in 2017, focused on cybersecurity, digital payments, and risk prevention.  
• As big tech came to play an increasingly important role in China’s finance, especially with regards to consumers and SMEs, authorities started laying down the rules: In 2020, Chinese regulators ramped up their efforts to regulate fintech companies, especially after Ant Group’s IPO was suspended in November 2020. Rules for microlending, antitrust, and digital payments have been released since.

Digital yuan: China’s central bank has been working on a digital form of cash, the digital yuan, since 2014. If implemented, it will be the first state-backed digital currency by a major economy. The central bank appears to have accelerated the development of the currency in 2019 after Facebook announced its Libra project. Trials for the e-CNY started in late 2020 in four Chinese cities: Chengdu, Shenzhen, Suzhou, and Xiong’an.

Expectations: The guidelines directly called for the improvement of “the level of financial technology.” They also included language similar to the previous plan’s regarding inclusive and green finance, as well as on financial risk prevention and monitoring.

• The guidelines called for continuing R&D on digital currency.

So what? China’s fintech industry will continue to grow, especially given a lift in the 14th plan. But incumbents will face more competition as a result of antitrust regulations and the opening up of payments systems that DCEP will bring. Tech companies dabbling in finance will also be increasingly brought under the fold of financial regulation.

China is vastly increasing investment in semiconductors. In 2020, cash flowing into China’s semiconductor firms amounted to RMB 227.6 billion (around $35.2 billion) through the primary and secondary markets, a stunning 407% increase from the previous year, according to TechNode’s research.

China is the world’s largest consumer of semiconductors, and the lion’s share of revenue from purchasing these chips go to foreign firms. China consumed $143.4 billion worth of wafers in 2020, and just 5.9% of them were produced by companies headquartered in China. 

China has sought to make more of its own chips for years. In 2017, Chinese vice premier Ma Kai said: “We cannot be reliant on foreign chips.” Last year, President Xi Jinping called to “make technological self-sufficiency a strategic pillar of national development.” Beijing is expected to add “a suite of measures to bolster research, education, and financing” for the semiconductor industry to a draft of this year’s 14th five-year plan, China’s top-level policy blueprint for the following half decade, Bloomberg reported.

Concern over chip dependency has grown higher over the past two years as the US used semiconductors as leverage against companies like Huawei, a Chinese “national champion” which supports the country’s mission to lead the world in the next-generation wireless technology known as 5G.

The Trump administration banned Huawei from buying components from US companies in 2019 and cut the company off from third-nation suppliers that use American technology in 2020. The moves prompted Chinese business and political leaders to resolve to never again be put into such a situation.

China has massively increased investment in semiconductors over the past two years. The central and local governments have launched hundreds of policy funds, or guidance funds, to support the industry. The private sector also jumped onto the bandwagon. Venture capital investment into the semiconductors sector more than tripled in 2020 from the previous year. China also tapped its massive private capital market by opening up its financial market to let individual investors directly support high-tech firms that are not yet profitable. In 2020, 32 chip companies went public on China’s A-share market, up from 18 in 2019.

Big funds

The National Integrated Circuit Industry Investment Fund, known as the Big Fund, is the Chinese government’s main vehicle for semiconductor investment. The fund was first set up in 2014 by China’s Ministry of Finance and China Development Bank Capital, as well as several other state-owned enterprises, which together injected RMB 138.7 billion into the fund.

The Big Fund was established to invest in chip manufacturing and design, and promote mergers and acquisitions, according to China’s Ministry of Industry and Information Technology (MIIT), which supervises the fund.

It has shown a strong preference for semiconductor manufacturing companies, as China strives to produce cutting-edge 7-nanometer chips. The RMB 138.7 billion first Big Fund closed all of its investment projects at the end of 2019. Around 67% of its total investment went to semiconductor manufacturing firms, according to a report by Eastmoney Securities, a Chinese brokerage.

The first Big Fund had backed companies like Shanghai-based Semiconductors Manufacturing International Corporation (SMIC) and Huahong Semiconductor Limited. SMIC is China’s largest contract maker of semiconductors. It was also added to a US export blacklist in 2020.

In October 2019, the Big Fund raised another RMB 204 billion in a new funding round from the finance ministry, state-owned enterprises, and local governments.

Meanwhile, provincial governments have set up guidance funds totaling more than RMB 300 billion to support local semiconductor industries.

Opened stock market

In July 2019, China opened up a Nasdaq-style board on the Shanghai Stock Exchange. The STAR Market is the first Chinese exchange to allow unprofitable companies to list., revamping China’s earlier stock market rules.

However, not every unprofitable tech company is welcome. The Shanghai bourse has said that the STAR Market prefers companies that align with the “Made in China 2025” blueprint, Beijing’s plan for self-sufficiency in strategic sectors such as semiconductors and artificial intelligence.

Of the 216 companies listed on the STAR Market, 36 are semiconductors firms, as of the end of January. They include SMIC, which debuted on the market in July 2020 and saw its shares jump more than 200% on the first day of trading.

The STAR Market’s appetite for semiconductors has spurred a rush of activity in the sector. More semiconductor companies went public in 2019 and 2020 than all of those from 2010 to 2018. In 2020, some 32 chip companies went public on China’s A-share market, raising a total of RMB 87.6 billion. 

VC money more than tripled

At the same time, private capital is quickly moving into the sector.

In 2020, the total amount of VC investment into Chinese semiconductor companies grew more than 366% from the previous year to RMB 140 billion, according to data from Itjuzi, a Chinese VC funding database. The total number of VC investment deals also nearly doubled in 2020 to 413.

Thanks to a robust stock market that gives investors more options to exit, later-stage rounds in semiconductors have seen steady growth. The percentage of investment deals after Series A had increased to 55.8% in 2020 from 33.1% in 2018.

Unlike government-led funds, VC firms prefer chip-design firms to manufacturing companies. Chip designers accounted for around 67.2% of VC investment deals in 2020.

What’s next?

Despite heavy investment from the government and private investors, experts have said that China will fall far short of its 2025 goal.

While China’s goal is to make 70% of the chips it uses by 2025, IC Insights, a market research firm, forecasted that China will produce only 20.7% of its chip consumption in 2024, growing only 3% from 2020.

The country not only needs to produce more chips, but it also needs to make sophisticated chips that can meet the demands of modern computing devices, such as high-end smartphones and supercomputers. However, experts said mainland China’s chip-making capability is “generations behind” the leading edge in Taiwan.

Though a complete value chain in five years may be a dream, China is making progress in the sector. Changxin Memory Technology, a state-backed semiconductor startup, started mass production of the country’s first locally designed dynamic random-access memory (DRAM) chip in September 2019. HiSilicon, Huawei’s chip-design branch, ranked among the world’s top 10 vendors of semiconductors in August for the first time. 

But to emerge as a world-class semiconductor maker, analysts say, that China also needs to narrow a talent gap. It faces a talent shortfall of around 300,000 people, according to the China Semiconductor Industry Association.

How many of China’s top university graduates end up working for the domestic semiconductors industry? Where do Chinese chip makers find talent? Will the talent gap narrow as China continues to invest in the sector? We will dive into that topic in the next issue of this newsletter.

TechNode Squared offers members monthly newsletters focusing on trending topics, industries, and companies.

In the next two weeks, we are launching our next two. We’ve been getting ready for a few months, and we’re excited to share them with you.

The first, starting today, will explore trending topics in cleantech. Next week we’ll publish the first issue of In Focus: Semiconductors. All newsletter subscribers will receive free copies of the first issue. Become a member now to receive every issue in your inbox.

The start of a new five-year plan is a great time to start tracking clean tech. Beijing has made it clear that controlling carbon emissions will be a focus in the next plan period, and we expect to see even biggest investments in technologies that address emissions, pollution, and other environmental challenges.

Semiconductors is a no less timely topic. In the face of rising tensions with the US, China has become increasingly eager to source these vital components at home. But with only 6% of the country’s demand currently met by domestic companies, there’s plenty of room for growth. Funding—both private and public—has flooded into the sector in the last year.

Previously on In Focus

Since the launch of our bi-weekly In Focus: Bytedance premium newsletter on March 12, 2019, we published 16 issues within seven months, covering topics such as Bytedance’s bet on AI, the difference between China’s Douyin and global TikTok, and how does Bytedance’s algorithm work.

In 2020, we explored new topics including Meituan-Dianping, China’s lifestyle super-app; Drive I/O, a deep dive into auto tech; The Big Sell, on China’s e-commerce industry; Expanding Empires, on China’s tech giants expansion abroad; and China VC Roundup, a monthly technology investment activities in China. The Big Sell and Drive I/O newsletters are continuing. Become a member now to receive them in your inbox.

SAIC Motor, the biggest automaker in China, will use processors for its self-driving cars from a domestic chip startup, throwing its weight behind a young upstart as Beijing accelerates plans to replace foreign-made chips with homegrown.

Why it matters: For one of the world’s biggest automakers to gamble a major strategic push on a young and relatively untested chipmaker signals the importance that Beijing places on rapid acceleration of self-reliance in advanced chips.

• Horizon Robotics lacks a global reputation compared with larger rivals such as Nvidia and Mobileye. In August 2019, it launched the Journey 2, its first auto chip to meet global auto stress-test standards, and began shipments in March.

Details: SAIC, China’s largest automaker and Volkswagen’s manufacturing partner, will use processors and software from Horizon Robotics, a rising Chinese chipmaking startup, for its upcoming car models that include advanced driver-assisted capabilities, according to a joint announcement released Monday (in Chinese).

• The state-owned auto manufacturer will also collaborate with the chipmaker to build and mass produce its next-generation, highly autonomous driving technology that is finally “capable of competing with Tesla’s full self-driving (FSD) capability,” the statement said (our translation).
• The company is valued at around RMB 30 billion ($4.64 million), a 50% increase compared with early 2019, and is eyeing a public listing on China’s Nasdaq-style STAR Market later this year, persons close to the company told TechNode.
• A company spokeswoman declined to comment on the valuation and the public offering when contacted by TechNode on Monday.

Context: SAIC is among a list of state-backed automotive majors now shifting towards Horizon Robotics as a domestic source for semiconductors. The chipmaker is considered to be China’s only alternative to global chip-making giants for auto processors.

• US sanctions of Chinese technology giants including Huawei, as well as a pandemic-fueled global chip shortage, is renewing Beijing’s urgency to cultivate a domestic chip sector by 2025.
• Carmakers are receiving state support. The Shanghai municipal government announced (in Chinese) Saturday that it is partnering with Horizon Robotics to establish its global research and development center in the city in an effort to accelerate the development and adoption of China-made central processing units for intelligent vehicles.
• In an interview with Chinese state broadcaster China Central Television (CCTV) last month, Horizon Robotics vice president Zhang Yufeng said that it is currently the only Chinese chipmaker with computing platforms for mass-produced vehicles.
• The company said recently that it shipped 160,000 of its Journey 2 artificial intelligence chips, which it boasts is more power efficient than Nvidia’s offerings, to Chinese automakers including SAIC, Changan, and Chery as of December, nine months after shipments began. It has outsourced production of its processors to Taiwan Semiconductor Manufacturing Corporation (TSMC) since 2017.
• Journey 5, its next chip model for advanced self-driving functions, is scheduled to launch before June and ship in 2022. Its computing power is expected to reach 96 trillion operations-per-second (TOPs), higher than the 72 TOPS of Tesla’s FSD computer.
• The company has an annual shipment goal of more than 1 million units this year.
• The five-year-old startup announced earlier this month that it had closed its $900 million Series C from investors including China’s State Development & Investment Corporation (SDIC), China’s biggest EV maker BYD, as well as Great Wall Motor.
• Competition with Tesla’s advanced self-driving capabilities is a catalyst for many Chinese AV manufacturers, and SAIC is no exception.

Correction: An earlier version of this story erroneously stated that the Journey 2 was Horizon Robotics’ first auto chip instead of the company’s first auto chip to reach global stress test standards.

Huawei on Monday unveiled its latest foldable phone as the embattled Chinese smartphone maker ramps up efforts to entice premium phone users in its home market.

Why it matters: Huawei is focusing its limited production capacity on high-end models after being cut off from the global chip supply chain. The new phone is priced starting at RMB 17,000 (around $2,785).

• The company’s last foldable phone, priced at RMB 16,999, was met with great enthusiasm from Chinese consumers. The model sold out within seconds of being made available.

Details: The Mate X2 foldable phone features an 8-inch interior display when unfolded and has an additional 6.5-inch exterior display.

• The 256GB version of the Mate X2 starts at RMB 17,999 while the 512GB version costs RMB 18,999. The model will is available for purchase in China starting Thursday. The company did not say if it will be available in overseas markets.
• Two rounds of US sanctions last year have “made our operations extremely difficult,” said Richard Yu, head of Huawei consumer business, at the launch event on Monday. “But thanks to our partners and consumers… we survived in 2020.”

Context: Huawei, once the world’s largest handset vendor, is now ranked third globally after shipping 170 million units in 2020. 

• A January report by market research firm Trendforce estimated that the company’s smartphone shipments will drop to 45 million units in 2021.
• The sharp decline is mainly because the company sold off its budget brand Honor last year. The company has been cut off from the global semiconductor supply chain and now relies on stockpiles to maintain production.
• In January 2020, Huawei told Chinese media that it sells approximately 100,000 units of its Mate X foldable device every month.

China produced a scant 5.9% of semiconductors it used in 2020, according to a report published Thursday, indicating significant reliance on foreign technology as the country pushes for independence on chips.

Why it matters: China, the world’s largest semiconductor market, is determined to increase domestic production of chips, and plans to make 70% of chips it uses by 2025.

Details: China’s integrated circuit (IC) market increased 9% to $143.4 billion in 2020 compared with a year earlier, according to a Thursday report by market research firm IC Insights. China-headquartered firms, however, only made $8.3 billion worth of ICs sold in the country in the same year, the report said.

• Around 15.9% of ICs sold in China in 2020 were made locally, but most of them were made by foreign companies with wafer fabrication plants in the country, such as Taiwan Semiconductors Manufacturing Company, SK Hynix, and Samsung. Together, such firms made around 10% of chips sold in China last year.
• IC Insights estimated in the report that 60% of semiconductors produced in China were components for exported products. The country is home to some of the largest smartphone makers in the world, including Xiaomi, Huawei, and Oppo.
• Programmable logic devices, which are used to store the logic pattern integrated onto chips during programming, was the largest segment of China’s IC market in 2020, accounting for 26% of total wafers sold.
• Strong sales of smartphones and other computing systems during the pandemic drove growth in microprocessors, which was the second-largest IC product segment in China last year, according to IC Insights. The category grew 12% last year to $32.7 billion.

Context: In December, the US added China’s largest chipmaker, Shanghai-based Semiconductors Manufacturing International Corp (SMIC), to an “Entity List” that effectively cut the company off from American technology.

• Huawei, the world’s largest maker of telecommunications equipment, has been been plagued by US sanctions. The company has now essentially been cut off a supply of advanced semiconductors.

As I outlined in my previous article, designing and manufacturing automotive semiconductors that are up to industry standards is difficult. Chinese semiconductor companies have not focused on this area until relatively recently, especially because it has been much easier to scale fast and make money in the consumer market.

The main types of semiconductors that go into a car are control chips, analog and mixed signal power chips, sensors, wireless communications, interface chips, and memory chips. I will concentrate on the areas I think China is growing: MOSFETs, memory, image sensors, and autonomous driving chips. It happens that these are the areas where I have the most hands-on experience.

Power electronics

Power transistors are abundant in the high tech cars of today: windscreen wipers, windows, and sunroofs use metal-oxide-silicon field effect transistors (MOSFETs). Roughly speaking, a MOSFET uses an electric field to control the flow of electrical currents. Metal-oxide-silicon (MOS) is the material they are made of, and field effect transistor (FET) is the type.

MOSFETs are relatively simple and cheap to produce, so automakers use them for controlling and converting electric power—what is known as power electronics. What is making them more and more interesting for China is their use in power electronics for electric vehicles: DC/DC converters, on-board chargers (OBCs) that allow electric and hybrid vehicles to charge from any AC power supply, and traction inverters that convert electricity from the battery to AC power that can be used by the engine. 

As EVs become more common, use cases for newer materials are becoming more apparent. Wide-band gap (WBG) materials like gallium nitride (GaN) and silicon carbide (SiC) in FETs are newly applied in power electronics, and allow for higher voltages, which are required for faster switching speeds. This in turn improves the power conversion efficiency, and therefore the range, of EVs.

Tesla has gone the route of using SiC MOSFETs from ST Micro for its inverter in newer models. It previously used insulated-gate bipolar transistors (IGBTs). Others, like Nexperia, have chosen to use GaN instead.

There are concerns that WBG materials are unreliable, such as being extremely sensitive to gate voltages with absolute maximum values close to recommended operating conditions. But that’s what automotive standards regulate, and some GaN and SiC field effect transistors have already passed the Automotive Electronic Committee’s Q100 and Q101, the basic stress tests that guarantee a certain level of reliability acceptable to automakers. I expect in 2021 we will see them being used in more and more EVs. 

Pricing may be an issue at the beginning because WBG FETs individually are still more expensive than IGBTs or MOSFETs. However, WBG materials can lower overall costs due to the simplification of the surrounding circuitry. As EV brands compete to achieve longer range vehicles, demand will increase and with it will come a reduction in pricing.

In the global power electronics semiconductor market, Nexperia, a spin off of NXP that is now Chinese-owned, makes up about 7-10% of the market, and it accounts for more than 13% of the MOSFET market. It is ranked number two globally for automotive grade MOSFETs behind Infineon. 

Huawei invested in Oriental Semiconductor, a MOSFET IDM, which to date has very limited market share.

The purpose here is not to debate SiC vs. GaN, there are advantages and disadvantages to both, but to make clear that there is a Chinese-owned company, Nexperia, at the forefront of global EV power electronic semiconductors. Nexperia is head to head with famous global names in the industry such as TI, NXP, Infineon, ONSemi, and Rohm. I expect to see Nexperia grow in China along with the domestic EV industry.

Memory

Today’s cars use local memory primarily for infotainment and driver assistance. Automotive grade memory does not account for as much of the memory market as consumer electronics and telecommunications, but it is still a market worth around $10 billion—and growing. The smarter the car, the more memory it needs. Autonomous cars will have to make calculations really quickly, so they will need high-performance local memory.

DRAM, NOR, NAND, and so on, are all memory types used in the industry, but of course must go through stringent testing and pass standards such as AEC-Q100 to be acceptable to automakers. All the usual suspects in memory ICs are prevalent here, Micron, Samsung, and Infineon (Cypress), as well as smaller companies like Macronix and Winbond.

NOR is easier to develop. The market is dominated by Taiwanese companies like Macronix and Winbond, but there are also China mainland companies like Gigadevice doing well. 

Gigadevice’s overall memory market share is about 18%. It has also developed automotive grade products and is a majority shareholder of Changxin Memory Technologies (CXMT), a Hefei-based foundry specialized in DRAM chips. Through CXMT, Gigadevice has a route into the much larger DRAM market. 

Yangtze Memory Technologies (YMTC) is focused on NAND but has yet to produce an automotive grade product. I don’t think it should yet. It has a lot on its plate: Its consumer products are not yet a success, its production capacity is still lacking, and it is facing legal challenges from Micron over patent infringement. Its funder Tsinghua Unigroup has other problems it needs to deal with before expanding into even more new areas: In December it defaulted on $450 million of debt.

DRAM is a more difficult but more rewarding design task; it makes up around half of the memory used in the automotive market. CXMT to date has no automotive grade DRAM product, so that leads us to Integrated Silicon Solutions (ISSI).

ISSI is a US company headquartered in California. Its core competency is in DRAM, SRAM, and NOR flash. Automotive is one of its key markets, boasting customers such as Bosch, Delphi, and Continental. Back in 2015, Cypress Semi (now part of Infineon), looked to acquire ISSI to add DRAM as the last piece of its automotive semiconductor puzzle. Chinese investment vehicle Uphill Investment outbid Cypress and acquired ISSI. 

Fast forward four years and ISSI switched hands again when it was acquired by Chinese fabless company Ingenic in a RMB 7.2 billion deal. This was a somewhat strange deal, in that a small, relatively unsuccessful MIPs-based fabless CPU company acquired a much larger relatively successful US memory company. 

The deal passed CFIUS review, maybe because ISSI was already owned by a Chinese consortium since 2015. By contrast, Tsinghua Ungroup’s attempts to acquire Micron in 2015 were blocked. It is likely that ISSI was not considered as important, and the Committee felt that it couldn’t be seen to block every single tech deal. 

Like Nexperia, this ISSI acquisition gives China another route into DRAM, and also a route into automotive grade products and knowledge transfer of what is actually required to be successful in the industry. 

CMOS image sensors

The use of complementary metal-oxide-semiconductors (CMOS) in the automotive area is driven by growth in autonomous driving applications. CMOS are a type of high-resolution imaging transistor that is used in most cameras, from DLSRs to smartphones. 

Autonomous cars will usually come with a mix of radar, lidar, and CMOS image censors (CIS) to cover all bases. CIS, for example, may not work well in low light conditions and to reach level 5 autonomous driving more and more sensors are needed on a vehicle. A car produced in 2021 may be loaded with 8 image sensors, and this number is only growing. 

In fact, although demand dropped over 2020 due to Covid-19 related externalities, there are now not enough CIS chips in the market to meet demand, and prices are going up over 40% (in Chinese).

As with power electronics and memory, China’s leading image sensor company also came about through acquisition. Omnivision was originally acquired by a consortium of Chinese investment companies in 2015 and then by Chinese company Will Semiconductor in late 2018. The acquisition instantly made Will Semiconductor one of the most valuable Chinese semiconductor companies, which was hardly a household name before. Even today most people in the industry are more familiar with Omnivision than Will, and Omnivision’s headquarters are still in Santa Clara.

In 2019, Omnivision accounted for around 10% of the global $19.3 billion CMOS sensor market. The same year, it was beaten into third place by Samsung with a 21% market share, and king of CMOS Sony with a 42% share. 

But when it comes to CMOS for the automotive sector specifically, Omnivision is doing better than Sony. It holds around 22% of the market, second only to US company ONSemi at 36%, Sony can only muster 10%. 

Technically, Omnivision’s products are just as good as ONSemi or Sony. All these companies offer similar 8.3MP front-view camera CMOS products for autonomous driving. Omnivision sells a lot of its products into European automotive OEMs and is well placed to grow in China as well, especially with demand outstripping supply.

Autonomous driving

You need a chip to process what your sensors are detecting and there are several Chinese startups specializing in this space. Rather than gaining momentum and market share via acquisitions, this area is characterized by established foreign players and local Chinese companies, and it’s highly competitive. 

Startups like Horizon Robotics and Black Sesame face competition not just from the likes of Huawei, with its MDC chip, but also from a whole host of foreign companies that are already more established automotive semiconductor suppliers. These established players have other revenue streams which means that they don’t just rely on the automotive market, or even this specific subsection of it. This allows them to grow into the market without having to burn through investor cash in the hope of future revenues.

One might argue that these Chinese companies have an advantage domestically, but that isn’t necessarily the case. NIO announced last week that it will use Nvidia’s Orin system on a chip (SoC) in its automotive processor (ADAM), indicating that even Chinese carmakers might opt for foreign processors. SoCs are integrated circuits that combine all the main components of a computer; memory, processing, etc. NIO’s ADAM will use four Orin SoCs to push above the 1000 TOPS required for level-5 autonomy. 

At our company we have met with most of the automotive OEMs and “tier-1s”—direct suppliers to OEMs—in China on behalf of our clients. The vast majority are developing autonomous vehicles using foreign SoCs like Nvidia’s Orin. Others we usually come across include Nvidia Xavier, TI’s TDA4X, Japanese Renesas’s V3H, and Ambarella CV22. Sometimes Horizon and Huawei are mentioned, but Black Sesame is nowhere to be found. Based on my experience, even in China, American companies and Renesas are outperforming their local counterparts.

This isn’t to say local companies have no hope. Huawei obviously will face problems supplying high-end autonomous driving SoCs if it continues to face export controls from the US, but I wouldn’t discount them yet. 

Horizon Robotics has already partnered with key tier-1s and some OEMs, including Audi. Its Journey 2 automotive AI processor is said to have shipped 100,000 units, and its level 3-capable Journey 3 is said to be going into mass production in Q3 2021. The company also has a clear roadmap to L5 for its future SoCs.

Conclusions

This is just a snapshot of a part of the industry I have had most contact with. China’s largest and most global players in the automotive chips sector came to be Chinese through acquisition. Some of these acquisitions may have struggled to go through in today’s climate, but the fact they were done earlier shows some foresight on these Chinese companies’ part. At the same time, in fields like autonomous driving, homegrown companies are rising. 

The acquired companies are in a good position to take advantage of the growing EV and AV industries, but the home grown companies may struggle to compete with the size and scale of their foreign counterparts.

Nexperia, ISSI, and Omnivision have all kept their HQs in their respective home countries, but are concurrently operating strong R&D or manufacturing facilities in China—and in my experience Chinese owners are rarely hands off. ISSI and Omnivision have design teams in China, whereas Nexperia operates packaging R&D on the mainland. 

There is nothing nefarious about this, it is quite normal and makes sense. But technical know-how is transferred naturally as part of the work process, so even if these companies switch owners in the future I expect some skills and knowledge will have been transferred to Chinese employees.

Chengdu’s first digital yuan lottery

Chengdu, a city in China’s southwestern Sichuan province, will launch its first digital yuan lottery to distribute RMB 50 million ($7.7 million) of the currency via red envelopes. The lottery is the fourth public digital currency trial to take place in China.

READ MORE: Chengdu to distribute $7.7 million in its first digital yuan lottery: report

Bitcoin for private data

Chinese authorities arrested 30 people in connection with selling 600 million pieces of personal information collected across 10 Chinese provinces, and accepting RMB 8 million in cryptocurrencies as payment. The suspects were using the encrypted messaging app Telegram to sell the data. (Jiangsu Internet Police official WeChat, in Chinese)

The chip shortage

The global chip shortage has hit cryptocurrency mining rig manufacturers. As Bitcoin prices have risen, so has the demand for mining rigs. Chipmakers have been unable to keep up with demand. (Reuters)

READ MORE: Digital yuan goes physical, mining rig prices rise: Blockheads

The BSN update

The Blockchain Services Network, a government initiative to build an internet of blockchains, announced that it is partnering with ConsenSys. The New York company’s Ethereum-based enterprise blockchain solution Quorum will be available in over 80 nodes of the BSN in China. (CoinDesk)

Rural finance

Eastern Jiangsu province launched a blockchain-based platform for rural finance in collaboration with Ant Chain and Jinhu Rural Commercial Bank. The platform will support the management of land mortgage loans, using smart contracts to automate deposits and verification. (Letter Chain Finance, in Chinese)

The staff news

Huobi’s Chief Investment Officer Sharlyn Wu is reportedly preparing to resign from the cryptocurrency exchange. The CIO drove Huobi’s investments in decentralized finance over the last six months. (Wu Blockchain)

The Trump administration is revoking certain licenses for some suppliers of Chinese telecommunications firm Huawei, Reuters reported Monday, and it warned it would deny more applications.

Details: The Semiconductor Industry Association, an American industry group, said on Friday that the US Department of Commerce had issued “intents to deny a significant number of license requests for exports to Huawei and a revocation of at least one previously issued license,” Reuters reported, citing people familiar with the matter.

• One of the sources in the report said eight licenses were revoked from four companies. Intel, which supplies Huawei with systems-on-a-chip (SoCs) used in smartphones and personal computers, was among the companies.
• Another affected company was Kioxia Corp, a Japanese flash memory chip maker formerly known as Toshiba. The company had at least one license revoked, said two Reuters sources.
• Some 150 licenses for $120 billion worth of goods and technology ready to ship to Huawei were pending approval before the latest action.
• Another $280 billion of license applications for goods and technology for Huawei have not been processed, according to Reuters.
• The Commerce Department has told companies that it “intends to deny” those applications.

Context: According to two US government regulations issued in 2019 and 2020, companies around the world have to seek a special license from Washington if they want to sell products that contain US technology to Huawei.

• In September, Intel received a license from the US government to sell to Huawei. In November, US chipmaker Qualcomm was approved to sell 4G chips to the Chinese company.

China is driving up the automotive value chain, and is shooting to go all the way up to automotive chips. Only a few years ago Chinese cars consisted of cheap knock-offs of western brands—who remembers the SCEO HBJ6474Y? But over the past decade, China has gradually made progress.

The modern car is extremely complex. The average car has at least 50 chips, and electronics account for over 40% of the entire bill of materials. Who is supplying these chips, what do is the chips’ function, and what companies in China are moving into this market?

These questions have been brought to the fore recently as Chinese automotive companies faced a chip supply shortage that has led to some minor production halts.

The pecking order

The global automotive semiconductor market is worth around $41 billion and may grow to $65 billion in the next couple of years. At $41 billion, it accounts for around 12% of the entire semiconductor market.

Less than 3% of global sales of automotive semiconductors come from Chinese companies. European firms make up about 37%, American ones around 30%, and Japanese ones around about 25%. Only one of the 20 top global automotive semiconductor companies is Chinese, and even that one is a spin off from NXP that was acquired by a Chinese company, its headquarters is still in the Netherlands.

With the growing need for autonomous driving capabilities, processing power within cars is increasing. So much so that a car today is more of a computer with wheels.

There is a range of different types of chips in a car, from simple to complex. The main types are control chips, analog and mixed signal power chips, sensors, wireless communications, interface chips, and memory chips.

It is no secret that China has huge automotive ambitions, but why does it still make up such a tiny portion of the overall automotive chip market?

Well, one big reason is that this market is difficult. It’s difficult for a lot of reasons, but not so difficult they can’t be overcome. Any company new to the market needs to be patient and prepared to spend a lot of time not making money before they get anywhere. Some companies used to consumer market chips just aren’t prepared for this.

Product and supplier requirements

Unlike chips for normal consumer products—which China is quite good at designing — automotive chips, like any component going into a vehicle, have much more stringent requirements. Automotive chips must be able to withstand much wider temperature ranges, be resistant to vibrations, shocks, anti-interference, and have very low failure rates.

Automotive companies usually require single digit defects per billion parts, and even sometimes zero defects. By comparison, industrial grade chips usually require less than one part per million, and consumer grade chips a few parts per thousand. All this reliability and consistency, must be achieved at mass production and each part of the product must be traceable, including packaging and even raw materials.

That’s not all.

Having the best and most reliable chip for a certain function out there isn’t always the most important thing for automotive companies. They need to know that the chip manufacturer can keep producing the same chip consistently over a long period of time.

The chip must last not only at least as long as the vehicle is on the road, usually over 15 years, but also be available for as long as the vehicle manufacturer produces the car model, at least 30 years. So, supply chains must be reliable and stable for decades.

Industry standards

To make sure semiconductor suppliers meet the requirements, carmakers require their suppliers to pass industry standards tests. Using these benchmarks, they can identify suitable suppliers. The most common standards are AEC-Q100 for reliability, ISO 26262 for functional safety, and ISO/TS 16949 for quality management.

All these standards make it difficult for any semiconductor company to enter the automotive industry. Completing the relevant tests, submitting the documents, getting certified for all relevant standards for your chip, making sure your suppliers meet the standards too, and then becoming an approved supplier for an carmaker, can take two to three years—at best.

Hidden costs

Manufacturing and legal costs compound on these quality management bills.

The level of quality required in automotive chips means that much of the industry players are integrated design manufacturers (IDMs), meaning that they manufacture chips as well as design them. This ensures that not just the design process is automotive compliant, but also the manufacturing and packaging processes. This means there is much more upfront capital expenditure to enter the market than if one was just setting up a fabless company.

Legal costs can also rack up. Semiconductor suppliers in the car industry often have joint liability if something goes wrong with the chip, and so may bear some costs for product replacement, compensation, and fines. Any company thinking about entering the industry will be overly cautious and may decide it is not worth it.

Even if a new entrant decides it is willing to bear all these costs and passes all the standards requirements, convincing carmakers to buy their chips will be an uphill battle. Older semiconductor suppliers, and carmakers already have strong supply chain relationships that can be very difficult to break into.

Who is doing well and what can China do?

Chinese automotive chip companies can be placed into three main categories; acquired, mature companies moving into automotive space, and newly emerging companies.

China’s largest automotive chip companies have come via acquisition. The likes of Nexperia (acquired by Wingtech), ISSI (acquired by Ingenic), and Omnivision (acquired by Will Semi), are all world leading in their specific fields, MOSFETs, memory, and image sensors respectively. Companies in the second category, like Huawei, or new entrants, like Semidrive and Horizon, are China-focused, for now—but they have global ambitions.

I think it is foreseeable China takes up more of the market, especially domestically. China could even start creating its own automotive standards to make it easier for them.

In the next article I will discuss what some of these Chinese companies are doing in the field of automotive chips, what their plans are, and how successful I believe they will be.

READ MORE: SILICON | Can China make chips?

The US is planning to add dozens of Chinese companies, including the country’s biggest chipmaker, SMIC, to the same trade blacklist that has cut off telecommunications equipment giant Huawei from American technology and components, Reuters reported Friday.

Details: The US is expected to add around 80 new companies to the so-called entity list, nearly all of them Chinese, according to Reuters, citing two people familiar with the matter. American firms are barred from exporting technology and key components to companies on the blacklist without government approval.

• China’s biggest chip manufacturer, Shanghai-based Semiconductors Manufacturing International Corp., and some of its affiliates are expected to be included in the entity list designation, it said.
• The blacklisting would force SMIC to seek a special license from the US Commerce Department before buying key goods from American suppliers.
• Such restrictions could potentially curb SMIC’s ability to source US-made chip-designing software, raw material, and machinery needed for the company’s semiconductor production.

Go deeper: Exclusive-U.S. to blacklist dozens of Chinese firms including SMIC, sources say – Reuters

The Trump administration faces further legal obstacles in its ongoing effort to ban Chinese video-sharing app Tiktok. In his final days in the White House, the US president is seeking a tough-on-China technology legacy, including blacklisting China’s largest chipmaker. Meanwhile, a bill passed by the US House of Representatives earlier this month could potentially accelerate the pace at which Chinese tech firms return home to list.

Tiktok untouched

On Monday, US District Judge Carl Nichols in Washington fully blocked the Trump administration’s move to ban Tiktok in the US, NPR reported.

• Nichols found that Trump “overstepped his authority” in using his emergency economic powers to try to block transactions between Tiktok and US companies. 
• Tiktok’s lawyers had demonstrated that Trump government officials’ “failure to adequately consider an obvious and reasonable alternative before banning TikTok” showed that the decision to ban the app was “arbitrary and capricious,” Nichols wrote in the ruling.
• The ruling blocks a Trump executive order issued on August 14 which would outlaw US transactions with Tiktok. The ban is set to take effect on Dec. 12. 
• On Oct. 30, a federal judge in Pennsylvania blocked the decision after Tiktok users challenged it in court.
• Trump administration had set a Dec. 4 deadline for Tiktok parent Bytedance to either sell or spin off the app’s business in the US. The government said that day that it would not extend or enforce the deadline. Trump said previously that he had approved “in concept” a deal in which American companies Oracle and Walmart would create a US-based company, Tiktok Global, to take over the app’s US operations. But the deal is subject to Beijing’s approval, which hasn’t yet said a word about it.

Tough-on-China tech legacy

The Trump administration on Thursday added Shanghai-based Semiconductor Manufacturing International Corp. (SMIC), China’s largest chipmaker, to a blacklist that could cut it off from American investment, Reuters reported. Foreign policy and political analysts said that Trump wants to leave a “tough-on-China” legacy that cannot be reversed by his successor, Joe Biden.

• The US Department of Defense on Thursday added SMIC and state-owned oil giant China National Offshore Oil Corp. (CNOOC) to a list of entities designated as owned or controlled by the Chinese military. 
• While the list, mandated by a 1999 law requiring the defense department to compile a list of Chinese military-controlled companies, did not trigger any penalties, a recent executive order issued by Trump will bar US investors from buying shares of the blacklisted firms starting late next year.

US bill to drive Chinese tech firms home

A bill passed by the US House of Representatives last week is likely to accelerate US-listed Chinese tech firms’ pace going home. The bill will bar Chinese companies from US exchanges if they don’t fully comply with American auditing rules, Reuters reported.

• The potential that US auditors will be able to inspect Chinese companies’ audit documents has already led some Chinese tech firms to delist from US stock exchanges or dual-list their shares in Hong Kong. 
• So far, companies like online media firm Sina and online travel agency Ctrip have decided to delist from US markets, while e-commerce firm JD.com and gaming giant Netease have debuted secondary listings in Hong Kong.
• “The Holding Foreign Companies Accountable Act” bars securities of foreign firms from being listed on any US stock exchanges if they have failed to comply with the US Public Accounting Oversight Board’s audits for three years in a row, according to Reuters.
• The act would also require US-listed companies to disclose whether they are owned or controlled by a foreign government.
• Chinese companies are likely to shrug off the bill because they have alternative capital-raising venues at home, the SCMP cited analysts as saying on Dec. 3. 
• The Hong Kong exchange, another popular destination for Chinese tech firms seeking to list overseas, is keen to attract tech firms with corporate shareholding structures allowing shares with extra voting rights, according to the SCMP.
• In mainland China, regulators are permitting companies that are not yet profitable to list, overhauling previous strict listing thresholds and potentially luring more tech firms to list at home.
• The audit bill was unanimously passed by the US Senate in May. The White House said last Wednesday that President Trump is expected to sign the bill into law.

Donald Trump’s administration on Thursday added China’s biggest chipmaker, SMIC, to a blacklist that could cut it off from American investment in the US president’s last days in the White House, Reuters reported.

Details: The Trump administration on Thursday added Shanghai-based Semiconductor Manufacturing International Corp. (SMIC) and state-owned oil giant China National Offshore Oil Corp. (CNOOC) to a list of entities designated as owned or controlled by the Chinese military, according to Reuters.

• The list, mandated by a 1999 law requiring the US Department of Defense to compile a catalog of firms “owned or controlled” by the People’s Liberation Army, did not trigger any penalties. However, a recent executive order issued by President Trump will bar US investors from buying shares of the blacklisted firms starting late next year, said the Reuters report.
• SMIC is listed in both Hong Kong and Shanghai, while CNOOC has a unit that is listed in Hong Kong. SMIC shares declined by more than 2% on Friday morning before trading for the company’s Hong Kong-listed shares was suspended.
• SMIC said in a stock market statement that it was assessing the impact of its addition to the list and said investors should be aware of the investment risks, according to Reuters.

From Washington to Berlin, New Delhi to Shanghai, Chinese tech companies remain entangled in geopolitical conflicts this week. In the US, the Chinese-owned video-sharing app Tiktok just won an initial success in its legal challenge against the Trump administration. White House officials renewed pressure on Europe to ban Huawei from their next-generation 5G networks after German Chancellor Angela Merkel refused a full ban on the Chinese telecommunications equipment maker. A new round of export bans were imposed on China’s largest chipmaker SMIC by the US. In India, banned Chinese apps are trying to re-enter the market with revised names and logos.

Tiktok’s initial win

On Sunday, a US judge halted a looming Tiktok ban at the last minute. The ban, announced by US President Donald Trump last Friday, would have removed Tiktok from American app stores starting from midnight Sunday.

• The injunction granted by US District Judge Carl Nichols gave Tiktok a temporary reprieve amid ongoing deal negotiations to meet with Trump’s demand to sell Tiktok’s US operations. 
• However, the judge didn’t consider Tiktok’s appeal to block an executive order from Trump demanding the company to divest from its American assets, according to court documents. The order, requiring Tiktok parent Bytedance to either spin off or sell the app’s US operations within 90 days, will go effect on Nov. 12.
• Bytedance has applied to the Chinese government for a deal that would give American software maker Oracle and retail giant Walmart a combined 20% stake of Tiktok’s proposed US business. Beijing hasn’t yet made a final decision, but smoke signals from state media indicate opposition.
• In the past week, the party mouthpiece People’s Daily published three editorials commenting on the Tiktok deal. One of which (in Chinese) reads: “The ‘Tiktok deal’ is based on unfairness… If the forced deal finally goes that way, American stakeholders would earn tens of billions of dollars…then why do they need venture capital and entrepreneurship in the country when they can just mug Chinese companies?” (our translation).
• “China won’t swallow its tears when its core interests are endangered, and Chinese companies are not lambs to the US slaughter,” said another editorial (in Chinese).

US renews campaign to ban Huawei in Europe

On Tuesday, Keith Krach, the US undersecretary of state for economic affairs, said Finland’s Nokia and Sweden’s Ericsson were the only companies that European governments should choose for the 5G network rollouts. Huawei is “an arm of the CCP surveillance state and a tool for human rights abuse,” Reuters quoted him as saying.

• Krach’s remarks came as Germany and Italy are deciding whether to allow Huawei to participate in building their 5G networks. Last week, Merkel refused to compromise on her position that Germany shouldn’t single out Huawei with a targeted ban, Bloomberg  reported. Her government finalized draft regulations for the security of Germany’s 5G network, which would tighten the government’s scrutiny over equipment vendors.
• Before Germany made its 5G decisions, the UK and France had adopted a de-facto ban on Huawei, vowing to phase the company’s products out from their 5G and 4G networks in the next few years.

SMIC on Huawei’s heels

Shares of Semiconductor Manufacturing International Corp (SMIC) tumbled more than 6% this week after reports that the US had imposed restrictions on exports to the Shanghai-based chipmaker. The decision was made by the US Commerce Department on Friday upon the conclusion that SMIC’s products could be used for military purposes and therefore pose “unacceptable risk,” Reuters reported Saturday.

• The Commerce Department said in a letter to some suppliers of SMIC that they will now have to apply for individual export licenses to ship to the Chinese company.
• On Monday, the Shanghai-listed company said in a statement (in Chinese) filed with the Shanghai bourse that it had not received any official notifications about the restrictions from the US government. The company also said it had no relationship with the Chinese military and had never produced products for military end-users.
• Chinese Foreign Ministry Spokesman Wang Wenbing told reporters Monday that China opposes (in Chinese) US restrictions on SMIC and that the country would take necessary measures to safeguard the interests of Chinese enterprises.

Chinese apps launch second offensive into India

In India, several Chinese apps previously banned by New Delhi are trying to reenter the market with rebranded versions, local newspaper The Economic Times reported.

• Chinese video app Kuaishou has launched video-sharing app Snack Video, a Tiktok lookalike. Kwai, an international version of Kuaishou, as well as Tiktok were both banned in India in June.
• Hago, another Chinese social media app banned in June, has been replaced by an app called Ola Party, which allows users to log in using their Hago credentials, according to The Economic Times.
• The Indian government has banned a total of 177 Chinese apps from the country in two rounds of app bans imposed in June and September. The most high-profile apps banned including Bytedance’s Tiktok, Kuaishou’s Kwai, Tencent’s instant messaging app Wechat and the popular mobile game Player Unknown’s Battlegrounds, or PUBG.

The US Commerce Department license granted to Intel allowing it to continue supplying Huawei shows that Washington wants the Chinese telecommunications company to rely on US products rather than make its own chips, according to an industry expert.

The US government has imposed license requirements on chipmakers around the world which want to sell products that contain US technology to Huawei. The new restrictions came into effect on Sept. 15.

Silicon Valley-based Intel supplies integrated circuits such as systems-on-chip (SoCs), central processing units (CPUs), and graphics processing units (GPUs), used in computers. However, the company doesn’t contract out its manufacturing capabilities to make customized chips for clients, nor does it sell chip-making tools or machinery.

The move shows the US “may be willing to grant licenses as long as it doesn’t help Huawei create its own chips,” Stewart Randall, head of electronics and embedded software at Shanghai-based consultancy Intralink, told TechNode on Thursday.

Intel’s license to continue shipping to Huawei doesn’t help Huawei make its own chips but it does help the Chinese company’s server, personal computer, and laptop product lines, Randall said, adding that this shows Washington wants Huawei to “rely on US chips.”

Intel is the first company known to have received US permission to sell chips to Huawei. Huawei suppliers around the world, including Chinese contract chipmaker Semiconductor Manufacturing International Corp., South Korean chipmaker SK Hynix, and Taiwanese chip designer Mediatek, have applied to the US government for similar licenses. None of the applications have yet been approved.

On Wednesday, Huawei rotating chairman Guo Ping told reporters that US chipmaker Qualcomm is applying for a license to sell its chips. “If Qualcomm were granted the license, we will be willing to use their chips to make phones,” said Guo.

Huawei now relies on its stockpile of semiconductors to continue making products ranging from 5G base stations to smartphones and laptops. Guo said Wednesday that the company is still verifying how many wafers they have in stock.

“We have sufficient chip stock for base stations… But as to smartphone chips, we are still looking for solutions because Huawei uses hundreds of millions of smartphone wafers every year,” Guo said.

Analysts said Huawei’s stockpile of chips may last four to 10 months. “We are confident that Huawei’s chip stock can last until the end of this year… It is possible that Huawei will still have chips to use in the first half of 2021, but, in this period the uncertainty is huge,” IDC analyst Will Wong told TechNode in an interview last week.

US officials have complained many times about “loopholes” that allow Huawei to keep its chip supply chain running in the face of export controls. Now it seems that the “loopholes” are closed, and tight.

After being subjected to three rounds of export restrictions, the telecommunications equipment and smartphone maker has lost nearly all access to semiconductors using US technology—meaning the high-end chips it needs for its carrier and handset businesses.

Richard Yu, president of Huawei’s consumer business, said Aug. 7 that the company had to stop making its in-house Kirin chips, which are widely used on the company’s mobile devices, because they are made using US technology.

Despite the looming bans, Huawei has been on a roll lately. The company was ranked the world’s largest smartphone vendor for the first time in the second quarter. However, in an event last week, Yu said the growth of Huawei’s smartphone sales during this period had been “affected” by “a shortage of components.”

In other people’s eyes, however, the situation could be much worse. Analysts told Reuters that US export restrictions would threaten Huawei’s status as the world’s largest handset maker, and warned its smartphone business would “disappear entirely” if it could not source the chips it needs.

The uncertainty in Huawei’s supply chain has also taken a toll on its carrier business. The British and French governments have told domestic telecom operators to phase out Huawei equipment, citing the risks of the company’s supply chain continuity.

It looks like the end of the world for the company. But what options does Huawei still have? We asked experts, and it doesn’t look good.

What happened this week?

Huawei has faced escalating US restrictions for over a year.

May 16, 2019: The US government bans American companies from shipping components and technology to Huawei, but granted the company a series of reprieves, the last of which expired in August. 

May 15, 2020: The White House announces plans to tighten its stranglehold, cutting Huawei off from global semiconductor foundries that use American software and technology to Huawei. These news rules officially took effect on Tuesday. 

Aug. 17: US government expands licensing requirements, seeking to prevent Huawei buying US-linked chips through subsidiaries or third-party vendors

After Tuesday’s deadline, Huawei will lose access to most of the semiconductor fabrication plants in the world that can make high-end chips because they use US technologies. Huawei cannot buy ready-made chips that contain US technology from any third parties because of the August ban.

Experts said that the US will move swiftly to block any further “loopholes.” The company has stockpiles of chips, but only enough to last a few months. It has to plan out how to use these stockpiles in order for its production to continue.

Can Huawei still get chips?

Huawei has an in-house chip designer known as Hisilicon. This subsidiary designs a variety of chips used in Huawei’s products. They include the Kirin series for mobile devices and the Balong series for telecommunications gear.

Hisilicon could struggle to continue designing Kirin or Balong chipsets because it lost access to US-origin electronic design automation (EDA) tools, Jan-Peter Kleinhans, project director at Germany tech-policy think tank Stiftung Neue Verantwortung, told TechNode in an email.

EDA is a category of software tools for designing electronic systems such as integrated circuits and printed circuit boards. The EDA industry is dominated by three US, or US-linked, firms—Synopsys, Cadence, and Mentor Graphics. Together they account for 60% to 70% of the global EDA market and around 95% of sales in China.

But even if Huawei managed to design chips, it would still need an outsourced fabrication plants to manufacture them, like nearly all semiconductor companies. Taiwan Semiconductor Manufacturing Co. (TSMC), South Korea’s Samsung, and Chinese company Semiconductor Manufacturing International Corp. (SMIC) are Huawei’s existing suppliers. All three are forbidden to use US-origin manufacturing equipment to fabricate chips for Huawei, Kleinhans said.

They can apply for licenses to continue supplying Huawei—but it’s up to Washington whether to grant them. SMIC, China’s biggest chipmaker, said Tuesday it had applied to the US government for a license to continue supplying to Huawei. TSMC reportedly planned to apply for a license to continue shipping to the company. A unit of Samsung is also seeking approval from the US government to continue supplying Huawei.

“The outlook is rather grim,” Kleinhans said. “Also, even if Huawei finds ways around the current restrictions, the US government’s trajectory is pretty clear: this is now the third export ban against Huawei. There can easily be a fourth or a fifth, if they deem it necessary.”

So far, none of the applications have been approved.

How will Huawei make phones?

With Huawei’s chip stockpile, smartphone production may not need to halt immediately. But the question is: How long will Huawei’s stockpile last?

Four to 10 months, according to analyst Will Wong at market research firm IDC.

Wong told TechNode that Huawei currently has a stock of high-end chips from TSMC and medium- to low-end chips from Mediatek, a Taiwanese chip designer.

“We are confident that Huawei’s chip stock can last until the end of this year,” Wong said. “It is possible that Huawei will still have chips to use in the first half of 2021, but, in this period the uncertainty is huge.”

The company might use Mediatek chips to produce more medium- to low-end phones during the rest of the year to make up its losses in the high-end handset market, said Wong, adding that Huawei might have to save some chips for production next year.

“All Huawei has to do is to bide its time, because there might be a turnaround after the November US presidential election,” he said.

“No matter how much chip stock does Huawei have, it has to race against time,” he said. “There may be a better situation after the election, or perhaps Huawei can manage to produce chips in China, but the key is time.”

A Huawei spokesman declined to comment on questions about the company’s plans for chip sourcing. He said in a statement to TechNode that the company is “still evaluating the long term impact of the matter at hand and are actively seeking solutions to minimize the impact for everyone.”

How will Huawei’s carrier business be affected?

The US government has been pushing Western countries to avoid Huawei equipment in their next-generation 5G networks, saying that the Chinese government could use its gear for spying purposes. Huawei, the world’s largest supplier of telecom equipment, has repeatedly denied the allegations.

Eventually, some US allies announced they would begin excluding Huawei. But what made some European countries dodge Huawei products were not Washington’s security warnings, but the possibility that the company would not be able to supply them due to semiconductor export bans.

In July, the United Kingdom and France instructed telecom operators to phase out Huawei equipment from their current networks over the next few years. Both countries cited the uncertainty around the company supply chain as a reason for doing so.

“The UK government revised its 5G strategy and excluded Huawei from further 4G/5G deployments exactly because they are not confident that Huawei will be able to serve British operators in the future because of the US export control,” said Kleinhans.

“Following the UK’s analysis, I think it’s fair to say that Huawei will struggle to maintain or even upgrade customer networks in the near future,” he said.

Arm is barely out of the news these days. When the UK-based semiconductor IP company was acquired by Softbank in 2016, the whole industry wondered what it meant for the company and how it would change. At the time, many Chinese licensees weren’t too happy about having to license key technology from a Japanese corporate overnight. But in the end, Softbank was rather hands off and things went on as normal.

Finally, this week, the US’s Nvidia announced plans to acquire Arm from SoftBank. The deal would combine Nvidia’s world leading GPU and AI capabilities with Arm’s dominance in mobile and edge chipsets, potentially creating a world leading semiconductor company capable of servicing from the cloud all the way to the edge.

But the deal needs approval from the US, UK, and Chinese governments, and China could be the toughest hurdle. The country let Nvidia’s Mellanox acquisition go through, but also famously blocked Qualcomm’s acquisition of NXP. My bet in this case is that they will not allow the Nvidia-Arm deal to go through. Arm architecture is critical to China’s emerging chip design industry, and there’s no upside to China if they’re owned by a US company—and a competitor.

It may take some time before we know for sure—the company says it may be over a year—but if it is approved would it be a success for Nvidia and Arm? What might it mean for the industry? And what will China focus on as it evaluates the deal?

A good deal for Nvidia

It’s easy to see why Nvidia is interested in Arm.

Nvidia’s focus has been on AI in the cloud. Its GPUs are market leaders in this space, with the global top four cloud services using Nvidia GPUs for 97% of their accelerators. This includes Alicloud, which although more diversified, still uses Nvidia for over 80% of its accelerators. Tencent’s gaming as a service offering uses Nvidia GPUs, and even Chinese server manufacturers like market leading Inspur are releasing ever more AI servers based on Nvidia GPUs. However, Nvidia’s business does not cover the edge market: its products are not suitable for handsets, internet of things (IoT) devices, among others. This is the area where Arm is dominant.

Essentially all handsets and the vast majority of IoT devices are based on Arm architecture. Arm licenses its processor cores to companies like Qualcomm, Mediatek, Unisoc, and Hisilicon. The cores are then used as the foundation of the companies’ system on chip (SoC) products like Snapdragon, Helio, S500, and Kirin, not to mention all the IoT chips out there. Through this acquisition Nvidia would gain access to a part of the market it had previously had no presence in.

This isn’t all though. Arm-based CPUs like those from Huawei (Kunpeng), Ampere, Marvell, and Phytium have been attempting to mount a challenge to Intel in high-performance computing (HPC). Intel is currently dominant, with over 90% market share, in HPC CPUs, while Intel’s x86 architecture holds over 98% of the market. But it is feasible a Nvidia + Arm CPU solution could begin to eat into Intel’s HPC market share. Nvidia would have the whole stack—even the networking side, via its acquisition of Mellanox last year.

So, it makes sense for Nvidia, at least if it is playing the long game. Arm’s profits are something like $300 to 400 million per year, meaning if nothing changes it would take over 100 years to make back its reported $40 billion price tag . Not all things can be measured in such a way though, and I expect Nvidia CEO Jensen Huang thinks he can grow this profit and build an all-encompassing ecosystem.

A farewell to Arm?

Arm’s founders certainly aren’t happy about the deal, as they made clear in an open letter/petition called “savearm.co.uk,” asking the British government to block it.

To be a successful silicon IP company, in general, it is expected you aren’t also a competitor.  With Nvidia, Arm would lose its independence.

Nvidia has promised that Arm’s business won’t change, that it will remain independent, continue its open licensing model, and maintain customer neutrality. But other than trust what is there guaranteeing this? Softbank was rather hands off with Arm, but Nvidia is a deep tech company, and it’s my opinion that its management will want to put their own spin on things. Will server chip licensees now see Nvidia as a competitor—and what about automotive chip giants like Qualcomm or NXP? Fabless companies around the world will be having discussions right now about how they plan for this.

One option, as I have written on a few occasions, is RISC-V. I don’t see RISC-V replacing Arm as the core general purpose processor in handset chips just yet, and I also don’t see IoT companies being as concerned about this acquisition as others as Nvidia doesn’t compete in this space.

What I do expect to see happening now is Arm licensees—many of whom are also RISC-V members—stepping up their investment in the open instruction set, and perhaps using it more often in complex heterogenous designs where RISC-V cores may act as accelerators on a chip that has Arm as its main processor. Indeed, I have seen this kind of chip quite often in China already. In the IoT space, I already see companies moving to RISC-V who previously used Arm M-series cores, but this is something that was already happening, and I don’t see the Nvidia acquisition making much difference.

Overall, in the handset, server, and automotive chip markets Arm licensees will be worried, and I expect them to come up with medium-to-long-term contingency plans. There is potential in this time frame—perhaps five to 10 years—for RISC-V to become more feasible in these chips as the main processor, and that could cause Arm/Nvidia problems. I should add RISC-V’s limitation isn’t technical, but more related to building an ecosystem to match Arm’s. It would be wise for Nvidia’s Huang to stick to his word, keep Arm independent or it may be the case we have already reached peak Arm.

China

China is going to “love this deal.”

That’s what Huang told the EE Times, promising that the structure of Arm’s China JV won’t change. I can’t say I agree though, unless he knows something the rest of us mortals don’t.

Chinese media have reported that Arm may be able to resolve the crisis with its China JV before the sale. According to The Paper, they’ve reached a compromise under which Arm will drop charges against Wu and he will step down soon. But this was contradicted by recent news showing that an outgoing investment company owned by Allen Wu “Ningbo Meishan Bonded Port Area ARM Investment Management Partnership” is suing Arm China.

So the JV stays how it is and Arm gets rid of the CEO it doesn’t like. It doesn’t sound like Nvidia or Arm is giving much to China. Huang hasn’t addressed the elephant in the room—if the deal goes through, China’s AI chips companies will be dependent on a competitor for key IP, and Arm will be US owned!

The merged company would threaten some of China’s star AI companies. AI, and especially AI semiconductors, are a key part of China’s self-development strategy, and China has some strong companies in the inference space like Horizon Robotics, Intellifusion, Iluvatar, Sensetime, Artosyn, and others all using Arm architecture.

Nvidia will have strong AI training capabilities with its GPU but now also strong inference capabilities, giving it an advantage over these companies. Perhaps this will force some firms to move to RISC-V for future designs. AI companies like Canaan have already done so.

READ MORE: China’s AI chip startups: how many will survive?

Worse from China’s point of view, the deal would make Arm’s IP US-owned, as Washington is cutting off Chinese companies like Huawei from American-owned technology. Along with fab equipment and electronic design automation (EDA) tools , semiconductor IP is an area where the US is strong and China is weak, and Arm is the world’s largest silicon IP company. More than 40% global IP sales are from Arm, and 95% of chips designed in China use its IP. In short, it adds another weapon for the US to use against China.

As mentioned in the savearm.co.uk letter, Arm would become subject to US Treasury Department regulations. This could mean that any device in the world using Arm architecture will have to comply with these regulations, potentially giving the US government the ability to cut off Chinese companies it doesn’t like not only from designing chips using Arm IP, but also from buying semiconductors with these chips in (e.g., Oppo buying Snapdragons), or buying a device that uses Arm chips (e.g. a Chinese IoT company buying Telit IoT modules). It could all be blocked if the US government choses—at least, there is risk of this.

Does this sound like a deal the Chinese government will like? I don’t think so, and I struggle to think what it would want in return for letting such a deal through.

Chinese broker Huajing Securities downgraded its rating of Shanghai-based chipmaker SMIC to “sell,” citing US-China tensions and its inability to continue supplying Huawei.

Details: Huajing Securities analyst Zhao Bing lowered his rating for Semiconductor Manufacturing International Corp. (SMIC) shares trading on Shanghai’s STAR Market to “sell” from “buy.” He also lowered its target price to RMB 47.5 (around $7) from RMB 55.23 in a research report (in Chinese) published Tuesday.

• Even though the chipmaker has seen the capacity of its 14-nanometer chips steadily increase, it will be difficult for the company to convert the increased capacity into profit because it had to stop supplying to Chinese telecommunications equipment and smartphone maker Huawei, according to Zhao’s report.
• The report also cited a Reuters story which said that the company might be added to a US Entity List, which bans American companies from shipping technology or components to blacklisted firms. “If SMIC is added to the Entity List, its clients will dial down their interests in SMIC products out of concern for the company’s shipment continuity,” Zhao wrote (our translation).
• SMIC did not respond to an emailed request for comment.

Context: The chipmaker said Tuesday that it had applied to the US government to continue supplying to Huawei. On the same day, a grace period for a US semiconductor ban against Huawei expired, meaning SMIC, which uses US technology and machinery to make chips, can no longer ship to Huawei.

China’s biggest contract chipmaker SMIC has applied to the US government to continue supplying to telecommunications equipment maker Huawei, local media reported, after the grace period for a semiconductor ban expired on Tuesday.

Details: Shanghai-based Semiconductor Manufacturing International Corp. (SMIC) told Chinese newspaper Securities Times that the company had applied to the US government to continue shipping to Huawei and vowed that it would “strictly comply with laws and regulations.”

• Shares of the company jumped 8.4% on Wednesday morning in Hong Kong on the news. 

Context: SMIC itself, however, is under threat of being added to a US technology export blacklist. The US Defense Department said earlier this month that the Trump administration is considering imposing export restrictions on the company.

• Experts told TechNode that SMIC may not have the capacity or capability to produce chips Huawei needs because its technology is “generations behind.”
• SMIC is able to make 14-nanometer (nm) chips. In May, SMIC received $2.2 billion from Chinese state-backed venture capital funds to increase the capacity of one of its 14-nm chip fabrication plants.
• However, the chips Huawei needs include 5-nm Kirin 1100 processor for servers and 7-nm Kirin 810 chip for smartphones. Taiwan’s Taiwan Semiconductor Manufacturing Co. (TSMC) is able to make more advanced 7-nm chips, but the company has reportedly halted shipment to Huawei.

A government-backed semiconductor manufacturing project based in the central Chinese city of Wuhan has gone belly-up, with key operator HSMC mired in debt. The local government said the project amounts to nearly RMB 128 billion (around $18.7 billion) in investment. 

Chinese media recently reported that the construction of the Wuhan Hongxin Semiconductor Project, which was planned to house China’s first 7-nanometer (nm) chip fabrication plant in a 650,000 square meter (around 160 acre) structure, had been at a standstill since December. 

Local newspaper National Business Daily said in a report (in Chinese) on Monday that work had stopped on the project’s headquarters in Wuhan as of Thursday, with no buildings completed. The newspaper cited a contractor of the project as saying that construction had been halted because workers had not been paid. 

On Aug. 28, the Commerce Bureau of Wuhan’s Dongxihu District, where the project is located, said in response (in Chinese) to a local resident’s inquiry that the project had been suspended because of “financial difficulties.”

On July 30, the Dongxihu District government said in a semi-annual report about the local economy that “there is a huge funding gap in the Hongxin Semiconductor Project” and that it faces “risks of stagnation at any time.” The report cited the “challenge in the capital market” because of the “global outbreak of Covid-19.”

The district government deleted the report (in Chinese) from its website after wide coverage from local media.

The project’s operator is a company founded in 2017 called Wuhan Hongxin Semiconductor Manufacturing Co. (HSMC). The company said on its website (in Chinese) that it expects to be able to build a 14-nm chip production line that can produce 30,000 wafers per month and a 7-nm chip production line with the same capacity. It did not give a timetable for those goals.

The decline of the ambitious chip manufacturing project highlights risks as local governments in China rush to achieve dreams of semiconductor self-reliance. According to Made in China 2025, a government initiative announced in 2015 aimed at boosting the high-tech sector, China wants to produce 70% of chips it uses by 2025. But making cutting-edge chips is hard, and attempts to charge into the industry haven’t gone well.

Vast investment and big hires

The Hongxin Semiconductor Project had received RMB 15.3 billion in funding as of the end of 2019, according to the Wuhan Municipal Development and Reform Commission, a government body that oversees local macroeconomic planning. The project is expected to receive an additional cash infusion of around RMB 8.7 billion in 2020, it said.

It is a truth universally acknowledged—as Jane Austen would have put it, during a second career as a semiconductor market analyst—that a new chipmaker in possession of a good fortune must be in want of talent. HSMC has been courting engineers at Taiwan Semiconductor Manufacturing Co. (TSMC), the largest contract chipmaker in the world. The company, together with another local government-backed chipmaker, had hired more than 100 engineers and managers from TSMC since last year, according to a Nikkei Asian Review report in August.

In Taiwan, HSMC is known as a generous suitor. One anonymous source told Nikkei that the HSMC offers packages “as high as 2 to 2.5 times TSMC’s total annual salary and bonuses” for engineers and managers from the Taiwanese company, which supplies high-end chips to big tech firms such as Apple, Google, and Huawei.

In July 2019, HSMC hired as its chief executive Jiang Shangyi, formerly a research and development vice president at TSMC. The 75-year-old chip veteran also served as an independent director at Semiconductor Manufacturing International Corp (SMIC), a Shanghai-based state-backed chipmaker, from 2016 to 2019.

Where was the money from?

While the Wuhan municipal government said the project had received billions of RMB in funding, HSMC’s shareholding structure doesn’t reflect that. The company is 10% owned by a government-owned firm and 90% by a Beijing-based private firm, according to Chinese corporate information platform Tianyancha. The Beijing-based firm is majority-owned by company Chairwoman Li Xueyan, who holds a 54% stake. Mo Sen, one of the company directors, holds the balance.

On Monday, Chinese media The Cover reported that the Beijing-based company never put real money in the project.

Public information shows Li has no experience in semiconductors and data from Tianyancha shows she also has stakes in a baijiu retailer, a few catering companies, and several medical firms.

Li cannot be reached for comment. HSMC didn’t respond to an emailed request for comment.

“The strange thing about HSMC is that it’s unclear where its money is from… It seems that the company didn’t actually receive as much money as it claimed to have,” Gu Wenjun, chief analyst at Shanghai-based semiconductor research company ICwise, told TechNode (our translation).

Chen Rang, a semiconductor investor cited by the National Business Daily, hinted that the Wuhan municipal government may have leveraged land resources to attract private capital to back the project. “But the semiconductor industry has a high standard on investment and it is far from enough to just utilize land resources [to raise money],” Chen said.

Phantom mask aligner

HSMC’s goal was to make China’s first 7-nanometer chips. All it has to show for it is a few uncompleted buildings. It did buy a high-end machine needed for bleeding-edge semiconductor production, but it was put up as collateral for a loan.

The semi-annual report by the Dongxihu District government also said that HSMC had bought “China’s only mask aligner that can produce 7-nm chips” from Dutch company ASML, referring to an instrument that enables photolithography in the fabrication process.

If true, it would be quite a coup—the US government has been campaigning since 2018 to prevent ASML from selling the most advanced machine required to make high-end chips to Chinese companies, according to Reuters.

Chinese media Caixin tried to find the unique 7-nm machine, and it does seem to exist. But they found that it was under mortgage; is good only for 14-nm chips, not 7-nm; and, citing an anonymous semiconductor industry insider, that SMIC has around 10 units of the same model.

Court files show that the machine had never been used when it was held as security for the RMB 582 million loan in January.

“You will need at least two mask aligners and nearly 100 pieces of other machinery to make chips,” said Gu of ICwise. He added that no Chinese chipmaker has realized the mass production of 7 nm chips.

READ MORE: SILICON | Can China make chips?

Fool me once

The Hongxin project was widely questioned in the semiconductor industry, said Gu. “No one believed that it would be a success,” he said.

There are similar stories from other parts of China. In July, Dekema, a Nanjing-based chipmaker backed by the local government, announced it was bankrupt because of “financial difficulties” in raising additional funds from investors. 

The Nanjing company previously received $3 billion from investors including the Nanjing municipal government. Founded in 2016, the company said it would “fill the blank in China’s contact image sensor (CIS) chip production.” CIS chips are a key component widely used in portable scanners and bar code readers. After the bankruptcy announcement, local media found that the company’s headquarters consisted of two unfinished buildings and that it had not produced a single wafer.

“Building [semiconductor] production lines needs long-term and consistent investment and it usually takes three to five years to see the initial results,” Gu said. “Production lines backed by local governments face the risk that the support is not consistent because of rotations in officials.”

“We appeal to local governments to make decisions on semiconductors after necessary analyses,” he said. “Whether a semiconductor industry can be built doesn’t depend on how much subsidy the government gives, but on how capable the participants are.”

China Tech Investor is a weekly look at China’s tech companies through the lens of investment. Each week, hosts Elliott Zaagman and James Hull go through their watch list of publicly listed tech companies and also interview experts on issues affecting the macroeconomy and the stock prices of China’s tech companies.

Make sure you don’t miss anything. Check out our lineup of China tech podcasts

Elliott and James welcome Kevin Xu to the podcast this week. Kevin is the author of Interconnected, a bilingual newsletter on tech, business, geopolitics, and US-China relations. The three guys discuss China’s cloud services landscape and its competitive dynamics. They also discuss TSMC and the intense competition in semiconductor development.

Hosts may have interest in some of the stocks discussed. The discussion should not be construed as investment advice or a solicitation of services.

Get the PDF of the China Consumer Index.

Watchlist:

• Tencent
• Alibaba
• Baidu
• iQiyi
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Luckin Coffee

Hosts:

• Elliott Zaagman– @elliottzaagman
• James Hull– @jameshullx

Guest:

• Kevin Xu– @kevinsxu

Editor

• Peter Isachenko

Podcast information:

• iTunes
• Spotify
• RSS Feed
• Music: “Hey Ho” by Steve Jackson, Royalty Free Music

Shares of Chinese heavyweight chipmaker SMIC jumped more than 200% during its Thursday debut on the Shanghai tech bourse while those listed on the Hong Kong exchange fell 17%, signaling skepticism from global investors.

Why it matters: The contrast shows that international investors are cool on the prospects of China’s biggest contract semiconductor manufacturer despite strong support from the state.

• Shanghai-based Semiconductor Manufacturing International Corp. (SMIC) is expected to play an important role in China’s ambitious plan of making 70% of chips it uses by 2025 under the Made in China 2025 initiative, a government scheme announced in 2015 with the aim to boost the high-tech sector.
• However, experts have said SMIC is “generations behind” the world’s edge-cutting chip-making technology. The company mainly produces 14-nanometer wafers while companies such as Taiwan Semiconductor Manufacturing Co. have started mass-producing 5-nanometer ones.

Details: Shares of SMIC surged 245% to RMB 95 at the open on its first day of trading on Shanghai’s Nasdaq-style STAR Market. The shares were priced at RMB 87.1 (around $12.5) by the end of the morning trading session.

• The company issued 1.7 billion shares at RMB 27.5 each on its secondary listing in Shanghai.
• Meanwhile, shares of the company listed in Hong Kong were down 17% to HKD 31.9 (around $4.11) during Thursday morning’s trading session.
• “Some investors have switched their money from the HKSE-listed entity to the STAR-listed entity, on the expectation the IPO would ‘pop,’” said Michael Norris, research and strategy lead at AgencyChina.

Context: SMIC’s secondary listing on the Shanghai bourse is the biggest stock sale in mainland stock markets in a decade since Agricultural Bank of China’s RMB 68.5 billion initial public offering in 2010.

• SMIC’s shares were up more than 200% in Hong Kong this year.
• In May, China’s National Integrated Circuit Industry Investment Fund, a state-backed industry fund, injected more than $2 billion into a SMIC chip fabrication plant. 

Huawei said Tuesday the UK’s decision to ban the Chinese telecommunications equipment maker from its 5G networks was “disappointing” and urged the country to “reconsider.”

Why it matters: The British government said that banning Huawei gear was due to “uncertainty” around the company supply chain. The company argued that it was a “politicized” decision.

Details: Huawei urged the British government to reconsider the ban announced Monday on the company’s equipment from the country’s 5G network rollout, said Huawei in a statement to TechNode on Tuesday.

• “It threatens to move Britain into the digital slow lane, push up bills and deepen the digital divide,” the company said.
• The UK government also ordered telecom operators to remove existing Huawei equipment from their 5G networks by 2027, citing a US ban on Huawei in May that could bar the company from the global semiconductor supply chain.
• “Given the uncertainty this creates around Huawei’s supply chain, the UK can no longer be confident it will be able to guarantee the security of future Huawei 5G equipment,” Digital and Culture Minister Oliver Dowden said on Tuesday.
• Huawei, however, said the UK’s decision was “about US trade policy and not security.”
• “We remain confident that the new US restrictions would not have affected the resilience or security of the products we supply to the UK,” the company said.

Context: A new US regulation announced by the Department of Commerce in May requires companies around the world to obtain licenses for sales to Huawei of semiconductors made with US technology, potentially cutting the company off from global chip manufacturing. 

• The company sources critical chips for its smartphones, 5G base stations, and other devices from global semiconductor makers such as Taiwan’s TSMC and Win Semiconductors, and South Korea’s Samsung Electronics.

Huawei said Monday its revenue during the first half of the year grew 13.1%, a significant slowdown from the same period last year as the company faces stricter sanctions from the United States.

Why it matters: The Shenzhen-based telecommunications gear maker’s business in the first six months of the year was hit by a double whammy—a new round of US sanctions imposed in May and the Covid-19 pandemic that has disrupted the global economy.

• “The complex external environment makes open collaboration and trust in global value chains more important than ever,” Huawei said in a statement Monday.

Details: Huawei booked RMB 454 billion (around $64.9 billion) in revenue in the first six months of the year with a net profit margin of 9.2%, the company said in the statement.

• Huawei’s consumer business earned RMB 255.8 billion, while its carrier and enterprise units reaped a respective RMB 159.6 billion and RMB 36.3 billion, the company said.
• Second quarter revenue rose 22.7% year on year, according to TechNode’s calculations based on stated data.

Context: The same period a year earlier, the company reported 23.2% year-on-year revenue growth, before the impact of a May 2019 US blacklisting that sought to cut the company off from American technology. Huawei touted the growth as proof that US sanctions had a limited impact on its business.

• The ban took effect in May after several reprieves. Before that, some of Huawei’s important American partners such as Google—which provides commercial licenses to millions of Huawei’s Android-powered smartphones—had already terminated cooperation with the company, dealing a blow to its consumer business, its biggest source of revenue.
• In May, the US Department of Commerce announced a new regulation requiring companies around the world to obtain licenses for sales to Huawei of semiconductors made with US technology, an upgraded version of a May 2019 ban that applied only to American companies.
• The new regulation could potentially cut Huawei off from the global semiconductor supply chain. Affected Huawei suppliers include Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker which produces high-end chip designs for Huawei; Taiwan’s Win Semiconductors, which makes Huawei’s radio frequency chip designs; and South Korea’s Samsung Electronics, which ships memory and storage to Huawei.
• Huawei had reportedly started shifting some production of its chip designs from overseas contract makers to domestic ones such as Shanghai-based Semiconductor Manufacturing International Corp., but experts believe the homegrown alternative is too backward in technology to supply the cutting-edge chips that Huawei needs.

China is set for its biggest stock sale in a decade when homegrown chipmaker Semiconductor Manufacturing International (SMIC) debuts on Shanghai’s Nasdaq-style STAR Market at the end of this month.

Backed by heavy subscriptions by mainland investors, the Hong Kong-listed company could raise as much as RMB 53.2 billion (around $7.6 billion) in a secondary listing on the Shanghai bourse, potentially the biggest in mainland stock markets since Agricultural Bank of China’s RMB 68.5 billion initial public offering in 2010.

SMIC is just the latest example of China’s chip funding fever. A report by Nikkei Asian Review says Chinese chipmakers have raised around RMB 144 billion this year from equity markets, already twice the amount of money they raised in the whole of 2019.

Shanghai-based SMIC is China’s largest contract chipmaker. It’s a solid division II team, manufacturing reliable midrange chips mostly for domestic customers. It lags a few years behind the cutting edge: SMIC is still inching towards 7-nanometer chip production while Taiwan Semiconductor Manufacturing Co. (TSMC) has been producing them since 2018. But the company’s 14-nanometer chips are not good enough to supply many domestic needs, such as Huawei’s most advanced Kirin chips. 

The on-going race between China and the United States for technology supremacy has given SMIC its chance at the major league: US sanctions on Huawei could force the world’s largest telecommunications gear maker and second-largest smartphone maker to move all its chip production from TSMC to SMIC. The state is ready to pour billions into the company’s effort to master cutting-edge production. Shares in SMIC have gone up 215% from the beginning of this year, driven by increasing domestic demand, favorable policies, and the dual listing plan itself. It’s a huge opportunity—but a daunting challenge.

The company said it plans to spend 40% of the proceeds of the Shanghai stock offering to help produce 14-nanometer or higher-end chips, and 20% will be put into research and development.

But to become a global leader, experts suggest, SMIC will need more than money. 

Money from the state—and more from the market

Since it was founded in 2010, SMIC has enjoyed generous support from the state. In the same month it announced the secondary listing plan on the Shanghai bourse, a state-backed industry fund injected more than $2 billion into a SMIC chip fabrication plant. 

Years of state support have put China in the fourth spot on global wafer capacity ranking in 2019, according to semiconductor market research firm IC Insights. 

China is known for its lavish investments to boost industries deemed strategically important. In the semiconductor sector, the well-known National Integrated Circuit Industry Investment Fund, or the “Big Fund,” underwrites chipmakers. The fund has gathered a total of RMB 342.7 billion from the finance ministry, state-owned enterprises, and local governments. 

Read more: VC roundup: State-backed ‘big funds’ manage 60% of China’s VC/PE money

In addition to its official goal (in Chinese) of “investing in chip manufacturing, designing, and promoting mergers and acquisitions,” the fund is also expected to provide “guidance” to get private capital into key sectors.

To raise really big money, SMIC and the Big Fund count on the markets. In 2019, investable assets held by Chinese residents that can be put into the equity market were RMB 29 trillion, according to the China Chief Economist Forum (in Chinese), a Shanghai-based think tank, while the entire national budget (in Chinese) for guidance funds was RMB 2 trillion in 2019.

The STAR Market on the Shanghai Stock Exchange also shows a strong preference for semiconductor firms. Of the 122 stocks listed on the board, around 20 are from the semiconductor sector. The board, known for a meticulous pre-listing review process that can take up to six months, took only 29 days to go through SMIC’s application.

“The Big Fund has definitely achieved its goal to guide private capital into the semiconductor sector, and I think the effect is significant,” Fang Jing, chief analyst at Cinda Securities, told TechNode.

“Thanks to the push of the Big Fund, the proportion of total capitalization of semiconductor firms in the A-share market’s electronics sector grew to approximately 30% from just more than 10% a few years ago,” he added. “It is no exaggeration to say that the past two years have been a feast for semiconductor investments.”

Money may not be enough

Beijing’s expectations are very high for SMIC. According to the Made in China 2025 plan, a government initiative announced in 2015 aiming to boost the high-tech sector, China wants to produce 70% of chips it uses by 2025.  With 18% of the domestic market (in Chinese), SMIC is the only company that’s even on the road to this target.

The target seems more urgent now in the context of escalating US-China economic conflicts. The Trump administration has already blocked Huawei’s access to its technology and machinery and would potentially cut the company off from the global semiconductor supply chain.

But despite heavy investments from the government and private investors, experts predict China will fall far short of the goal of semiconductor self-sufficiency by 2025.

A May report by IC Insights predicts that China will produce only 20.7% of chips it uses in 2024, growing only 5% from 2019.

China not only needs more chips—it needs better ones. SMIC is “generations behind” TSMC, Alex Capri, visiting senior fellow at the National University of Singapore Business School, told TechNode in an interview in May.  SMIC, one of the country’s most sophisticated chipmakers, mainly produces 14-nanometer wafers, while the most edge-cutting chip fabrication technology is now 5-nanometer. For Huawei, this means there is nowhere to buy cutting-edge chips in the domestic market.

In addition to closing a capital gap, China also needs to narrow the talent gap in the semiconductor industry to catch up with the bleeding edge of chip designs, said Fang of Cinda Securities.

China faces a talent shortfall of around 300,000 people in the semiconductor industry, Yu Xiekang, vice president of the China Semiconductor Industry Association, told local media in 2019.

“It should start with education because you can’t always poach talents from overseas. We need not only technology self-sufficiency, but also education self-sufficiency,” Fang said.

Clarification: This post has been updated to clarify the attribution of a quote in the last paragraph.

China’s biggest server maker, Inspur, said Friday that Intel has resumed shipments to it. The American chipmaker briefly suspended shipment after Inspur was added to a US list of Chinese companies it deems military-controlled.

Why it matters: The list, announced by the US Department of Defense, paves the way for US President Donald Trump to impose sanctions on 20 Chinese companies, including Inspur and Chinese telecommunications equipment maker Huawei. However, Intel’s twist indicates the list has not been turned into an export control list.

• Inspur has around 37.6% of China’s server market in the first quarter of this year, according to market research firm Gartner (in Chinese). The company is an important provider of hardware used by many of China’s leading cloud-computing firms like Aliyun and Tencent Cloud.
• Inspur spent some RMB 17.9 billion (around $2.5 billion) on sourcing components from Intel in 2019, accounting for 37.5% of its total expenses, according to its 2019 annual report (in Chinese).

Details: Inspur has received notice from Intel that the US company has resumed shipment to the Chinese server maker, Chinese media Caixin reported Friday. Intel also confirmed the information to Caixin.

• Intel said Wednesday it had suspended shipments to Inspur because it needed to “adjust its supply chain to comply with relative US laws,” Caixin has reported.
• Shares of the company, where are listed on the Shenzhen Stock Exchange, surged 4% Friday morning on the news.
• The interruption to shipments came after the Pentagon compiled a list of 20 Chinese companies with ties to the Chinese military last month. President Trump can use the International Emergency Economic Powers Act’s authorities against entities on the list, Axios reports, citing Larry Wortzel, a commissioner of the US-China Economic and Security Review Commission.

Context: Chinese manufacturing companies are increasingly subject to supply chain disruption when sanctioned by the US as a result of intensifying geopolitical conflicts between the world’s two largest economies.

• In 2018, ZTE, a smaller rival of Huawei, saw its market value tank by billions of dollars after the US banned American companies from exporting components and technology to it for seven years. The ban was later lifted in July 2018.
• In May 2019, the US imposed similar sanctions against Huawei. The company expected the ban could reduce its production output by $30 billion over 2019 and 2020.

Understanding China’s tech sector means knowing the biggest players in the venture capital space. They are not the big tech companies like Tencent or Alibaba, nor international consortiums backed by Softbank. They are onshore funds that raise money from the Chinese state.

For years, China has adopted the so-called “Temasek model” of managing state wealth—setting up state-backed investment firms to manage hundreds of billions of dollars like the Singaporean sovereign wealth fund.

Those funds, accounting for only 26.6% of total Chinese VC firms, managed more than 60% of the money in China’s private equity market in 2019, according to a June report (in Chinese) by the Chinese investment research firm Zero2ipo.

They raise money from China’s finance ministry, state-owned enterprises, and local governments’ fiscal reserves, but some local funds also raise private money as well.

Unlike Temasek, which issues detailed reports to the public about its portfolio value and returns to shareholders every quarter, Chinese state funds often operate mysteriously and are sometimes criticized (in Chinese) by local media for a “lack of transparency.”

The outside world has very limited access to state-backed funds’ investment activities. Local media and research institutes often find out what these funds have invested in only after their portfolio companies have gone public and disclosed their shareholding structures. Other information, such as their backers and management, can be gleaned from corporate registration databases maintained by market regulators.

We don’t know about the returns they yield and how they make investment decisions. Critics say state-backed funds usually make decisions following economic plans rather than market incentives.

A brief history of state-backed funds

Back in the Stone Age (aka the 1980s), state funds were the only players in China’s private equity market. The country’s first PE firm was set up in 1985 by the State Science and Technology Commission (succeeded in 1998 by the Ministry of Science and Technology) to “provide funds for the industrialization of technology achievements.”

• 1992: Boston-based International Data Group (IDG) becomes the first foreign VC firm to invest in China.
• 1998: The first state fund, China New Technology Venture Capital Co., is shut down by the central bank with debts of around RMB 6 billion. Local media said in 2004 the firm had never made any venture capital investments but rather operated a loan business.
•  2004: The Shenzhen Stock Exchange (SZSE) opens a board for small- and medium-sized enterprises, providing more exit channels for VC firms.
• 2005: The National Development and Reform Commission, China’s top macroeconomic planning body, issues a guideline to advise central and local governments in setting up “venture capital guidance funds” to help out small- to medium-sized tech firms.
• 2007: A new company law allows limited partnership, a popular partnership for VC firms to hold their investment in companies.
• 2009: The SZSE opens the Chinext startup board.
• 2015: Chinese Premier Li Keqiang announces a plan to set up national-level guidance funds to support innovation and industrial upgrading.
• 2015-2018: A series of guidance funds are set up by central and local governments, targeting sectors such as high-tech, manufacturing, and aviation.

Big money

According to the Zero2ipo report, by the end of 2019 China had around 14,000 private equity and venture capital firms, 26.6% of them state-backed. Together, those funds managed 60.5% of all the money raised in the market.

Many more private firms have entered the market recently, but in dollar terms it has hardly changed. In 2014, around 70% of newly founded Chinese VC firms were state-backed, altogether managing around 59% of new funds raised in the market.

The report attributed the increasing share of state-backed funds to the foundation of a series of “guidance funds” founded between 2015 and 2018. “Their size usually ranges from several billion RMB to several tens of billions RMB, sharply increasing the scale of capital managed by state-backed funds,” said the report.

Key players

China’s so-called guidance funds use state money to invest in companies in industries that the government considers strategically important. There is no official list of those strategically important industries, but “Made in China 2025,” a government-led industrial subsidies scheme (as well as a focus of the US-China trade war), has outlined some “prioritized sectors” that include semiconductors, new materials, and next-generation information technology.

Not all guidance funds are relevant to tech. Other major funds have missions such as supporting the country’s small- and medium-sized enterprises.

The chip fund: The China National Integrated Circuit Industry Investment Fund, dedicated to investing in semiconductor firms, is dubbed the “big fund.” It was set up in 2014 and raised RMB 138.7 billion from the Ministry of Finance and China Development Bank Capital, as well as several other state-backed enterprises.

The chip fund was set up to invest in semiconductor manufacturing and designing, and to promote mergers and acquisitions, according to China’s Ministry of Industry and Information Technology (MIIT), which supervises the fund. In October 2019, the fund closed another financing round, raising RMB 204 billion.

The internet fund: In 2015, the Cyberspace Administration of China, together with the Ministry of Finance and some state-owned enterprises, formed the China Internet Investment Fund. The fund focuses on investing in Internet-based services and promoting the development of “Internet innovation,” according to Xinhua. It raised RMB 30 billion in its first financing round and will have a total scale of RMB 100 billion. Portfolio companies of the fund include cloud computing company Kingsoft Cloud and voice recognition technology firm Unisound.

The manufacturing fund: In 2019, China’s finance ministry and several state-owned enterprises set up a RMB 147.2 billion National Manufacturing Transformation and Upgrading Fund. The fund will invest in companies working on areas including new materials, next-generation information technology, and electrical equipment, according to a filing by one of its investors.

The big funds’ biggest deals

• In October 2019, China State-owned Capital VC Fund led a RMB 1 billion Series A in Qianxun Spatial Intelligence, a company that uses China’s homegrown Beidou Navigation Satellite System for location and data analysis services.
• On May 13, the China Internet Investment Fund led a RMB 1.8 billion financing round in Cloudwalk, a facial recognition firm.
• In May, Chinese media reported that semiconductor maker Unisoc had raised RMB 5 billion from the China National Integrated Circuit Industry Investment Fund.
• On May 15, the chip fund injected more than $2 billion into domestic chip maker Semiconductor Manufacturing International Corp (SMIC).
• On June 1, the National Small and Medium-Sized Enterprise Development Fund participated in a RMB 180 million Series B in I-Kingtec, a Beijing-based commercial drone maker.

A vote of confidence

State-backed funds are seen by experts as a tool to execute economic plans while making a profit. But the idea is that they will “guide” private capital to strategic sectors rather than replace it.

Another report from Zero2ipo in January said the total scale of China guidance funds reached RMB 10 trillion and a total of 1,686 guidance funds have raised a combined RMB 4.7 trillion as of the end of 2019.

On top of making money for the state, these funds also aim to leverage China’s massive private capital to invest in sectors considered strategically important by the government.

State-backed funds targeting specific sectors are important because they are seen by the market as a vote of confidence, and thus help lure private capital to invest in those sectors, as Dong Dengxin, director of the Financial Securities Institute at the Wuhan University of Science and Technology, told TechNode in an interview last year.

Who are the decision-makers?

While the state-backed funds are born with political tasks, their decision-making processes are not market-oriented, according to a 2015 paper by Chen Zhihai, the general manager of Chengding Fund, a Shanghai-based venture capital firm backed by a state-owned enterprise.

State funds, especially those backed by local governments, are very cautious about their investments, said Guo Libo, research head of investment research and consulting firm Chinaventure, when he spoke to Chinese media outlet Caixin last year.

From 2015 to 2018, many state-backed funds preferred investing in pre-IPO companies because they wanted to avoid risks and pursue a quick return, said Guo.

In the paper, Chen wrote, the management of state-backed funds, especially investment decision-makers, was composed mostly of cadres allocated from central or local governments rather than professional investors selected from the market.

“[The cadres] may have done some research on the country’s macroeconomics or some specific industries, but in the long term, they won’t be able to put enough effort into the research of investments, sometimes resulting in inaction because they would rather avoid mistakes than make decisions,” wrote Chen.

Huge, but sluggish

State-backed funds have incubated some successful companies in key areas such as semiconductors and artificial intelligence. SMIC, a Shanghai-based contract chip maker backed by state money, has started to take over some chip production of Huawei’s chip designs from Taiwan Semiconductor Manufacturing Co. (TSMC) amid US sanctions. The Hong Kong-listed firm is expected to dual-list its share on Shanghai’s Nasdaq-style STAR board in July. 

Despite the massive amount of cash injections, state investors, especially those backed by local governments, have sometimes failed to mobilize private capital into targeted sectors.

In October 2019, auditors of three provinces reported that their guidance funds yielded low returns and had not “sufficiently” mustered private capital, according to Chinese business newspaper 21 Caijing (in Chinese).

In central China’s Henan province, some 43 guidance funds were set up as of the end of 2018, with a planned target of raising RMB 38 billion from fiscal money and private investors. However, they only raised RMB 19 billion and fiscal money accounted for 92%, according to the report. In north China’s Hebei province, auditors said only 14.7% of RMB 6.3 billion raised by 13 guidance funds were used for investments by the end of 2018.

These setbacks are signs that while these state-backed funds have a huge share of the market, they hold big disadvantages in terms of inefficiency. Encumbered by their politicized nature and bureaucratic decision-making processes, their efficacy and results are still far from certain.

In the past few months, a series of power struggles have rocked Chinese tech companies, including e-commerce company Dangdang, bitcoin mining rig maker Bitmain, and UK chip designer Arm’s Chinese branch.

The disputes at the three companies were over different versions of the same issue: removed company executives trying to regain power. But their approaches varied, as well as the results. Some tried to grab company seals, some tried to restore a key position at a company with the support of the authorities, and some just ignored decisions made by the board.

Bottom line:  The power struggles in the three companies are, at their core, battles between management and shareholders. But some peculiarities of Chinese corporate governance makes it easier for executives to seize control and harder to resolve such standoffs.

Three coups

Grabbing seals: A former executive tried to take control of e-commerce marketplace Dangdang by forcibly seizing the company’s official seals from its office in a daylight raid.

• In February 2019, Li Guoqing announced in an open letter that he had left the company, indicating a peaceful handover.
• But on April 26, Li broke into the company’s Beijing headquarters with six others and took control of nearly 50 of the company’s official stamps and financial seals.
• In a letter to employees distributed during the visit, Li says he would take over the company’s operations, while Yu Yu, his wife and co-founder, would no longer be executive director, legal representative, nor general manager.
• On July 13, local police said Li’s takeover of the stamps “didn’t break the law.” 
• On the same day, Dangdang said the police’s decision was “shocking” and that the company had filed for administrative reconsideration.
• Li claims that he was authorized to take control of the company at a temporary session of the general meeting of shareholders. However, rival Yu owns 64.2% of Dangdang, according to its corporate registration information.
• Seals? Company seals are considered a company’s legal signature. Documents affixed with a company seal are usually seen legally binding upon that company.
• It seems that Li didn’t take control of the company as he planned. Chinese media still recognizes statements by Yu as representing the company.

Defying the board: On June 10, Arm China, a subsidiary of British chipmaker Arm, rejected a decision by its own parent company to fire China chief Allan Wu.

• The day before, Arm said the board of Arm China, a joint venture set up by the British firm and a Chinese investment consortium in 2018, voted to remove Wu from his position as chairman and CEO.
• The Chinese subsidiary fired back with a statement saying the board’s decision was invalid and that Wu remains in his positions. Arm’s UK headquarters responded that they stood by their original statement firing Wu.
• The statement by Arm’s UK headquarters said Wu had been fired “after an investigation uncovered undisclosed conflicts of interest and violations of employee rules.”
• The Arm China board voted 7-1 to dismiss Wu, Bloomberg reported Saturday.
• All signs show that Wu is still in charge of Arm China. In an open letter signed by a number of Arm China employees, Wu’s supporters said they were “shocked by the allegations against Wu.”

Whatever this is? Bitmain’s co-founder Zhan Ketuan’s coup attempt started with reappointing himself as the legal representative of the company with the help of Beijing’s market regulator.

• Context: In October 2019, Bitmain co-founder Wu Jihan ousted Zhan from company positions as co-CEO and legal representative.
• On May 8, the Market Administration of Beijing’s Haidian district convened a meeting to hand over Bitmain’s business license to Zhan after the market regulator backed Zhan’s claim that the change of the company’s legal representative was invalid. Zhan claimed a document submitted by Wu to change the legal representative did not follow proper procedures.
• A physical brawl broke out at the government office after Bitmain management tried to take the license from Zhan by force.
• Corporate registration information shows Wu replaced Zhan as the company’s legal representative on October 28, 2019.
• Zhan has partially controlled Bitmain since he was re-granted the position as the company’s legal representative. In June, Zhan re-took the control of Bitmain headquarters in Beijing and ordered employees to halt product deliveries. 

Why is it so hard to know who’s in charge?

The power of legal representatives: Chinese corporate law requires every company to have one legal representative, an executive position on par with the CEO in importance. Leadership turnovers in a Chinese firm almost always involve the company’s legal representative in some capacity.  

The representative is practically the company incarnate: they have the power to act on behalf of the company and are answerable for the company’s mistakes—they can even go to jail on the company’s behalf. It’s a high-risk, high-reward position.  

• The board of directors has the power to remove a legal representative, but until the papers are filed—and stick—the officeholder’s power can outweigh that of their supervisors.

The Chinese-style insider-ownership problem: Experts have attributed the frequent power struggles that happen within Chinese companies partially to a so-called “insider ownership” problem. 

When American CEOs get away with ignoring their shareholders, it’s usually because they own company stocks or that the company’s equity ownerships are highly dispersed, Zheng Zhigang, professor at Renmin University’s School of Finance, wrote in an article in 2017.

In China, executives rely more on informal personal relationships to control their companies—so much so they can sideline the board, according to Zheng.

Chinese company founders usually own their companies and hold executive positions, forming “strong social connections” with employees in the process. When leadership challenges arise, this “de-facto control” is often unassailable, even overriding the board of directors, said the article.

• In the Dangdang case, when Li broke into Dangdang’s office in Beijing, employees working there “didn’t dare” to stop him because he was an “ex-boss,” according to Chinese media reports.
• Bitmain’s Zhan tried to buy support from workers. He offered RMB 10,000 ($1,400) to any employee who returned to their desks the day he marched into Bitmain’s headquarters.
• Wu of Arm China, despite being removed by the board, stays in power as employees show their loyalty. “Wu has been leading our way until today after he joined Arm in 2004, started to lead Arm’s Chinese branch in 2007, and became Arm China’s chairman [in 2018],” said the open letter by employees.

A lawyer’s view: Cheng Jun, a lawyer at Beijing Yanshang Law firm, argues that the power struggles happening in Chinese tech companies may be a result of poorly conceived corporate structures.

China’s current company law doesn’t provide comprehensive provisions on how to balance power inside an enterprise, he said, but company founders can formulate clauses in the company constitution to prevent ambiguous power structures.

“I estimate 99% of Chinese companies simply adopted templates of company constitution provided by market regulators instead of drafting their own,” he said.

Trust the court: In the long run, Cheng said, China’s courts can be trusted to resolve the problems at three companies. “Eventually, the decision-makers are company owners, or the shareholders, who exercise their power through the board of directors,” he said.

But “eventually” is a long time. According to Bloomberg’s reporting on Saturday, Wu will remain the legal representative of Arm China until he hands over the company seals he holds. The problem is he refuses to do so.

Shareholders could go through the courts, the article said, “but the process could take years.”

Arm’s China subsidiary appears in be in open conflict with headquarters, as it rejected a decision by the British chipmaker to fire China chief Allan Wu.

Details: Arm China, a joint venture set up by Arm Ltd and a Chinese investment consortium in 2018, said in a company statement (in Chinese) Wednesday that Wu remains the chairman and CEO of the company.

• The announcement came one day after Arm UK said that the board of Arm China voted to remove Wu from his position as CEO and replace him with two co-CEOs, Ken Phua and Phil Tang, according to Bloomberg.
• “There are no leadership changes happening at Arm China, and Chairman and CEO Allen Wu continues to lead the company,” the statement said.
• Arm China is an independent legal entity set up in China and the decision was made “upon relevant laws and regulations,” said the company.
• Arm’s UK headquarters told Bloomberg Wednesday that the company stood by its original statement firing Wu, and added that Wu had been fired “after an investigation uncovered undisclosed conflicts of interest and violations of employee rules.”
• “Following a whistleblower complaint and several other current and former employee complaints, an investigation was undertaken by Arm Limited… Evidence received from multiple sources found serious irregularities, including failing to disclose conflicts of interest and violations of the employee handbook,” said the British firm.
• Arm China didn’t reply to an e-mail requesting comment on Arm headquarters’ latest statement.

Context: UK-based Arm, which is owned by Japanese telecom giant Softbank, licenses semiconductor technologies such as the Arm architecture to chip makers. Arm is a key player for Huawei and other Chinese IC companies, as its architecture are standard for mobile phone CPUs, among other applications.

• Arm China was formed in 2018, when Softbank sold 51% of Arm’s Chinese subsidiary to a consortium consisting of China Investment Corp., the Silk Road Fund and Singaporean state investment firm Temasek Holdings, according to Bloomberg.
• Arm Ltd directly owns 47.33% of Arm China, according to the Chinese joint venture’s corporate registration information.
• Phua, one of the co-CEOs appointed by Arm Ltd, is currently vice president of the British firm’s strategic business development department, according to his Linkedin profile.
• A similar boardroom drama erupted at another British semiconductor IP firm in April, when leaders at UK’s Imagination technologies resigned over what they called “Chinese government” control of the company.

Read more: Chip designer Arm says Huawei ties unaffected by US trade restrictions

Can China gain semiconductor independence while the US escalates the “Great Chip War”? “It’s going to be a big hit while China works it out,” TechNode contributor Stewart Randall said at a webinar on May 28, “but given time and money, yeah, it’s possible.” 

Randall discussed the US “Export Ban 2.0” against Huawei with fellow TechNode contributor Jan-Peter Kleinhans at the second installment of the monthly “Tech After Hours” webinar series. With that ban, the US said, “you think you’re ahead of us, but I’m going to prove you wrong,” said Randall, who is head of Electronics and Embedded Software at Intralink.

“It would be really hard for Huawei to go around this ban,” said Kleinhans, director of the Geopolitics and Technology project at the Berlin-based Stiftung Neue Verantwortung. But in the long run, he said, “I don’t think any country, China included, will be held back.”

Fresh out of tricks

Huawei itself might have a tough time with the new export controls, Randall said. They’ve surprised us before—but he “can’t personally see how they could keep on designing” this time without access to Electronic Design Automation (EDA) tools or fabs.

Even a magic trick that evades this round of sanctions may not matter, Kleinhans said. The real question is about the US government’s “direction of travel.” Even if the most recent export ban against Huawei isn’t watertight, we can “probably expect a third or fourth one until they get it right.”

According to him, this isn’t just about the trade dispute anymore, or even previous allegations of theft of intellectual property. “It’s about containment,” he said. 

Randall agreed. “When you have the ability to do this and China is your adversary—why not?”

Huawei’s chip design subsidiary, Hisilicon, will be particularly hurt by the export controls, he said. The company represents the cutting edge of China’s integrated circuit industry and is a point of national pride. Even if Huawei buys more chips from other companies, Hisilicon won’t “have anything to do,” and that would “be embarrassing to China—Hisilicon enters the top 10 in the world, and a few months later it doesn’t exist.”

And in the near future, “if Hisilicon collapses, China can’t make world-beating military tech, doesn’t have access to fabs—that could lead to some kind of pressure on China and a compromise with the US.”

Parallel semiconductor stacks

So in the short- and mid-term, Kleinhans said, the US can certainly block China’s way. But with extra Chinese investment, “in a decade or two we have very different semiconductor stacks.” He and Randall agreed that the most reasonable option would be a “trailing-edge” chip, something “middle-range” in case China got cut off from the rest of the world. 

“Interestingly,” Kleinhans said, “you see a connection between different regions… in Germany and Europe, there’s a fraction of policymakers saying, well, in the public domain, we don’t need the latest and greatest—we need secure and trustworthy ICT systems.”

Building up to independence will be difficult, if not impossible. No semiconductor company today can do anything without US tools or equipment, Randall said. “It’s just how the industry is,” he said, “you could flip it around and say that the US is reliant on Taiwan to make its chips.”

As both speakers said, that independence will come easier in some processes and products than others, and getting there is going to take more than cash. In Kleinhans’ words, “if it was just about money, China would’ve already been successful.” China will need to get smart about how it invests, and how it attracts talent to the industry.

Crisis or opportunity

So who stands to win, and lose, from the Great Chip War?

Expect no winners in the short- and mid-term, Kleinhans says. “Every single dollar you spend there eats away from R&D.” 

But long-term, he sees it as an opportunity for companies to make their supply chains more resilient—not just to buffer against geopolitical crises, but also pandemics and natural disasters.

For US semiconductor companies, life isn’t about to get any easier, according to Randall. Europe, though, has been trying to sit on the fence, and as China moves to exclude US suppliers and move to non-US equivalents, “maybe that’s a good opportunity for others out there when blood is on the streets.”

The Great Chip War isn’t likely to simmer down anytime soon. Both governments will have to decide how much they want to escalate, and if China decides it wants to hurt the US, it could target something else, making the chip war bleed into other industries and products.

Overall, it’s bad news for an industry that depends on global supply chains and distribution of labor. “So I’m really wondering,” Kleinhans said, “in 20 years, if you’re a historian looking at this time period, how much innovation got lost in the nitty-gritty details of this tech rivalry?”

On May 15, the world’s largest contract chipmaker announced plans to open a production plant, or “fab,” in Arizona, US. If you know the industry, it doesn’t seem to make business sense: the Taiwan Semiconductor Manufacturing Company (TSMC) will build a 5nm fab in Phoenix, Arizona and start churning out chips by 2024, with a target of processing 20,000 wafers per month. The chipmaker plans to invest $12 billion through 2029.

Because TSMC, maybe better than anybody else, knows that the semiconductor value chain is the football in the US-China competition over tech. And the contract chipmaker is right in the middle of this.

Even though their planned Arizona fab may not make a lot of sense economically speaking, it is an understandable long-term business decision to stay in the US government’s good graces. Especially since both the US Department of Commerce and the US Department of Defense have pushed TSMC for quite some time to open a fab in the United States.

Value chain chokepoints

If the US government perceives a foreign ICT (information and communication technology) vendor as a threat to their national or economic security, they will go to great lengths to curtail this vendor’s technological advances. Huawei is learning this lesson the hard way. The Chinese telecoms giant is the target of several export control measures by the US government.

Even though export controls are rather crude and antiquated policy tools, they are still effective if the market is highly concentrated. This is the case for the semiconductor value chain, and that is why the US government will most likely continue to utilize export control measures to cut Chinese companies off.

READ MORE: Export controls and the rise of US-China techno-nationalism

The global semiconductor value chain relies on a handful of US companies for certain production steps, most importantly electronic design automation (EDA) software and semiconductor manufacturing equipment (SME). EDA software is necessary to design any type of chip, and EDA vendors have close connections to both foundries, such as TSMC or Samsung, and SME vendors to integrate the next generation of production lines into their software. Right now, and for the foreseeable future, there is no way around Synopsys, Cadence, or Mentor Graphics EDA software if you want to design modern chips—and all three are US companies.

The market for SME machines, which foundries such as TSMC must buy to produce chips for their clients, is less concentrated but still largely under US control. Five companies dominate the world market: Applied Materials (US), ASML (NL), LAM Research (US), KLA-Tencor (US), and Tokyo Electron (JP).

In 2019, China’s largest foundry, the Semiconductor Manufacturing International Corporation (SMIC), tried to buy extreme ultraviolet (EUV) lithography equipment from ASML. EUV lithography is necessary to produce any leading-edge chip. But EUV equipment falls under existing export control regimes and so far, the Dutch government has denied the necessary license to sell the equipment to SMIC, partly due to pressure from the US government. Since ASML is the sole supplier of this kind of EUV equipment, SMIC will not be able to produce any chips that are 7nm or smaller.

By focusing on EDA software and SME machines, the US government has found a chokepoint in the industry. With the recent US export control measures, Huawei and its chip design subsidiary Hisilicon cannot use US EDA software to develop chips, and foundries are not allowed to use US manufacturing equipment to produce chips for Huawei.

The US approach only works because both EDA and SME are highly concentrated markets dominated by US companies. For the few suppliers outside of the United States, such as ASML, the US government uses diplomatic pressure to ensure that Chinese chipmakers are cut off from leading-edge technologies. That means, no matter how much funding SMIC can secure, if they cannot buy leading-edge manufacturing equipment, they will not be able to produce leading-edge chips anytime soon and will fall even further behind.

Balancing act

Of course, TSMC knows these chokepoints within the global semiconductor value chain intimately. That is why their move to open a small, financially unjustified foundry in the United States makes perfect sense from a business continuity perspective. TSMC’s commitment to the US can be interpreted as a trust-building measure, providing the company with potential leverage in future negotiations.

The truth is, TSMC’s fab will make very little difference to the US’s strategic position. That is why the US government is not united on this issue. Right after TSMC’s plans were announced, some US senators wrote a letter to Trump criticizing lack of transparency over potential subsidies and tax breaks for TSMC as well as national security concerns. They argue that the US government should instead invest in US semiconductor companies, such as Intel, to strengthen their national industry.

In times of geopolitical uncertainty, both governments and companies are trying to diversify their semiconductor supply chain. Because the semiconductor value chain is highly concentrated, US export control measures are highly disruptive.

Huawei’s latest announcement of collaboration with the French-Italian chipmaker STMicroelectronics is one way for Huawei to lessen their reliance on US-origin technology and get on better terms with European governments.

Meanwhile, Intel has just invested in a Chinese EDA company, potentially signaling to the Chinese government that they support a healthy Chinese semiconductor ecosystem.

While the US government is trying to isolate China’s semiconductor industry and prevent some of China’s national champions from making technological advances, corporations are continuing to make investments in a globalized industry.

Many suppliers within the semiconductor value chain will struggle not to fall victim to the tech rivalry between China and the US. This value chain is highly efficient, but not at all resilient, and every new export control measure the US government implements will be met by the Chinese Communist Party with accelerated efforts for self-sufficiency.

The US on May 15 announced a set of strict new rules intended to cut Huawei off from all advanced semiconductor makers. These rule changes set WeChat abuzz with what to do next.

Proposed responses range from a massive national project to catch up in semiconductor technology, to the rise of a new generation of Chinese young people better equipped to navigate and rewrite the rules of the global governance regime. A disconcerting number of articles suggest, at times as a casual aside, that Huawei’s problems would disappear if China takes control of Taiwan, and with it Taiwan Semiconductor Manufacturing Corporation (TSMC), the world’s largest contract semiconductor manufacturer.

Even the cooler heads propose rather aggressive industrial policies. Ning Nanshan, an anonymous Shenzhen-based commentator on Chinese industrial and economic developments, argues that Huawei will be able to buy cutting-edge chips that are free of American technological components in a matter of years, and that in the meantime Huawei’s business can survive in order to maintain China’s dominance in 5G.

READ MORE: Export ban II: Huawei’s harsher, higher stakes sequel

He outlines the capabilities that Huawei and Chinese domestic fabricator SMIC would need to develop in the next few years in order to produce cutting edge and wholly “de-Americanized” chips, focusing on investments in EDA software, advanced lithography machines, and chip design research. In the interim, he suggests several measures that Huawei could take to shore up its business, and argues that it should use the 120-day buffer period to stockpile chips for 5G bases, even if that means letting the mobile phone business wither:

The U.S. has not attacked Huawei because Huawei is the second largest smartphone maker in the world, but because Huawei is the global leader in 5G technology.Therefore, Huawei’s chip stockpile must be used first and foremost to supply the needs of its 5G bases.

Meeting this demand should not be difficult. The number of base stations globally is in the tens of millions, constituting a small source of demand compared to the billions of mobile phones in the world. Nor will Huawei be building every single base station. Therefore, it is fully feasible to meet the chip demands of 5G base stations. In China, for example, there are expected to be 550,000 5G base stations built in 2020. Huawei can stockpile the millions of chips needed to build these base stations.

It is also important to note that because Huawei already provides 2G, 3G, and 4G services to more than 100 countries around the world, it is impossible for the United States to completely prohibit fabrication on behalf of Huawei. It will at least have to allow for the supply of chips for maintenance of existing infrastructure, lest it pose a threat to the network stability of many countries.

Of course, the mobile phone market is a different matter. Huawei shipped 240 million units in 2019, and supplying these phones with chips will be difficult under present conditions.

Li Guangman, a columnist for the hawkish news commentary site Chawang, advocates a broader approach to countering America’s Huawei ban in an article originally published on his own public WeChat account. He calls on China to meet force with force, dealing America five blows:

First, impose comprehensive sanctions on core American companies;

Second, in light of the fact that the US has threatened Chinese national security, cease the implementation of the first phase of the trade agreement, and stop buying American agricultural products;

Third, take advantage of divisions between America and its allies to form an international strategic alliance for science and technology;

Fourth, put China’s resources into building a national chip industry, ridding ourselves of dependence on the United States;

Fifth, sell off US Treasury bonds as soon as possible…

Right now, China needs the spirit of the “Two Bombs, One Satellite” Program, it needs the spirit of the Battle of Triangle Hill [trans: a Korean War battle remembered as a Chinese victory over the US], and it needs the spirit of self-reliance!

Li, and some of his vocal fans, think globalization was a mistake, suggesting the country was better off under Mao Zedong’s policy of total self-reliance. “It is unfortunate that the path of self-reliance was betrayed by the traitors to our nation. Now we can only count the losses and start on the path again,” the most upvoted commenter wrote.

Other writers think such a response would play into America’s hands.

Big Brother Flower Cat, anonymous author of the popular WeChat account Cat Brother’s Vision, thinks that Trump is playing three dimensional chess. He argues the semiconductor issue is a bait and switch, along the lines of Ronald Reagan’s “Star Wars” missile defense program.

If America’s aim were really to strangle Huawei, he argues, it would not allow a 120-day buffer period in which Huawei could stockpile two years’ worth of chips, and it would freeze Huawei out of the international banking system as it has some North Korean and Iranian banks.

America is not pursuing such an aggressive course of action, the article says, because it is hoping that China will spend hundreds of billions of dollars on semiconductor research—following the pattern of the Soviet Union, which some argue sped up its own economic demise by responding to US missile defense with a costly rearmament program.

By the time China’s investment begins to pay off, chip demand will plateau due to the introduction of new 5G-enabled technologies. He even suggests, rather unrealistically considering Huawei’s vested interest in fostering the growth of the mainland semiconductor industry, that America could grant permits to other companies to sell chips to Huawei after China has sunk massive investments into its domestic industry.

How should China avoid spending hundreds of billions on useless competition, the author asks? By invading Taiwan and getting control of TSMC:

This is an asymmetrical war. This is also a very painful war for us to fight. How do we break out of the position we find ourselves in? I have thought it over for several days, and concluded that the tried strategies will not be sufficient, our only option is:

Use force to break the situation! Reunify the two sides of the straits and take TSMC! Although this method cannot completely solve the problem, it can save us more than five years of catchup time in 5G technology and save a lot of money we would otherwise need to invest. Now I very much look forward to unification coming soon.

This author is certainly out on the extrmes to propose that China seize TSMC as a near term strategy for dealing with the Huawei ban. But many articles note that Huawei’s problems would disappear if unification occurs without going so far as to argue for unification as a means to that end.

Dai Wenchao is a former private equity fund manager who takes historical perspectives on contemporary economic questions through his pseudo-academic social media account. In “Huawei crosses the path and passes through catastrophe,” he looks at a wide range of historical moments, from the Mongol defeat of the Abbasids to the fall of Constantinople, that are used on Chinese social media and in Chinese classrooms to advocate confrontation with the West. The title specifically references two ancient ideas that are popular guides to present day issues.

The first, “crossing the pass,” refers the moment four hundred years ago when a rising Central Asian power crossed a pass near the Great Wall to topple China’s Ming Dynasty and establish the Qing Empire. The Ming Dynasty in this story is, of course, the US, and the idea of crossing the pass suggests that Huawei is coming to a Rubicon moment.

The latter, “passing through catastrophe,” is a Daoist concept that calls on an upstart to grab unprecedented power, even if it means incurring conflict with heaven. Both ideas suggest that Huawei cannot kneel in the face of foreign resistance to its expansion. But the author dismisses attempts to find easy answers to Huawei’s predicament, which he argues is China’s predicament, in earlier cases of rising powers challenging incumbent ones.

Just as Huawei’s rise was enabled by a unique blend of American-inspired management techniques, Chinese values, and a cut-throat growth-oriented “wolf culture” all its own, its continued rise on the world stage will require an entirely fresh approach to making oneself amenable to others’ needs while sticking to one’s guns:

Against the background of its rise, Huawei’s problems are also those that other Chinese companies will face, which will only come into greater clarity over the next twenty years. In the history of Chinese business, no company has walked this difficult tightrope set up by global governance. How should they cross it? The answer will not be found in our twenty-four centuries of history, Daoist magical arts, or in Confucian philosophy.

Although it is insufficient to find the answer to China’s rise vis-à-vis America in the Jurchen Army’s crossing the pass to conquer China, the name “crossing the pass” is notable—Huawei certainly has a “pass” it must cross, and China, too, has a “pass” it must cross. This is what will allow the world to understand us and treat us as we hope. As to how we cross the pass, history does not give us a silver bullet. We need a new generation of Chinese to rise to the occasion.

The problem that Huawei faces is a problem that China faces, and the answer for Huawei is the answer for China.

The debate about how China should respond to the Huawei ban is a microcosm of the broader debate raging about how China should deal with the US. Not all online commentaries are equally bombastic in their approach to the “Huawei problem,” as it is often called. Dai encourages Chinese companies to be more responsive and responsible when dealing with foreign rules. Ning concerns himself more with redoubled industrial policies than punitive sanctions.

But against the backdrop of a fiercely nationalistic discourse, even the most measured voices must reckon with the widespread view that the Huawei ban is just one stage in the same global struggle as the Korean War. Those who believe confrontation can be avoided are on the backfoot.

As the US moves to cut Huawei off from global chip manufacturing, experts say the domestic market doesn’t offer a replacement. Flagship domestic semiconductor fabrication company SMIC can’t handle state of the art products, and itself is vulnerable to being disrupted by a US export ban.

The Chinese telecommunications equipment manufacturer and handset maker could be cut off from global chip manufacturing by a new regulation announced by the US Department of Commerce May 15. The regulation requires companies around the world to obtain licenses for sales to Huawei of semiconductors made with US technology.

Affected Huawei suppliers include Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker that produces high-end chip design for Huawei; Taiwan’s Win Semiconductors, which makes Huawei’s radio frequency chip designs; and South Korea’s Samsung Electronics, which ships memory and storage to the Chinese company.

Guo Ping, the rotating chairman of Huawei, told reporters Monday that the rule would “inevitably harm Huawei’s business to a great extent” and that the company is confident that it would find a solution soon.

“If Huawei finds no way around this and TSMC closely follows the US ban, this would be a severe blow to Huawei’s business—which is exactly what the US administration is aiming for,” Jan-Peter Kleinhans, director of the project IT Security in the Internet of Things at the Stiftung Neue Verantwortung, told TechNode.

READ MORE: Export controls and the rise of US-China techno-nationalism

An onshore option

On the same day the Commerce Department rule was made public, two Chinese state-backed funds announced they would inject a total of $2.2 billion into a domestic chipmaker, Shanghai-based Semiconductor Manufacturing International Corp. (SMIC). The investment is seen as China’s measure to foster chip-making capacity at home amid international supply chain uncertainty faced by Chinese companies. Experts say the company is the only domestic supplier comparable to TSMC.

SMIC also uses US-made equipment, but it is unlikely to cut ties with Huawei at Washington’s behest.

Huawei reportedly had started shifting some production of its chip designs from TSMC to SMIC by April, but the new export ban may drive Huawei to accelerate the transfer. The Nikkei Asian Review reported Monday that TSMC, a key manufacturer of chips designed by Huawei’s Hisilicon, has halted new orders from Huawei in response to Washington’s new rule change.

Generations behind

However, experts said SMIC may not have the capacity or capability to produce chips Huawei needs, including its 5-nanometer Kirin 1100 processor for servers and 7-nanometer Kirin 810 chip for smartphones. Hisilicon, a subsidiary of Huawei, designs those chips.

“SMIC has no production capabilities for anything close to 7-nanometer,” said Kleinhans.

SMIC has the capability to produce 14-nanometer wafers and the company has already started producing the Kirin 710 chipset for Huawei’s low-end Honor smartphones, according to Kleinhans. However, the company currently only has a production capacity of 6,000 14-nanometer wafers per month, which, according to an expert cited by Chinese media The Paper, is nowhere near enough for Huawei.

Losing access to higher-end chips produced by TSMC, such as Kirin 1100 and Tiangang, a 7-nanometer chipset designed for 5G base stations, would leave Huawei unable to make its flagship smartphones and 5G towers.

The $2.2 billion injections from state-based funds will go to a SMIC wafer plant. The company said the investment would help the plant to increase capacity of 14-nanometer wafers to 35,000 per month.

Nomura Holdings, a Japanese securities firm, said in a report recently the defect rate of 14-nanometer chips made by SMIC was around 70% and it would take the company one to two years to demonstrate proficiency, according to Chinese media Caixin.

“SMIC can’t produce anything smaller than 10-nanometer and the cutting edge chips that Hisilicon needs for the Kirin chips is 5nm…It’s generations behind,” said Alex Capri, visiting senior fellow at the National University of Singapore Business School.

Trendforce, a Taiwan-based semiconductor research firm, said in an investment note that the defect rate of 14-nanometer chips produced by SMIC is so high that Huawei will have no choice but to rely on TSMC to produce wafers under 16nm.

Another Huawei?

SMIC is also vulnerable to pressure from Washington, because the Chinese company also uses US technologies to produce chips. American authorities will likely claim it is a violation of the new rules if it continues to supply Huawei.

“About 50% of all the microchips that are made anywhere by anyone involve US manufacturing equipment,” said Capri. An even higher percentage of chips have use American-made design software, he added.

The US hasn’t targeted the Shanghai-based contract chipmaker yet, but a deeper collaboration with Huawei would potentially enrage the US government.

“The US could just put SMIC on a restricted entity list. In which case, you would have the same situation,” said Capri.

New export ban rules announced by the US Department of Commerce could be the blow that finally incapacitates Huawei, cutting off its ability to create advanced semiconductors.

Despite these restrictions, Huawei has continued to use US technology.  

Hisilicon has been able to continue designing chips, relying on existing licenses from key US Electronic Design Automation (EDA) tool companies Synopsys and Cadence. The rules limited these companies’ ability to provide updates, patches, and technical support, but Hisilicon could continue using the software, even if it wasn’t quite up to date.

It also didn’t block Huawei from contracting chip fabrication to Taiwan Semiconductor Manufacturing Company (TSMC), a Taiwanese company, and to Semiconductor Manufacturing International Corporation (SMIC), a Chinese company, both of which use US equipment in their production lines.

The rules did prevent Huawei from offering Google Services on its phones, a significant blow that led to reviews like “a stunning phone you shouldn’t buy.” Indeed, Huawei’s handset shipments have started to suffer outside of China, but overall sales are up due to a huge increase in domestic demand—where Google Services are not allowed anyway.

The US now says it will apply the rules to indirect relationships like TSMC, meaning anyone in the world using US technology or software to design or manufacture semiconductors for Huawei must now obtain licenses from the US.

To directly quote from the briefing, “Huawei benefited from a loophole that allowed it to make use of US electronic design software and manufacturing equipment to continue to produce its own semiconductors. That ends today.”

I’m not a lawyer, and I can’t tell you if this version of the ban is watertight. People are already suggesting loopholes on Twitter. But at the end of the day, TSMC can’t afford to give up on its US market and will comply if its lawyers can’t find a work around. SMIC, as a Chinese company, could be another story.

How does this affect Huawei?

Under these rules, many more suppliers will need a US license to work with Huawei. Fabs owned by TSMC and Samsung will need a license; many semiconductor IP companies, even some non-US ones, will need a license; outsourced design service companies will need a license. One would assume that most of the time the US will deny licenses, or at least hold the threat of denial over China and Huawei if they don’t play ball.

The process of making a semiconductor is complicated and has multiple phases, going from raw materials, to design, to fabrication, to packaging and assembly. The new rules threaten Huawei’s ability to make chips in two central phases, by limiting access to fabrication plants (“fabs”) and preventing the use of EDA tools in design.

And the rules in theory also affect Chinese companies. Just like TSMC, SMIC will have to apply for a license to manufacture Huawei’s chips, as it too uses US equipment. Imagination Technologies may be Chinese owned these days, but it still uses US EDA tools, so its IP couldn’t be used by Huawei without a license unless the company moves away from these tools. All Chinese design service companies, such as Verisilicon, use these tools—there just aren’t any realistic alternatives.

Huawei is said to have prepared by stockpiling a lot of chips, and the rules came with a 120-day reprieve for orders already in place, so Huawei’s next Kirin chip (Kirin 1000), which is in production at TSMC, should be good to go. Production is expected to stop by mid-September, so I imagine Huawei will look to manufacture as many of this chip at TSMC as possible between now and then. Plans for the 5nm Kirin 1100 for next year may have to be scrapped, as only TSMC can do this. Any future high-end designs at 7nm and 5nm will have to be scrapped or moved to another less advanced process.

Of course, even this is possible only if there is a fab that can set that up without US equipment in that time period. There isn’t an obvious loophole.

The fab problem

Not having Google Services is one thing, but if you don’t have a chip you don’t have a product, even for the domestic market.

But Huawei has surprised us before and may continue to do so. It would have known this was coming, and as such will have some contingencies. But it’s hard to conceive of a plan that would cover this situation. Huawei does have a stockpile, but you can’t stockpile chips that haven’t been manufactured yet.

Without loopholes, there are more or less no existing fabs that can work with Huawei for now. In the short-term, this means Huawei has nowhere to manufacture its chips. In the medium-to-long term, there are some answers, if costly ones.

One, TSMC, Samsung, SMIC, and other fabs could create Huawei-specific, or China-specific, production lines with zero US equipment. This would be a huge investment just to deal with one customer, but if US restrictions spread to all Chinese companies it could make sense economically. Even Huawei alone could still make sense to TSMC, which relies on Huawei for 10-15% of sales, but this risks the wrath of the US government. The Chinese government might also push SMIC to set up a non-US line. It announced a $2.2 billion investment into SMIC straight after the US announcement, perhaps to create such a production line, but this wouldn’t replace TSMC’s 5nm and 7nm, and current SMIC free capacity is not enough to deal with orders from Huawei.

Two, Huawei could start fabricating its own chips, like Intel or Samsung. It would have to create its own chip production line free of US equipment. This isn’t something that can happen overnight, and would not be cheap, but would give it more control.

It makes more sense for it to work closer with domestic fabs to create US-free production lines, as it is more economical and lets both companies focus on their core expertise. Either option could result in no longer having access to leading edge process and so a worse product than today.

But either option could fail, depending on what the US does with international equipment makers. While there are non-US manufacturers, they are probably vulnerable to US pressure just as TSMC and Samsung are. Leading Dutch equipment company ASML has previously followed US export rules, and without ASML you can’t have a high-end chip.

The EDA problem

On the EDA front, Huawei’s research and innovation lab, called the 2012 lab, has been rumored to be working on its own set of tools. It is unclear how ready these are, but this could be one area where the company surprises us all.

Read more: SILICON | China’s design tools conundrum

Domestic tool companies already have tools for certain parts of the design flow, but nothing that covers the entire design process from architectural exploration, to RTL verification, to physical design, etc. The Department of Commerce has made it clear it wants to stop Huawei using Synopsys, Cadence, and Mentor tools, and I interpret the following to mean its partners can’t use them either to supply Huawei with design services or silicon IP:

This expanded rule will impose a US licensing requirement, an export-control licensing requirement whenever anyone anywhere in the world uses US technology or software to design or produce semiconductors for Huawei. Companies wishing to sell certain items to Huawei produced with US technology must now obtain a license from the United States.

That brings us to the IP problem. Although Huawei has a make rather than buy philosophy, it does rely on several IP companies that will be affected by the new rules, and these IP companies often use US EDA tools to design their IP. Although Arm cores were previously deemed to be UK origin technology and Huawei could continue to access Arm v8 and v9 architectures Arm uses EDA tools from companies like Synopsys, so could Arm IP be back on the chopping block? 

As I have written before, the new open source architecture RISC-V could be Huawei’s way out here. But while RISC-V is growing fast and is extremely versatile, its ecosystem does not match Arm’s yet, so it will be a few years before it is viable in consumer electronics like handsets.

But it’s not just Arm. There’s a lot of scattered IP in a design: the GPU, communication interfaces, on-chip monitors, etc. In addition to EDA, Synopsys, is also an IP provider. Just one example is its USB IP: Huawei uses Synopsys USB 2 and USB 3 PHY IP, and it no longer can. This IP is not something that can just be designed overnight, and Huawei will need to find an alternative that doesn’t come from a company using US EDA tools.

System-on-a-chip design companies like Hisilicon invariably rely on IP for some parts of their designs, in order to speed up the design process and create the best performing design possible. For some IP, it seems Huawei will have to design itself using a mix of its own tools and other domestic tools, as well as encourage its non-US suppliers to verify RTL using other tools. I spoke to one non-US IP company, whose lawyer confirmed it won’t be hit by the rules and can carry on licensing to Huawei, so there will be some IP suppliers Huawei can still rely on.

Production, EDA, and to a lesser extent, IP are the three main areas of concern, but there are many others, field programmable gate arrays and emulators for chip prototyping being one, 5G test and measurement equipment being another.

Deus ex Biden unlikely

I expect the US tech lobby will be going crazy right now, as many companies are not just losing their Huawei business, but also Chinese business. The first question I often get asked in meetings these days is: “is your IP American?”

The environment in the US is very anti-China. As Trump and Biden attack each other as soft on China, they’re bidding up the confrontational attitude, and I don’t expect that to change any time soon. There may be change rhetorically, but not in US policy goals.

China has, of course, been just as brash and undiplomatic. Its media are calling for a strong counterattack, and the government itself has threatened to use what it calls its “Unreliable Entity List.” That threat hasn’t been made concrete at this time, but Apple, Boeing, Qualcomm, and Cisco are have been rumored as targets.

I have considered some options for Huawei here, but none of them feel very realistic or short-term. The best option would be to find a way to avoid the ban coming into force.

Meanwhile, TSMC will be trying everything it can to help. Losing Huawei’s business would also a huge blow for the Taiwanese fab, and I’m sure it will be taking legal advice as well as lobbying the US government to let it continue its work with Huawei. Its announced fab in Arizona seems not entirely certain, so this investment could be used for leverage in any negotiations.

Will there be enough chips?

A worst-case scenario sees Huawei without enough chips for its next flagship product, and stuck with either nowhere to manufacture chips, or an inferior US-equipment free production line that means future products are no longer world leading, possibly after many months of interrupted production. That’s not even considering a scenario where the company can’t even viably design chips at all.

I’ve focused on phones, but Huawei also needs the chips it designs for all its other product lines: servers, laptops, switches, base stations, AI, cameras, etc. It will have been stockpiling a lot of these, especially 5G base station chips, but it still faces the problems highlighted above across all its product lines.

The company has surprised us before though, and perhaps it can again. But if it can’t, then we can expect a very different Huawei, and US tech can look forward to retaliation in China.

Is China pulling ahead of the US in AI? Not quite, argues Dieter Ernst of CIGI in a recent report entitled “Competing in artificial intelligence chips: China’s challenge amid technology war.” His deep dive into the dynamics behind China’s recent progress on AI chips manufacturing merits closer attention. 

Most western coverage of western AI firms focuses on those that operate in the application layer of the AI stack. But in order for Bytedance to instantly recommend tailored TikTok videos, or for JD to optimize delivery orders, they need to run their applications on hardware.

What AI chips do is optimize performance for specific tasks further down the AI stack. For instance, an AI chip can be tailored specifically for facial recognition, autonomous driving, or cloud computing. The best of these chips represent the bleeding edge of global semiconductor technology, and have grabbed the attention of Washington and Beijing. The Trump administration sees Chinese semiconductor progress as a grave economic and national security threat, and hopes to use a combination of sanctions and incentives to slow down China’s work on AI chips. Beijing officials hope to create a self-sufficient industry capable of withstanding American sanctions and ultimately competing on the world stage.

Read more: China’s AI chip startups—how many will survive?

Basic research lies at the heart of AI development. American researchers invented the field, and have been at its forefront ever since. Ernst contends that America’s “informal, flexible, and undogmatic approach to innovation is, arguably, the root cause for the resilience of the United States’ AI development trajectory.” He argues that “technology diffusion through knowledge networks, combined with intense contests among competing ideas” throughout academia, DARPA projects, and the private sector have made the American AI and semiconductor ecosystem the world’s most vibrant.

In contrast, China has struggled to marry basic research with industry. China’s electrical engineering community was practically wiped out by the Cultural Revolution, forcing researchers in the 80s to start decades behind global best practice. It has to contend with dramatic disconnects between academia and industry as well as, Ernst writes, “the institutional heritage of the Soviet planning system,” which assumed enterprises’ purpose was to meet production targets and not conduct research themselves (that work was reserved for national academies and institutes).

Until recently, the commercial and academic Chinese AI communities rarely interacted. While two of Ernst’s contacts in Chinese consumer-oriented AI companies noted that they had some researchers from public organizations take on moonlight consulting work, these sorts of arrangements pale in comparison to the public-private ecosystem America has created.

Many western analysts have pointed to China’s share of global AI publications as evidence of increasingly successful basic research efforts. The global AI research community is notable for its openness, with academics commonly posting their research in open platforms like Github and arXiv online. “If you don’t share your work, it’s meaningless,” said Yunji Chen, a researcher at the Institute of Computing Technology in Beijing, in a 2019 interview with Nature. 

The global AI community is, by and large, not happy about politics intruding. A Huawei researcher who due to a US State Department travel ban was forced to deliver his presentation remotely received a rousing round of applause at a normally staid conference.

But politics is likely already reshaping the academic community. As Western universities reject Huawei’s money and face increasing scrutiny for connections with the Chinese government’s Thousand Talents plan, western researchers are forced to reconsider their Chinese connections. Co-authorships develop out of connections made through global conferences and academic fellowships, which are less and less likely to be accessible to Chinese nationals. 

I’d be interested to see research that asks whether the global community is splitting into Chinese and western halves—perhaps measured by how often researchers on each side of the divide co-author with the other? This disconnect is likely to harm upstart Chinese researchers more than established western ones.

This comes at a time when basic research is only growing more important in the field. As AI chips are called upon to process massive datasets, companies around the world need to innovate with new architectures. This “paradigm shift” as “the focus of semiconductor innovation shifts from process technology and fabrication to architecture and design at the front end, and post-fabrication packaging at the back end” leaves an opening for a Chinese upstart to contend with American giants like Intel, AMD, and NVIDIA.

But despite the PR bluster, Chinese firms are all to various degrees behind the cutting edge and vulnerable to American actions. Chinese AI chip startups mostly focus on inference, as opposed to training algorithms, a much less technically demanding task. The fact that American capital markets are seemingly closed off to Chinese AI firms is another significant hurdle.  For the time being, going public on Chinese stock markets requires three years of profitability, a rule that discourages investment in R&D.

Industry experts agree that China only really has one player capable of competing with American giants on an even footing in any AI chip vertical: Huawei’s HiSilicon. And even HiSilicon is severely vulnerable to US sanctions. Since its most advanced chips are manufactured in Taiwan at TSMC’s 7nm foundries, American pressure could force Huawei to cut ties with one of its most important AI chip partners. As this week’s recent Department of Commerce regulation release attests, it looks like the US is preparing to drop this hammer.  Given that Huawei has been preparing for years for the US government to come after it, the fact that they still have foreign parts in their flagship phones means that this is much easier said than done.

American firms also stand to lose out from increasing restrictions on their ability to sell to Chinese companies. “A staggering 67% of Qualcomm’s revenue comes from China, for Micron this is 57%, and for Broadcom 49%.” With nearly one fifth of US semiconductor firms’ revenue reinvested into R&D, any big hit to their top line, if not paired with substantial US industrial policy to make up for this gap, will have long term consequences for

US competitiveness relative to Chinese, European, and other Asian competitors.

Chinese companies have made some real progress, particularly in areas where China has a natural comparative advantage. For instance, China currently leads the world in a handful of narrowly defined AI chips related to surveillance. Further, some argue that China has an edge in access to cheap, structured data sources thanks to a large pool of affordable college-educated labor. However, data-labeling is eminently outsourceable, and nowadays Chinese labor really isn’t cheaper than comparably educated Indians or Filipinos. After all, average hourly rates on Mechanical Turk are just $2.

However, American sanctions are forcing Chinese players out of their comfort zone in ways that will help the ecosystem over the long term. As anonymous blogger Youshu writes,

Some will no doubt say that “Yeah, we knew China wanted to develop its own semi industry, so what’s the rumpus?” This observation misses the mark. Before private firms were happy with the Americans, and state firms would just tell their bosses there were no good alternatives. But now orders are being pushed towards domestic rivals, even where they are not very good, providing them with revenues today, and confidence about future revenues, with which to fund R&D.

Ernst is more pessimistic.  He expects “islands of technological excellence [to] continue to coexist with deeply entrenched structural weaknesses in China’s emerging AI chip industry.” The Chinese AI industry will doubtless continue developing, but is unlikely to challenge America for global preeminence any time soon.

Imagination Technologies, a top UK semiconductor company acquired by a state-backed Chinese fund, ranks a listing on the Shanghai stock exchange’s tech board as its top option once it is ready to float shares, according to Reuters.

Why it matters: The chip design company is at the center of a geopolitical storm between China, the UK, and the US.

• In the beginning of April, the UK government intervened in an attempted boardroom takeover that they saw as leading to the transfer of key technological intellectual property to China.
• The private equity firm that bought Imagination Technologies in 2017, Canyon Bridge, is backed by Chinese state-backed venture capital firm China Reform Holdings.

Read more: Imagination Technologies: What’s at stake in the fight over control

Details: The UK chipmaker’s financials have been in a bad state for a while now, recording an operating loss of $23 million in 2019, a Reuters source said. An initial public offering is a few years down the line, according to the report.

• The Nasdaq-style tech board at the Shanghai stock exchange is a “top option,” the report said citing a source with knowledge of the matter.
• “There is an enthusiasm towards semiconductor companies in China, with the STAR Market. Many semiconductor companies have listed there and valuations have been attractive,” the source told Reuters.
• The focus is to save the business, not re-domicile it in China, Reuters’s sources said.

Context: The boardroom takeover was cancelled after intervention from prominent conservative members of the UK Parliament.

• With more than 30 years worth of patents, the company is one of the UK’s most valuable strategic tech assets.
• Imagination Technologies’ CEO, CTO, and CPO all quit after the attempted boardroom takeover by Canyon Bridge.
• About 11 billion devices or 30% of the world’s mobile phones, as well as 40% of cars use graphics chips developed by Imagination Technologies, Sky News said.
• The semiconductor designer’s shares fell in 2017 after it lost Apple, its biggest client. Cayman Islands-based Canyon Bridge swooped in to buy it for £550 million ($688 million).
• In January 2020, the Financial Times reported that the firm would be selling to Apple again.
• The STAR Market launched last year to attract more IPOs from tech companies in China. The tech board has relaxed listing rules relative to other exchanges in the country.
• At least five top semiconductor companies were reportedly accelerating plans to publicly list on the tech board in response to Beijing’s push for technological self-reliance.

Even as the world is in the grip of the coronavirus pandemic, the US and China are locked in an escalating race to control the technologies of the future. This new environment has inspired a philosophy I have described as “techno-nationalism”: mercantilist-like policies, such as export controls, that link a nation’s tech innovation and enterprises directly to its economic prosperity, national security, and social stability.

Going forward, loopholes in existing export controls could prompt stricter measures from Washington, which will come at higher costs for tech companies and continue to disrupt global value chains (GVCs).

For US and other foreign companies, this means two things: first, the US government could close export control loopholes, in particular the so-called de minimis rule; second, the Feds are likely to increase pressure on key suppliers and governments to stop selling controlled technologies to Chinese companies.

Export controls’ impact on value chains

An export control is a regulation put in place to protect national security, promote foreign or domestic policy, and, in some instances, control the export of items in short supply. By itself, an export control is not an export ban, and does not mean that the product in question can never be exported.

Export controls do, however, often mean that you have to ask a government for permission before selling, transferring, or transporting a product to a foreign market. Whether or not a license is required will depend on where the final buyer is located, who the buyer is, and how the controlled item will be used.

A key driver of export controls is the concept of “dual-use,” meaning that a commercial technology could be used for military purposes. In the US, for example, the US Department of Commerce has created an extensive list of dual-use technologies which can be found on the Controlled Commodity List (CCL).

Everything on the CCL is subject to “export controls,” but an actual export license will only be required based on the above “who,” “where,” “what,” and “why” criteria, for each unique instance. For example, the same item exported to China, Japan, and South Korea might only require an export license for China.

The US Export Control Reform Act of 2018 will expand the number of dual-use technologies on the CCL, targeting “emerging and foundational technology” and putting most, if not all, US-China technology transfers at risk of being subject to more export controls and license requirements. This would include things like machine learning, robotics, autonomous vehicles, and additive manufacturing (3D printing), among others.

This means that everything on Beijing’s “Made in China 2025” list will fall under the dual-use umbrella.

Export licenses add a layer of uncertainty to GVCs, and the denial of a license can turn a long-time supplier into an unreliable supplier literally overnight. Export controls also mean that a company’s supply chains will be examined under the proverbial regulatory compliance microscope, adding compliance costs, delays, and risks to previously routine business.

Read more: A Chinese view of AI export controls

Efforts to de-Americanize

Export controls are already costing US firms and businesses. Since being placed on the restricted entity list in May 2019, Huawei claims to have jettisoned all US technology from its P30 Mate smartphone, including radio frequency chips (made by Skyworks Solutions and Qorvo), memory (Micron), and design software and operating systems (Synopsis, Mentor Graphics, and Android).

According to a report by Bloomberg, Huawei has also eliminated US technology from the first 50,000 units of its next generation 5G base stations, turning instead to fabless design subsidiary HiSilicon. Bloomberg reported that this impacted US suppliers Intel and Xilinx.

The ramping up of US export controls—and Chinese companies’ subsequent efforts to decouple from US suppliers—has placed US companies in a precarious position, given their sizable revenues from the Chinese market. Huawei alone purchased approximately $11 billion worth of semiconductors from US firms in 2018.

To put this into perspective, more than 60% of Qualcomm’s revenue came from China in the first four months of 2018; for Micron, over 50%; for Broadcom, about 45%. Broadcom has revised its 2019 revenue estimate down by $2 billion because of the Huawei ban, and overall market uncertainty from the US-China tech war.

It is no surprise, then, that American companies are fighting to maintain their market share.

Two very compelling long-term fears make it very hard for, say, semiconductor firms to write off their Chinese customers . First, once a company loses market share, it becomes nearly impossible to recapture it if foreign competitors can step in to replace them. This is due to the very high switch-over costs and complexities involving semiconductor B2B relationships. A well-ensconced competitor in the semiconductor space is very difficult to supplant. Second, in a sector that must commit ever-increasing resources to innovation, revenue from existing business must be ploughed back into critical R&D activities. Losing that revenue damages future competitiveness.

US firms have therefore been lobbying the US government, through organizations like the Semiconductor Industry Association (SIA), to delay an all-out ban on tech sales to Huawei and other Chinese firms, and to convince the US Department of Commerce to quietly approve export license applications—so far, there have been virtually no accounts of denied export license applications for Huawei.

‘American’ technology

Even though current export controls are hurting US businesses, these rules are not that hard for many suppliers to dodge. In many cases, all it takes is a little creativity with the legal definition of “US technology.”

US export controls apply only to US technology—and whether technology is US is determined by so-called “de minimis” thresholds set out in US Export Administration Regulations. What matters is how much of the value of the product is made up of US “controlled technology.” These thresholds are currently set at 10% and 25% of a product’s overall fair market value, depending on the technology in question.

If a company wants to sell to Huawei, all it has to do is manipulate its supply chain to cut the value of the US content, or to increase the value of non-US made components. This can be done a lot of ways—none of which help US workers or suppliers.

To manipulate the value of non-US inputs, for example, companies can increase the costs of foreign labour, overhead, IP license fees, or the costs of materials. For a product near the threshold, this can be as easy as paying EU factory staff a bit more to raise the value of non-US components.

The de minimis loophole is incentivizing US companies to move operations overseas and has led the US government to consider reducing the thresholds, or eliminating them all together.

So far this has not happened, due to opposition from US companies and trade associations. However, this issue may yet re-emerge.

The next phase

Going forward, the US government could take a much tougher stance on export controls, which could have high costs for many firms. For starters, it could close the de minimis loophole, reducing the threshold to 5% or even zero. This would make it difficult or impossible for some firms to reshuffle their GVCs.

Another increasingly plausible scenario is that the US government will try to exert leverage over third-country companies to cut off sales to restricted entities such as Huawei.

Senior officials at the White House have agreed to new measures to increase pressure on the Taiwan Semiconductor Manufacturing Company (TSMC), the Taiwanese semiconductor foundry which produces microchips for Huawei’s HiSilicon. Under a new proposed rule, foreign firms that use US-made chip-making equipment would have to obtain an export license to sell certain micro-chips to Huawei.

Only a small handful of companies make the manufacturing machines that enable everyone else to produce high-yield microchips in commercial quantities, including TSMC. American companies, such as Applied Materials, Lam Research, and KLA-Tencor, dominate this space. Two other firms, ASML (Netherlands) and TEL (Japan), round out this small, exclusive club. However, because ASML and TEL come from countries with strong historical alliances with the US, Washington has the power to get them to acquiesce to its techno-nationalist agenda.

An uncertain future for export controls

Chinese companies will accelerate their efforts to de-Americanize their supply chains, no matter what happens to US export control policies.

The rise of techno-nationalism will push companies to decouple, ring-fence, and realign their value chains, in some cases pre-emptively and in other cases because of new government constraints.

The US-China technology rivalry, thus, will continue to present tech companies with increased risks and uncertainty well into the foreseeable future.

There appears to be a fight on for control of UK semiconductor IP company Imagination Technologies.

The April 4, Sky News headline “State-owned Chinese investor to seize control of chip designer Imagination,” might have sounded scary depending on your geopolitics. But only two days later, the plans were reportedly scrapped, with Chief Revenue Officer David McBrien officially stating “With regards to recent media speculation about the future of Imagination Technologies, we can confirm that there are no changes being made to the Board, which remains Imagination CEO Ron Black and the three Canyon Bridge partners, or the Executive Management of the company.”

With these people gone, at least for now, the company’s interim CEO is Ray Bingham, Chairman and co-founder of Canyon Bridge. Joining him are Canyon Bridge partners Jon Kao and Peter Kuo. It’s hard to say which way this one will fall. Chinese companies have failed before when taking over foreign semiconductor firms, but the UK government has also failed to block such moves before as well. A capitalist would say Imagination is already Chinese and the UK government shouldn’t interfere; a nationalist might say the opposite.

What’s at stake here? Would such a move change much, given Imagination is already technically owned by a Beijing backed company? What does China want with Imagination anyway?

What is Imagination Technologies? What does it do?

The UK has two major semiconductor IP powerhouses. One is Softbank-owned Arm; the second is Imagination Technologies. The original company was founded in 1985. I won’t go into its entire history here (we have Wikipedia for that), but traditionally it has been famed for two things: its PowerVR GPU technology, and the MIPS CPU technology it acquired in 2012.

The company has had a rocky time since 2016 though when Apple stopped using its GPUs in its phones. When Apple makes up half of your revenue, this is a problem. Imagination’s share price plummeted, and the company was removed from the London Stock Exchange. It sold off MIPS to US AI company Wave Computing the next year. This is where its China connection began.

The China connection

In November 2017, the entire company was sold to Canyon Bridge. While this private equity fund is Cayman Island-based, it is part funded by China’s central government. The US has previously blocked Canyon from acquiring US Lattice Semiconductor for this very reason.

However, the fund was able to purchase Imagination. The Daily Mail reports that “ministers nodded through the deal after assurances that China Reform would be a passive investor and that Imagination’s intellectual property and business would stay in the UK.” It helped that Canyon Bridge was bound by US law—that is, until it moved from its US HQ to the Cayman Islands.

After acquiring Imagination, Canyon almost immediately placed Leo Li, who had been an executive at Chinese companies Spreadtrum and Tsinghua Unigroup, as CEO. Leo was a US citizen at the time, but this was already a clear sign of the direction Imagination could be heading. Li lasted only around eight months before returning to China. Imagination’s China office also began describing the firm as a “Chinese company.”

This brings us to the news from this past week. Sky News reported that China Reform Holdings, a state-owned investment holding company, was looking to “take control” of Imagination by placing four representatives as directors onto Imagination’s board. China Reform Holdings is the largest investor in Canyon Bridge.

It was rumored that the new board would look to redomicile Imagination to China. While ownership would not have changed, the move seemed aggressive to some and may have worried some people at Imagination and in the UK government for reasons of technology transfer and potential job losses.

Why is Imagination attractive to China?

I can think of two reasons, although there could be more. Imagination is on a stronger business footing than in previous years, and IP is an area China needs to improve on its path to semiconductor independence.

In January 2020 Imagination won back its business with Apple, signing a new multi-year, multi-use license agreement. The size of the deal was not disclosed, but such an all-encompassing deal would provide an extremely strong footing for Imagination to grow its business. Such a deal usually includes a large up-front license fee, as well as ongoing royalty payments based off Apple phone sales. Owning and controlling a company Apple relies on is definitely an attractive position to be in and could potentially force Apple to go back to developing its own GPU, when it clearly had decided to move away from this strategy. Of course, owning and controlling a successful company is attractive in its own right as well, despite its recent rocky history, Imagination is now in a strong position, licensing its A-series GPU not just to Apple, but also to other companies in the mobile and automotive markets.

Meanwhile, transferring IP using Imagination Technologies would be by far the fastest way to get world-class GPU technology into China.

IP is an aspect of semiconductor independence in which China really struggles. The core CPU IP is all foreign, although RISC-V is helping out in this regard. But it’s not just CPU core IP. Whether its memory, DRAM controllers, communication IP, DSPs, on-chip monitoring, or security, none of the key global players are Chinese, and in some cases, there aren’t any Chinese companies. Chinese GPU makers exist, but not major ones.

Becoming more independent means innovating yourself or acquiring from abroad. RISC-V may fill the CPU gap in the long run and controlling Imagination could be key to filling the GPU gap. While VeriSilicon’s Vivante GPU range fills some of the gap, it isn’t a globally recognized consumer device GPU brand yet, whereas Imagination can fill the handset, tablet, automotive GPU gap with ease. Whether the world is going to license a GPU from a completely mask-off Chinese SOE is another matter.

What now?

Chinese companies have been rebuffed in previous efforts to gain control of IP in the semiconductor industry, usually at acquisition or investment stages, be it Lattice Semi as mentioned above, or Tsinghua’s previous attempts to acquire or invest in Micron, Western Digital, and several Taiwanese chip assemblers. But of all governments, the UK is usually the least likely to push back.

With the UK distracted by Covid-19 and Prime Minister Boris Johnson recovering from Covid-19, one might expect London to be focusing on other, more important things. But once the board fight made headlines, politicians made time.

It’s not clear what the state of play is now, but expect strong US pressure against the Imagination move, as it directly effects Apple, coupled with growing skepticism toward China in the UK government itself. There are rumors that GCHQ objected, and that the UK government and even Boris himself are angry at China over the virus situation. With this change in attitude, Huawei’s access to the UK’s 5G network is also uncertain.

It will be interesting to see how this plays out, but I expect China to continue to acquire key technologies going forwards, whether they fail with this takeover or not, in addition to innovation efforts. Since the fast track to control is always to acquire, I can’t see it stopping.

For companies like Imagination independence is key. It is always a difficult balancing act between looking to investors to scale up the company faster and making sure that investment doesn’t lead to loss of control to one player in the geopolitical tug-of-war that the semiconductor world has become. Winning one country increasingly leads to friction with another.

Huawei, the world’s largest maker of telecom equipment by revenue, released earnings for 2019, saying that it missed a target set internally by $12 billion due to a US trade ban. The company also warned of retaliation by the Chinese government.

Why it matters: After a year of “unprecedented challenges” brought by a US ban on sales of its gear to American companies, the marquee Chinese technology company reported significantly slower profit growth and revenues which missed its own goals by a wide margin.

• Despite the May ban, US suppliers continued to deal with Huawei. Eric Xu, Huawei’s chairman, said in an interview that in 2019 the company spent $18.7 billion with US companies. 
• Its annual earnings report also laid out future growth directions besides 5G: smart wearables and internet of things devices, cloud service platforms and artificial intelligence, and billion-dollar programs that support developers to add to its homegrown ecosystem, in an effort to pose a viable alternative to Android and Apple applications.

“The Chinese government will not just stand by and watch Huawei be slaughtered on the chopping board.”

—Eric Xu, Huawei rotating chairman, at a press event

Details: Huawei reported revenues of RMB 858.8 billion ($123 billion) for 2019, an increase of 19.1% year on year and maintaining consistent top line growth compared with a year ago when revenue rose 19.5% on an annual basis.

• It posted net profit of RMB 62.7 billion, slowing to 5.6% growth year on year compared with 25.1% year on year in 2018.
• Xu warned of retaliatory measures by the Chinese government during the annual report press event, saying “Why wouldn’t the Chinese government ban the use of 5G chips or 5G chip-powered base stations, smartphones and other smart devices provided by American companies, for cybersecurity reasons?”
• The carrier business grew 3.8% year on year to RMB 296.7 billion and accounted for 34.5% of the company’s total revenue, falling below 40% for the first time. Last year, it made up 40.8% of total revenue.
• Its consumer business earned RMB 467.3 billion during the year, making up more than half of total revenue (54.4%).
• Xu said that the US sanctions meant that its consumer business lost $10 billion in overseas markets. It remains the fastest growing of Huawei’s three major businesses. 
• Huawei shipped 240 million smartphone units globally, up 16.5% year on year compared with 35% year on year in 2018.

Context: The US banned its companies from doing business with Huawei in May but has since issued temporary licenses to allow Huawei to continue. It extended on March 10 this license again to May 15.

• Huawei said that its RuralStar base station solutions allow more than 40 million people living in remote areas to have mobile internet coverage. That includes a quarter of the smallest wireless carriers in the US on which many of the country’s farmers rely.   
• Huawei’s executives said that Covid-19 has affected its plans to build 5G infrastructure in Europe and China, though domestic construction may ramp up since the outbreak seems to be under control in China. 
• Much of Huawei’s manufacturing is based in southern China which means its supply chains are less affected by the Covid-19 lockdown in Hubei, central China.

Recently I have written about China’s problems with EDA tools and chip fabrication. It isn’t all doom and gloom for China, though, and I’d like to talk about some areas where China is doing better. Central processing units (CPUs) are a bright spot.

Much has been written about the Sino-US trade war, especially about Huawei, with a lot of this discussion revolving around access to x86 CPUs from Intel and AMD, and also access to Arm core IP. Currently, Huawei and others still seem to have some access to Intel and Arm technology, and probably will unless sanctions become more robust. If Huawei and other Chinese companies lose access completely, while it would be a heavy blow, it wouldn’t necessarily be a death nail. Chinese companies such as Loongson, Phytium, Huawei, Zhaoxin, and Alibaba have developed CPUs and core IP which can fill in some of the gaps that would appear.

What are CPUs?

Just so we are all on the same page, let’s quickly describe a CPU. The CPU runs the OS and various applications on a device, processing data and giving an output. CPUs used to contain one processor but now usually contain more than one processor (cores). You will have heard of dual-core, quad-core, etc. For example, the latest Qualcomm chips are octa-core based on Arm Cortex processor cores, just like Huawei’s Kirin chip. A computer may even have more than one CPU, each with multiple cores. Multiples CPUs are more common in the server space.

To make a CPU, one of the first things a design company will decide is the core their CPU will use and thus also choosing the instruction set architecture (ISA), an instruction set provides commands to the processor, it is the link between software and hardware. Software designed for one ISA may not work on another without emulation.

ISAs come in two basic types: faster CISC (complex instruction-set computer) architectures, and more power-efficient RISC (reduced instruction-set computer) architectures. A CISC ISA can do multiple things in a single instruction whereas a RISC ISA may need multiple different instructions to complete the same task. Arm, MIPS, and RISC-V are RISC architectures, while x86 is CISC.

Traditionally, if you’re building a server, you need performance and you’ll choose CISC for its speed. If you’re building a phone, you’ll choose RISC.

Once you’ve chosen CISC or RISC, you have to pick a specific processor core to base your design on, and thus the ISA. Choosing a core commits your CPU to its ecosystem of compatible tools, apps, middleware, etc., so it can be hard to switch if your team has already become accustomed to a certain ecosystem. I’ll look at the field by dividing it into processor cores or ISAs.

Arm

The smartphone industry grew with Arm and its ecosystem and today basically all handsets use an application processor based on the Arm architecture.

Although Qualcomm left the Arm server market, along with its China JV Huaxintong, and there is endless debate as to whether Arm can ever replace x86 in the server space, there are still a number of western companies such as Marvell, Amazon, and Ampere developing Arm server chips, and for China, it has become even more important to develop them.

In the Arm camp we have Huawei, and the lesser known Phytium. With the sanctions ongoing rumors have arisen that Huawei’s HPC Compute and HPC Storage business lines may be closed sometime this year as they have limited access to Intel CPUs and Intel support. This has increased Huawei’s efforts to replace Intel with its own Arm-based server grade CPUs. The fruit of these efforts to date was the impressive Kunpeng 920. One of the most powerful Arm CPUs in the market Kunpeng boasts 64 cores running at 2.6Ghz, at 7nm. The chip will mainly target cloud services and big data applications in Huawei’s Taishan server range. And while I believe it and future generations of the chip can be a success in this space it does not address Huawei’s concerns at the bleeding edge of HPC or even supercomputing.

The other Arm-based CPU player is China Electronics Corporation subsidiary Phytium. The company has a good relationship with the Kylin OS team, their offices are next to one another, along with the Beidou team. Indeed, much of Phytium’s team is also part of the National University of Defense Technology (NUDT). Although its HQ is in Tianjin, much of the R&D is in Changsha, near NUDT. Phytium has a range of desktop PC and server CPUs but has more of an HPC focus. Its latest Arm chip is also 64 core but runs at around 2.2Ghz and uses a 16nm process. Phytium’s claim to fame is of course its use in supercomputers like the Tianhe-2, but actually the majority of the processing here was done by Intel Xeon and Intel Phi CPUs, Phytium’s was mainly processing front-end tasks. This changed though due to an Obama ban resulting in the removal of Intel Phi, NUDT replacing it with its self-developed 128 core Matrix-2000 processor. This wasn’t as powerful as Intel’s latest offering at the time, but still more powerful than the older Intel Phi processors they were replacing. NUDT and Phytium while cannot instantly replace HPC workloads are moving strongly in that direction.

MIPS

MIPS, like Arm, is based on a RISC ISA, but it’s less successful. It never got traction in the handset world, but it’s got a long history in China.

The first commercial Chinese CPU I know of (please message me if you know of earlier commercial CPUs), was the Loongson (aka Godson) which began life in the Institute of Computing Technology (ICT) back in 2001 and was commercialized by Loongson and Lemote. You can Google image some nice pictures of the Lemote laptop and desktop PC. These days, its latest CPUs are based on MIPS architecture which is now owned by Waves Computing out of the US and are fabricated by ST Microelectronics from Europe. The latest Longsoon CPU runs at 2Ghz and has four cores on a 28nm FD-SOI process, fine for government civil servant desktop use. For next year it does have some plans to move to a 16 core 2.5Ghz 16nm CPU, not world beating, but a big improvement. Whilst it isn’t going to become a household name it can be used in certain government or military use cases.

While Loongson may have been the first, it’s the only general purpose CPU right now based on MIPS, another company, Ingenic is also using MIPS but for low-power application specific processors. Other Chinese CPU players base their designs off Arm, x86, or RISC-V.

X86

Intel’s x86 is the only major option for CISC, and as such dominates laptop and PC CPUs, and has a leading position in servers.

Some of you may have read my article on AMD’s JVs in China, so will have seen the name of Zhaoxin Microelectronics before. Zhaoxin is a JV between Taiwan’s VIA Technologies and the Shanghai government. Along with Intel and AMD, Zhaoxin has access to the x86 ISA. While I do not see the company competing with its peers at the high-end, Zhaoxin is showing progress in the low-end server, desktop PC, and notebook space. Its latest KX-6000 16nm, 8-core, 3Ghz CPU performs on par with a 2017 Intel i5, enough for China to be independent at the low-end. Zhaoxin is planning a 7nm CPU for 2020 as well. Let’s keep an eye out for performance figures.

Zhaoxin, along with AMD’s JV (THATIC), discussed in my previous article, are China’s attempt to remain independent when it comes to x86 CPUs. Right now, THATIC is limited to AMD’s older Zen architecture, rather than the newer Zen 2, and in all honesty its Dhyana CPU is said to be more or less a rebranded EPYC CPU. Rather than being world leading, the aim has just been to have access to decent x86 CPUs domestically.

Zhaoxin has more freedom to develop than THATIC so I expect to see more from it in the coming years, where as THATIC seems to be in more of a frozen state given restrictions placed upon AMD.

RISC-V

For now, RISC-V, is the open source budget option, mainly seen in low margin IoT applications where price beats ecosystem. But I foresee that changing as China pushes to reduce exposure to US export regulations, its ecosystem grows, and is proven in more and more applications.

I have previously written about the importance of RISC-V to China. In my opinion it is China’s best bet at becoming relatively self-reliant in CPUs. Details are in my previous article, but in brief, despite originating in the US, RISC-V is sanction proof and can be used as a base for CPUs ranging from low-power IoT to high-performance computing.

Whilst there are many companies working on RISC-V based SoCs, MCUs, and CPUs, Alibaba gained most of the headlines in 2019 when its new subsidiary T-Head announced the RISC-V-based c910 processor and RISC-V-based Hanguang 800 AI processor. The C910 CPU and Hanguang NPU help Alibaba improve AI features in its cloud services and allow it become less reliant on foreign chip suppliers like Nvidia, as well as giving it new revenue streams from by potentially selling its CPUs or licensing core IP to third parties.

Conclusion

China is on the road to CPU independence in the low and mid end, but it will be a few years yet before it can be independent in the high-performance computing space, but I am confident it can get there. The current geopolitical situation is only going to speed up the process and even if true, loophole-free sanctions are put into place China will only be slowed down temporarily, life finds a way. China will struggle to break into the top tier with most architectures, which must be licensed and do not allow licensees access to source code. RISC-V gives it the opportunity to do so. Ironically, it is a US open-source processor movement that has provided this opportunity to China.

The coronavirus epidemic is affecting every industry, and semiconductors are no exception.

While most industries have shut down, necessities in the medical, food, and logistics industries have carried on working. Semiconductors are one of the industries that have carried on production—even in Wuhan itself. There couldn’t be more of a striking example as to how important the semiconductor industry is to the Chinese government. It can’t stop for a week, even for covid-19.

Will this crisis have lasting effects on the Chinese semiconductor industry?

Wuhan memory

Two key companies in China’s semiconductor plans, YMTC and XMC, are located in Wuhan. For years, China has complained about the US-Korea-Japan memory cartel, and what it sees as price fixing. Since virtually every electronic device we use requires some form of memory, and China is the largest manufacturer of said devices, buying memory from the likes of Micron, SK Hynix, Samsung, and Toshiba is one of the key factors adding to China’s semiconductor deficit.

While there are other key Chinese memory companies—e.g. Changxin memory in Hefei—the two Wuhan memory makers have both have confirmed they are not stopping production. While the rest of us are forced to work from home due to covid-19 fears, two companies at the heart of the epidemic cannot be allowed to discontinue production.

It may sound crazy to carry on working in Wuhan right now, but shutting down a fab, even temporarily, is very expensive. Fabs usually run 365 days a year. They may sometimes undertake “warm” shutdowns for a few days for maintenance work, but almost never come to a complete stop. In a warm shutdown, the machines are kept on doing dummy runs to keep the equipment stable so production can continue straight away, meaning staff must be on site.

To get staff out of the plants would mean a full “cold” shut down in which all equipment is turned off. Some parts of the process can’t be stopped without destroying product. Once turned back on, it takes a number of dummy runs for each equipment before they can get back to normal. Since this could mean over a month to restart, cold shutdowns nearly never happen, and companies will do nearly anything to avoid them.

The companies claim to be taking all precautions necessary to ensure no infected employees return, including having employees live on-site, but from what we know about covid-19 it may be hard to even know one is infected for up to 14 days. Of course, in fabs everyone wears masks, goggles, and gloves all the time anyway. Let’s just hope they don’t face a shortage like the rest of the country.

YMTC claims production won’t be affected. This may be true, but I would worry about the company’s long-term goals. Chinese memory companies have made news with the large pay packets they rely on to attract experienced Korean, Japanese, and Taiwanese employees with, but even these may not be able to convince these employees to come back after they’ve been evacuated from a disaster zone. This may affect these companies’ long-term goals to catch up with their international rivals. MYMTC’s goal of moving from 64-layer NAND flash to 96-layer and above becomes a lot more difficult without international talent. Perhaps they can set up an offsite R&D center for such talent to work remotely from outside Wuhan. Moving staff out of Wuhan for a long while may be necessary if they are to retain talent but may not be workable from a practical standpoint.

China is taking a gamble here. While a cold shut down would be a big set back for China’s memory ambitions, even one infected employee on a production line would be much worse. Not knowing who could have been cross infected or what surfaces are contaminated would mean a much longer shutdown. Since it may be months before Wuhan returns to any kind of normalcy, perhaps carrying on is a risk worth taking.

HiSilicon doesn’t stop

Huawei’s HiSilicon is perhaps just as important to China’s semiconductor plans as memory self-sufficiency. It’s China’s largest semiconductor design company and key for the country’s wireless chip development. It’s no surprise then that, as contacts have confirmed, many of the Guangdong company’s employees continued working at their offices throughout the government-mandated “work from home” period. HiSilicon is a fabless semiconductor design company, not a fab, but a physical presence on-site is still necessary for much of the work involved. This is a highly secure company—they don’t just let employees log into their workstations from home.

With this being a key year for China and 5G it is even more important Huawei keeps the wheels moving. The big trade show of the year, MWC, may be difficult for some key Huawei employees to attend. MWC is requiring proof that all travelers have not been in China for at least 14 days before the event. This means the event will be difficult for any Chinese company to visit or exhibit. It will be interesting to see how this plays out.

Conclusion

It seems in Wuhan they have concluded the costs of a cold shutdown outweigh any risk of infection at these facilities. Fabs are the cleanest places around, so they should know what they are doing when it comes to prevention.

I don’t expect Hubei’s memory situation to have any effect globally. The main effect on memory pricing will be more related to the electronics industry as a whole slowing, and thus memory demand dropping. However, in the long-term, we may see these companies struggle to retain international talent, and thus lose ground in their bids to catch up.

HiSilicon has been dealing with enough troubles as of late. This is yet another, and affects all in the industry in China, but is a challenge that I believe they are best placed to cope with. Shenzhen is a hotbed for covid-19 cases, though, so they need to be careful.

Without any doubt though we can conclude that like supermarkets, delivery services, and the medical industry, the semiconductor industry is one key sector the government cannot allow to slow at any cost.

There has been a lot of hoo-hah recently about Huawei semiconductor subsidiary HiSilicon moving away from being captive to its parent company and selling chips to the open market. This story started gaining traction around September last year and became more mainstream in December, when the IC design firm showed its 4G Balong chip at the Elexcon Expo in Shenzhen. This led to speculation that HiSilicon would also be releasing its Kirin mobile chipset to the open market as well, and this was a “new strategy” for HiSilicon that would pressure Qualcomm. But the truth is there is no new strategy, HiSilicon always had a non-captive side, and has no plans to release 5G Kirin chips to the open market. In fact, there probably isn’t even a market for them.

HiSilicon never was 100% captive

Most people assume HiSilicon is captive to Huawei. The media always refers to it as such. People are most familiar with its Kirin series of handset chips and would be correct in saying these are for Huawei’s use only, but this isn’t all HiSilicon does. Its Kirin (handset Application Processor), Balong (handset baseband), Tiangang (5G base station), Ascend (AI), and Kunpeng (server) chips are captive to Huawei, but for many years now it has sold a whole range of chips into the open market: video processing, camera, STB, TV, and NB-IoT. These chips don’t show up in ads for products, so they don’t grab headlines, despite selling in the millions. Industry insiders in China often talk about “Big HiSilicon” and “Little HiSilicon” to differentiate between the captive and non-captive sides of the business.

The 4G Balong chip it has begun selling to the open market is mainly targeting the IoT segment, not handset, and isn’t even a new chip—it has been around since 2014. A CAT-4 4G multi-mode chip can and will compete with Qualcomm in the IoT space—think bike sharing or point of sale devices. Balong is mainly made up of three other chips—baseband, RF, and power management—and doesn’t have the super powerful application processor it would need to be a full on handset chip. This is not the attack on the handset industry some suggest it is.

What if Kirin was available to all?

HiSilicon has given no indication that it plans on selling its more advanced Kirin 5G handset chips outside of Huawei. But what would happen it did take them to the open market? Who would buy them and what challenges would it face?

It is hard to see who would actually buy Kirin chips. Apple and Samsung certainly wouldn’t, having their own chip teams. I would expect other foreign firms, despite their struggles, to stay clear of Huawei technology as well.

That leaves local Chinese handset players such as Oppo, Vivo, and Xiaomi. The problem here is of course one of competition. Huawei handset sales, while dropping in the west, have grown significantly within China as the company has pivoted to some extent. This has eaten into local competitors’ sales, especially the likes of Xiaomi, which even saw co-founder Lei Jun step down as chairman.

While these local companies also have dreams of chip design themselves, they still use Qualcomm and Samsung chipsets for their high-end phones. Using a Kirin chip would mean losing any differentiation they had over Huawei and may even mean Huawei makes more profit from their phone sales than they do, not something I think they will want to do. There could also even be integration problems: HiSilicon is used to integrating with Huawei but integrating with other manufacturers may mean it has to design its chips differently in the future, adding to complexity and cost.

Conclusion

The mobile chip market is notoriously difficult to enter, and a number of companies like Renesas and Ericsson have given up over the years. The low and mid-end of the market already has Unisoc and MediaTek, and in the high end there is Qualcomm and Samsung. I do not see space for Huawei. At best, in some dystopian tech decoupling future domestic companies could be forced to use Kirin chips or other domestic companies like Unisoc’s or even ASR’s.

Perhaps it makes sense for domestic companies to use non-5G Kirin chips in cheaper phones. Samsung has done something similar before with Unisoc, but again, low end isn’t where the growth is now, so why bother going through the trouble?

As of now, fighting to get its chips in non-Huawei phones isn’t something HiSilicon plans to do, and I don’t think it would be beneficial to the company. It has bigger fish to fry.

China’s securities watchdog has approved an application from chipmaker Rockchip to list on the Shanghai bourse, as the company taps the capital markets following an unsuccessful attempt to go public three years ago.

Why it matters: Founded in 2001, Rockchip failed to list on Shenzhen’s ChiNext board in 2017 for “critical sales stagnation and asset decline,” according to China Money Network.

• ChiNext was set up as a way for predominantly high-tech firms that do not meet the requirements of Shenzhen’s main board to go public.
• China plans to domestically produce 75% of all key components, which includes chips, by 2025 amid a protracted trade war with the US.

Details: Based in the eastern Chinese city of Fuzhou, Rockchip has launched a series of artificial intelligence (AI) chips since its failed listing.

• Rockchip’s revenue in the first half of 2019 reached RMB 574 million ($83.3 million) while its net profit was RMB 66 million.
• The company’s full-year 2018 revenue grew around 2% year on year, while its profits surged 80% to reach RMB 192 million during the same period.
• China Industrial Securities is underwriting the chipmaker’s initial public offering (IPO). The company’s roadshow will be held online on Friday.
• Rockchip said its IPO will not exceed 42 million common shares.
• The company launched its first AI chip in 2018, followed by another in 2019 that combined AI and internet of things (AIoT) infrastructure, which enabled voice recognition and face detection functionality.
• Payments platform Alipay uses Rockchip’s AI chip solution in its Dragonfly facial recognition point of sales system.
• The company holds around 400 patents, which include 27 for integrated circuit designs, according to its prospectus. Manufacturers including Samsung, Sony, Huawei, Oppo, and Vivo have adopted its products, the company said.
• It is unclear whether Rockchip will list its shares on the main Shanghai exchange or the high-tech STAR Market board.

Context: Rockchip produces chips for handheld devices including tablets and smartphones, as well as TV boxes, IoT hardware, and is looking to tap the smart speaker market.

• While China has downplayed its Made in China Initiative amid trade tensions with the US, the country is setting out ambitious goals to increase its technological independence, a move that will be driven by domestic companies.

Around 10% of Taiwan’s semiconductor engineers have moved to China as a result of Beijing’s stepped-up efforts to attract talent in support of its Made in China 2025 initiative, according to a report by Taiwan’s Business Weekly.

Why it matters: Chinese global consumer and industrial electronics powerhouses such as Huawei are dependent on chips made in the US, Japan, and South Korea, leaving the sector vulnerable to geopolitical risks. This became clearer after the US cut off Huawei’s chip supply by adding it to a trade blacklist in May, and Beijing is pouring money toward bolstering its weak chip sector.

• The Taiwan Semiconductor Manufacturing Corporation (TSMC) holds close to half of the the global market share of chip manufacturing, according to Taiwanese market research firm Trendforce.

Details: In the last five years, top executives and engineers from Taiwan have taken jobs in government-affiliated companies in China, including two senior research and development engineers and the co-chief operating executive of TSMC, Asian Nikkei Review reported.

• Chinese companies offer a salary two to three times higher than their Taiwanese counterparts, Business Weekly reported. One engineer told the Nikkei Review that his company in China pays for his daughter’s tuition at a private school.
• Business Weekly said that Taiwan is worried that the trend could cause a brain drain in Taiwan’s semiconductor sector.

Context: China’s State Council set up a fund to bolster investment in chipmaking in 2014. After its second financing round in July, it has raised RMB 338.7 billion (around $48 billion).

• Chip manufacturing requires engineers with a specific skill set, and Taiwan has a 40-year legacy in the industry and 40,000 semiconductor engineers, resources that China lacks.
• The trend of Taiwanese experts moving to China to work on chips is not new. China’s largest semiconductor manufacturer, Semiconductor Manufacturing International Corporation, was founded by Richard Chang in 2000 when his business in Taiwan was acquired by TSMC.
• Ahead of Taiwan’s elections set for Jan. 11, Beijing announced 26 measures designed to draw Taiwanese enterprises to the mainland and extend certain rights to Taiwanese individuals.
• The central government introduced Made in China 2025 in May 2015 as part of an initiative to bolster the country’s homegrown technology industries and reduce reliance on, among other things, foreign semiconductors.

SILICON | Can China make chips?

Stewart Randall continues his series on China’s efforts to achieve independence from integrated circuits imports.

At the risk of sounding too negative, let’s discuss China’s semiconductor fab/foundry situation. Fabs are one of the big reasons it’s hard to imagine China getting completely independent from integrated circuit (IC) imports: there isn’t anywhere in China that can make cutting-edge chips. The semiconductor independence “Big Fund” has prioritized the area.

I promise I will write some positive articles on China’s semiconductor developments, but this is a hot topic now. Rumors—denied by TSMC—swirled last week about US pressure on fab leader TSMC to cut sales to Chinese companies. So let’s look at this key part of the IC industry: physically making the chips.

What’s a fab?

A fab or foundry is a factory where semiconductors are fabricated. In order to manufacture the most cutting-edge chips, fabs need capital equipment from all over the world, the most advanced of which are from Europe, US, and Japan.

What goes on inside fabs is akin to alchemy. In a sense, at least when discussing silicon chips, they are using equipment from companies such as ASML and LAM to turn sand into a chip. This is not an industry you get into on a whim. One ASML photolithography machine—a single part of the production line—costs about $100 million.

Integrated device manufacturers like Intel operate their own fabs, but today we’re looking at “pure play.” Pure play fabs do not design chips, although some work closely with design service partners. They generally make chips to order for “fabless” IC companies like HiSilicon or Qualcomm, receiving designs in the form of GDSII-type files.

How fab are China’s fabs?

The imaginatively named “Taiwan Semiconductor Manufacturing Corporation” (TSMC) dominates the global pure-play fab market with close to 50% market share. Samsung is a distant second at 18%. Third place Global Foundries from the US has only around 9% market share.

There are two main Chinese companies in this industry: the “Semiconductor Manufacturing Industry Corporation” (SMIC)—I think they were trying to beat TSMC in the imagination department—and Hua Hong. These two have 5% and 1.5% global market share respectively, with most of their sales within China. While these two fabs are broadly competitive in anything 28 nanometers (nm) and above, anything below is a struggle, and the smallest processes are where the high-end chips are.

Chinese fabs are behind, and it’s going to be very hard for them to catch up for a few reasons: access to the latest equipment, a lack of talent, and being late to the game.

Equipment

It takes a long time for leading equipment companies to manufacture the latest equipment. Companies like ASML and LAM Research naturally put their biggest customers first in the queue. TSMC and then Samsung will always be first in line.

Further, equipment makers can’t easily expand production capacity to get Chinese fabs faster access to equipment like extreme ultraviolet photolithography (EUVL). The skills needed to make them are few and far between.

Geopolitics also gets in the way of delivering the latest equipment on time—or worse. A memory maker called Fujian Jinhua was cut off from this equipment in late 2018 by a US export ban. With no alternative to US and US-linked European suppliers, the company had to cancel plans for a $6 billion plant, and it appears is still not producing any chips. As of today, the company’s website is up, but its products page (in Chinese) is empty.

Talent

The best talent naturally goes to the best companies. If you are a fresh graduate looking at the industry you will want to go to TSMC or Samsung. Otherwise, you may even choose a different industry.

It’s rather anecdotal but every SMIC engineer (outside of management) I have ever spoken with has complained of low wages and extreme working hours—think 996, and sometimes even worse. The night shifts aren’t fun either. Now the extreme working hours may be similar at the likes of TSMC, but the wage situation is not.

To fill the talent gap SMIC and others have been targeting Taiwanese, South Korean, and Japanese engineers with large salaries and other perks. A lot of Big Fund money has gone into such talent recruitment, which has helped win some recruits—but could also cause even more dissatisfaction among local engineers who aren’t getting paid as much as their foreign peers. To date, the extra talent has not helped Chinese fabs catch up. The other hurdles are just too great.

Timing

Chinese fabs were late to the game, have always been behind technically, and as mentioned above, stand at the back of the line when it comes to purchasing equipment. It doesn’t work in every sector, but here it really has been first mover advantage. SMIC came into the industry 13 years behind TSMC, and 19 years later it is still behind technically, and far behind commercially.

For example, no Chinese fab was able to manufacture FinFET designs until this year. Without going into details, FinFET is the current highest end process, which can fit more transistors into a certain area using a 3D structure. TSMC has been producing FinFET since the early 2010s. After several delays, some of which were due to US pressure on ASML, SMIC finally announced that a 14nm FinFET production line was up and running a couple months ago, just starting low volume runs, and claims to be ramping up to mass production as we speak. Meanwhile, TSMC and Samsung are mature at 7nm, will have 5nm next year, and have begun construction of a 3nm fab.

Prospects?

China’s Semiconductor Big Fund invested in pure play fabs and memory fabs with little noticeable result in these two areas thus far, at least commercially. But watch this space. Big Fund Mark II, which raised RMB 200 billion (about $28 billion) in July, will likely continue to invest heavily in these areas, but there is only so much throwing money at the problem can do. Industry king makers like ASML are part owned by TSMC and Intel, making it difficult for Chinese fabs to get ahead of the queue for advanced equipment, and given the sensitivity of the technology Chinese investment or acquisition seems unlikely.

The only way out of this predicament is for Big Fund Mark II actually to invest its money into creating Chinese capital equipment players. It seems like this is a focus, especially plasma etching equipment. I imagine mainland plasma etching equipment maker Naura, will be receiving some of this money to push past its current 14nm limit, but there is still no sign of a strong Chinese player in high-end photolithography. Without one Chinese fabs will still rely on foreign technology. We all saw how Fujian Jinhua faired after foreign equipment suppliers all left.

While other countries are similarly dependent, China’s IC supply is at risk due to geopolitical reasons, and even with all the money in the world it will not have its own replacement equipment any time soon.

I wrote last week that electronic design automation (EDA) tools are an Achilles’ heel in China’s bid for integrated circuit (IC) autonomy. While representing only a relatively modest $10 billion of the global IC market, these tools—dominated by a Big Three of US, or US-linked, firms—are critical to all IC design.

This EDA reliance poses a problem for not just Huawei and IC design subsidiary HiSilicon, not just for the other companies on the US entities list who have hopes to design their own chips, not just to all semiconductor companies in China, but to the Chinese government itself. Not to sound hyperbolic. All of China’s “self-made” chips are designed, verified, validated, etc. using foreign—mainly US—EDA tools. Chinese chips may grab the headlines, but the government knows China isn’t as self-reliant as they’d like it to be.

While-domestically focused companies can get away with pirated tools, this strategy doesn’t work if you want to be globally competitive. China needs to develop its own EDA tools. Local companies, and even Huawei, have been developing EDA tools, but we have not seen any notable achievements in public. Huawei’s developments are not very public, and the maturity and functionality of other domestic Chinese companies is still lacking.

China’s EDA lag

China has been investing in EDA R & D since the mid-80s when it developed the “Panda IC Design System”, however, I haven’t come across any company using this since I have been here and can only assume it wasn’t very successful. These days the more well-known companies, at least in China, include Huada Empyrean, Xpeedic, Semitronix, Platform-da, ProPlus, Microscapes, and Arcas-da.

But most of these companies cannot provide a complete design flow. The only example I know of is Huada Empyrean’s design flow for analog ICs, and in flat panel displays it works with some of the largest manufacturers including, Samsung, CSOT, HKC, and BOE. Other customers include Ricoh, SK Hynix, Marvell, and Sandisk.

Other than Huada’s relative success in its sweet spot the Chinese EDA industry in general has struggled, but why?

There are several reasons for the gap: Chinese tools are not comprehensive enough, there aren’t enough engineers with the skills to develop such software, market entry is difficult, and Chinese companies don’t have enough access to keep up with developments in manufacturing.

What holds Chinese EDA back?

Comprehensiveness: Chinese tools are simply not comprehensive enough, especially in digital design. Most of the digital design process is dominated by Synopsys and Cadence. Even if in one or two parts of the design flow Chinese companies have technically competitive products, it is difficult to break into the market as the Big Three have the ability to support customers’ development from spec to production. Chinese companies need to create a total solution to begin competing locally on any level, but even then, it will be difficult due to other factors.

Talent: Most of China’s EDA tool development engineers actually work for the Big Three: of the 1,500+ such engineers in China, only 300 (in Chinese) work for domestic companies. To put things further in perspective, Synopsys on its own globally has over 5,000 such engineers. Would-be EDA entrants also have to compete for talent with more lucrative industries. Application level software development at Alibaba, Tencent, etc. pays much better than a struggling Chinese EDA company.

Market Entry: With 95% of the domestic market, belonging to the Big Three, it is a highly difficult market to enter. Even if a full set of tools could be developed, in the short-term it will be difficult for any fourth company to gain any significant market share. Companies are used to certain design flows and engineers have used tools from the Big Three since university. These difficulties have made the domestic EDA industry a less attractive target for investors and, in turn, limited development.

Integration with Advanced Process Nodes: The link between design and process is a key part of an EDA flow. The Big Three work with the world’s leading wafer plants and foundries to develop a strong understanding of their processes, whereas domestic companies often only have access after a new process is developed and even then, not necessarily complete access. This makes it difficult for domestic companies to design and improve their software to compete with the Big Three.

Piracy: As mentioned above, EDA tool piracy is rife in China. These tools aren’t cheap. Silicon IP can’t be “cracked,” but tools can be. Any domestically focused company looking to save money will save it here. This also means the government may see EDA tool investment as a lower priority, as it can still have access to the tools for military chip design for example, even if bans are in place.

State-backed EDA

The government is beginning to support EDA tool development to some extent, and I expect support to increase over the coming years. Such companies can now claim back 30% of their development costs from the government, capped at RMB 30 million (about $4.3 million).

The government has also helped individual companies. For example, the Guowei Group has been granted RMB 400 million from the central and Shenzhen government for EDA development work. Also, Huada Emperyan has received hundreds of millions in funding over the past couple of years, not just from VCs but also from the state-run “Big Fund.”

While such government help is obviously welcome and is of some assistance it is nothing compared to the Big Three’s internal R & D investments, and if China really wants to become independent in this field much more needs to be done. The recently announced new Chinese government $29 billion semiconductor fund, or “Big Fund Mark Two” as I will call it, may go some way to help, but it remains to be seen how much of this will be invested into EDA. I suspect a small amount compared to how much is invested into memory, foundry capital equipment, and traditional fabless design.

Conclusion

China’s current predicament opens up opportunities for domestic companies. Government investment, coupled with a large domestic market, means they potentially have the environment to grow and improve. China needs to do this in a gradual way though, and not let such companies rely too much on government support. Switching everything to a Chinese equivalent (if one ever exists) could mean slower time to market and worse end products. Adopting a national procurement policy across the board is risky and could discourage innovation. Only once a domestic tool or entire design flow is on a more or less level playing field should they switch, and support should be based on certain milestones to avoid creating SOE-like inefficient operations.

I can see a future where domestic companies compete domestically within China for certain chips, e.g. analog designs or simpler IoT designs. Globally this will be more difficult though, and without access to the most advanced technologies from foreign wafer companies and foundries domestic EDA companies will always be at a disadvantage. China can reduce its dependency but at least for now, has no way of being completely independent in this space.

The first of two articles in a series on electronic design automation tools in China’s semiconductor sector. Read the second part here.

Can China achieve independence in integrated circuits (IC)? It’s a question I get asked a lot, and over the next few months I plan to shed light on where China is doing well and where it is not. It’s a complicated picture, but let’s start by saying this: it’s not going to be independent anytime soon.

One big reason for this is electronic design automation tools (EDA), a critical layer of IC design currently dominated by companies that are either US-owned or at least subject to US export controls. There are home-grown alternatives for a few specialized applications and more are on the horizon, but this category is an Achilles’ heel for efforts at chip independence, especially for Chinese companies with global ambitions.

What are EDA tools?

EDA tools are the software tools used to design ICs and printed circuit boards. Despite only accounting for around $10 billion of the $450-500 billion global chip industry they are essential to the design and creation of semiconductors.

Different EDA tools are required for different tasks and work in a design flow that all chip designers use to not only design but also analyze, verify, and debug semiconductor chips. This is not something that can be done manually, especially given the complexity of modern designs, which can contain tens of billions of transistors. Tools can be broken down into four or five main subcategories: design, simulation, verification, manufacturing prep, and functional safety. It is feasible to mix and match, but people tend to stick to one flow to keep things simpler, faster, and cheaper

Who are the main players?

Although there are many EDA tool companies out there, the industry is dominated by three main players—Synopsys, Cadence, and Mentor Graphics. These were all US companies until recently, when Mentor was acquired by Siemens. It is still based in the US and is a US company in every other way. Together they account for approximately 60 to 70 percent of the global EDA market, with Synopsys alone accounting for over one third.

Personally, I have not met a single fabless chip design company in China that has not said they use either Synopsys or Cadence design flows, or tools from both. There are no local alternatives, and while some may supplement parts of the Cadence or Synopsys flows with tools from other companies, these are usually for niche situations and do not play a main role in their design process.

The back up my anecdotal experience, showing that around 95 percent of EDA sales in China are divided amongst these three companies.

What does this mean for China?

Speaking to my clients, and Chinese in the industry, suggests Synopsys and Cadence are no longer able to work with Huawei, or any other company on the BIS entity list. This was further confirmed during the launch of the Huawei Ascend 910 AI chip when Huawei rotating chairman said Synopsys and Cadence could no longer work with Huawei.

This isn’t a disaster right away. Companies like HiSilicon will no longer receive support from their suppliers, but they already have access to the tools, and they know how to use them. I wouldn’t be surprised if they continue bringing out chips through 2020.

Suppose this becomes the new norm though, and that HiSilicon loses access indefinitely. This would mean competitors have access to support, receive all the latest patches, updates, and improvements. HiSilicon doesn’t. Perhaps current licenses run out and they cannot renew them.

What tools can they use then? How quickly can they re-train engineers who have relied on US tools since their university days to use a whole new set of tools? Designs will come out slower and fall behind competitors.

What about alternatives?

A purely domestic company may be able to secretly use unlicensed/pirated tools. Indeed, this is extremely common in China. Many pure domestic companies I speak with will use pirated tools somewhere in their design flow.

Listed companies, or international players like Huawei, wouldn’t be able to get away with this though. A team of lawyers would be waiting for them.

Perhaps they could use third party design services? This would get around the problem, but would mean outsourcing the design. It would also mean a significant number of employees were no longer needed. For HiSilicon, the jewel in China’s IC design crown, it would be impossible to admit it was no longer designing chips, at least not the whole design. To get around this problem, China will need its own EDA solutions. In the next installment, we’ll see why this is not as easy it sounds.

Led by ex-Google chief Eric Schmidt, a US defense committee urged the government to increase its spending on artificial intelligence (AI) research and continue the use of export bans to ensure its lead over China.

Why it matters: The report is the latest and most comprehensive effort from the Department of Defense (DoD) to create a blueprint for safeguarding American interests against the rise of China as a global leader in AI. The National Security Commission on AI (NSCAI) released its first interim report on Monday, outlining key strategic concerns and proposing next steps.

“We are a pro-America Commission, and the final report will say how we will win this competition.”

⁠—Eric Schmidt, NSCAI chair

Details: The NSCAI recommended that the US enhance domestic and allied cooperation while expanding export controls on target technologies and protecting American research from  “state-directed espionage.”

• “US and allied AI hardware advantages,” referring to the leadership in semiconductors held by the US, Japan, and the Netherlands, must be protected through multilateral export restrictions, the commission wrote.
• Due to AI’s multiple applications, traditional item-based controls may not suffice, the report said. Instead, regulators should scrutinize potential end-use and the “end user of specific items, to prevent their use for malicious purposes,” the report said.
• But the US and its allies should be careful about possible retribution from Beijing, NSCAI warned.
• Universities should be “part of the solution,” the report said, meaning that they should work with law enforcement and intelligence services to keep American secrets. Preventing “direct or indirect assistance to China’s military and intelligence apparatus” should be top priority, the commission wrote.
• At the same time, the US should be open to collaboration with China on global standard-setting for safe use of AI.
• The report named the following concerns: China’s spending on research and development of AI, the ballooning commercial competitiveness of Chinese tech giants which is “is being harnessed to promote national objectives in AI,” China’s use of AI in the military, and its transformation into a pole of attraction for global talent.

China’s share of global AI investment shrinks as headwinds take their toll

Context: The NCSAI was established by the National Defense Authorization Act of 2019, an annual US regulation that sets the defense budget. It first convened on March 11.

• China’s spending AI research and development (R & D) grew by 300% from 1991 to 2015, according to R&D Magazine. In 2017, China briefly surpassed the US in AI-focused venture capital investments. It still lags the US, but is on track to surpass it by 2030, the year when Beijing has pledged to reach global AI supremacy, according to the publication.
• In terms of academic research, China’s global impact has increased but is still behind the US. Researchers at the Allen Institute, a US think tank focused on AI, predicted that Chinese researchers will overtake their American counterparts in terms of citations by 2025.
• Washington placed several prominent Chinese AI companies under an export ban in October 2019, including Sensetime, the most valuable AI company in the world.
• American universities are increasingly scrutinizing their relationships with Chinese companies and research institutions. The Massachusetts Institute of Technology and Stanford cut their funding ties with Huawei following its inclusion on a US trade blacklist.

China will no longer force foreign firms to transfer technologies in order to access the market, Wang Shouwen, a vice commerce minister said at a press conference in Beijing on Tuesday.

Why it matters: Forced tech transfer and the unequal playing field conditions on China’s mainland have been issues at the heart of the US-China trade war.

• Wang signaled new directives that will add to the Foreign Investment Law effective in 2020, barring the use of “administrative tools” which force foreign companies to hand over trade secrets.
• Beijing will refine policies so that foreign and domestic companies have equal market access to new energy vehicle production, Wang said.

Details: The new measures are aimed to bring about a transparent and predictable investment environment in order to stabilize foreign investment flows, according to Wang.

• A spokesman for China’s Foreign Ministry, Geng Shuang, said at a separate event that lead negotiators from China and the US have had conversations over the phone recently and will do again so in the future.

“Administrative organs may not implicitly or explicitly force the transfer of technology by foreign investors or foreign-invested enterprises.”

—Wei Ye, Commerce Ministry official 

Context: Wang’s pledge did not address the joint venture mechanism which forces foreign enterprises to partner with a Chinese company in order to operate in China, frequently creating conditions for unintended tech transfer.

• In July 2019, major California-based chipmaker AMD denied claims of wrongdoing for passing chip designs to its Chinese partners.
• China has long been accused of requiring foreign tech firms to give up intellectual property in exchange for access to the world’s second-largest economy. A 2019 survey by the European Union Chamber of Commerce showed that 20% of European firms doing business in China had been subject to forced tech transfer, up from 10% in 2017.

Briefing: European firms say forced tech transfers rising in China

• Earlier this month, US President Trump revoked a $250 billion hike in tariffs that would have gone into effect on Oct. 15 after striking a tentative agreement on increased protections for intellectual property rights, agricultural goods, enhanced access to China’s financial markets, and currency policy.
• China and the US are now working on the text for the so-called “Phase one” trade deal announced by the US president on Oct. 11.
• Washington’s tariffs have caused foreign firms to withdraw or halt investment and production in China amid an economic downturn.
• After Apple announced it was considering shifting 15% to 30% of its production out of China, Foxconn, a major supplier, unveiled a plan to move production to South and Southeast Asia to minimize tariff impact.

China has set up its second semiconductor-focused investment fund, raising RMB 204 billion (around $28.9 billion) from the finance ministry, state-owned firms, and local governments, the National Business Daily reported on Sunday.

Why it matters: The state capital-backed “Big Funds” will propel China toward its goal of building a world-class semiconductor industry amid urgent calls from Beijing to increase technological self-reliance.

• The first Big Fund was set up to invest in chip manufacturing and designing, and promote mergers and acquisitions, according to a statement (in Chinese) published in 2014 on the website for China’s Ministry of Industry and Information Technology (MIIT), which supervises the fund.

Details: Twenty-seven organizations participated in the second financing round of the China National Integrated Circuit Industry Investment Fund, with China’s Ministry of Finance the largest shareholder after a RMB 22.5 billion investment, according to corporate intelligence information platform Tianyancha (in Chinese), which showed the fund was registered on Tuesday.

• Other backers of the fund include China Development Bank Capital, state-owned firms such as China National Tobacco and the country’s three major telecom operators, local government-supported enterprises.
• The only privately owned investor was San’an Optoelectronics, a Shanghai-listed chipmaker headquartered in the eastern coastal city of Xiamen. The company contributed RMB 100 million to the fund, accounting for only around 0.05% of the total funds raised.
• The fund is chaired by Ding Wenwu, who is also the chairman of Yangtze Memory, a state-backed chipmaker which was reported last month to have started volume production of the country’s first homegrown 64-layer 3D NAND flash chips.

Context: China’s State Council, the country’s cabinet, published (in Chinese) the “National Integrated Circuit Industry Development Guidelines” in June 2014, which initially proposed setting up a special national industry investment fund to boost the semiconductor industry.

• The guidelines pledged to stimulate dynamism and creativity in China’s semiconductor companies and accelerate the pace of China’s semiconductor industry in order to catch up with international leaders.
• The first fund, which raised RMB 138.7 billion from the Ministry of Finance and China Development Bank Capital, as well as several other state-backed enterprises, was set up in 2014.
• The first fund has so far invested in 23 semiconductor firms ranging from chipmakers to chip designers and semiconductor material makers, according to data from securities firm Changfeng Securities (in Chinese).

E-commerce giant Alibaba has released a self-developed artificial intelligence (AI) chip, as the company increases its focus on chipmaking and aims to improve efficiency on its shopping platforms.

Why it matters: The chip, a neural processing unit, is developed by Alibaba’s chipmaking subsidiary T-Head, known as Pingtouge in Chinese. The company was set up in September last year.

• China has set its sights on driving its domestic semiconductor industry while simultaneously pushing to become a leader in AI by 2030.
• Observers have said that China’s lack of hardware prowess is currently preventing the company from overtaking the US in the race for AI supremacy.

“The launch of Hanguang 800 is an important step in our pursuit of next-generation technologies, boosting computing capabilities that will drive both our current and emerging businesses while improving energy efficiency.

—Jeff Zhang, Alibaba Group chief technology officer

China’s ‘military-civil’ partnerships could hurt its AI ambitions: report

Details: While Alibaba is currently using the Hanguang within its own operations, the company plans to make the chip’s computing power available through its cloud services.

•  The chip “largely outpaces” the industry average, Alibaba said in a statement.
• The company added that the task of classifying and tailoring product recommendations for the 1 billion images uploaded every day to e-commerce platform Taobao used to take one hour, with the new chip cutting that time to five minutes.
• The chip is currently being used to optimize product search and automatic translations on Alibaba’s e-commerce sites, and is also being applied to personalized recommendations and advertising, the company said.

Context: T-Head was formed under Alibaba’s research and development unit DAMO Academy in late 2018. The company earlier this year released an internet of things processor based on RISC-V, the open-source instruction set architecture.

• Alibaba has made investments in s slew of chipmakers, including China-based Cambricon, Kneron, ASR, and DeePhi.

The effects of the US-China trade war on the global supply chain for consumer electronics are beginning to show, reported Bloomberg on Thursday. Many manufacturers are moving operations out of China amid the uncertainty.

Why it matters: The conflict between the world’s two largest economies is not only affecting manufacturers in China and US farmers, but is also disrupting the decades-old global electronics supply chain that produces iPhones, laptops, and 4K televisions.

• Manufacturers are forced to pay special attention to where they produce goods to avoid high US tariffs on products made in China, while still looking to cater to consumers in the world’s most populous country.

Details: Some firms are uprooting production lines from China amid concerns that the tensions show no indication of cooling, Bloomberg reported.

• HP laptop-maker Inventec announced plans on Tuesday to shift production of notebooks for the US market out of China within months in response to President Trump’s threat to roll out full tariffs on Chinese-made goods.
• GoerTek, a Chinese acoustic components supplier for Apple’s Airpods, is trialing production of the wireless earbuds in Vietnam.
• Some Chinese firms are “de-Americanizing” their supply chains, reducing their reliance on US core technology out of fear that they will suffer the same fate as Chinese telecommunications equipment giant Huawei, which was put on a US trade blacklist in May.
• Foxconn, the Taiwan-based iPhone assembler, said in April that it would start producing the handsets on mass in India this year as the company reduces its footprint in China.

The Trump administration is delaying a decision on handing out licenses for US companies to resume shipping to China’s Huawei as the trade conflict continues, Bloomberg reported on Friday.

Why it matters: The move indicates there is no let-up from the US in its trade blacklisting of Huawei as it approaches the August 19 deadline of a 90-day-reprieve.

• The decision came after Beijing said it was halting purchases of US farming goods, according to people familiar with the matter cited by Bloomberg.
• Companies seeking to export US-made components and technology to Huawei must apply for a special license after the Department of Commerce put the company on a trade blacklist on May 16.

Details: Commerce Secretary Wilbur Ross said last week he had received 50 requests and that a decision on them was pending, according to Bloomberg.

• US chipmakers such as Intel, Qualcomm, and Broadcom sent their chief executives to meet with President Trump in July in a bid to accelerate the process of obtaining licenses to sell to Huawei.
• Trump said last week there were no plans to go back on his commitment made at the G20 meeting in Japan in June to allow more sales of non-sensitive products from US suppliers to Huawei.

Baidu, Alibaba, and Tencent (BAT) are the top three investors in AI startups among large Chinese companies. Most of such funding goes to those focused on application layers or algorithms. While the tech giant trio has only made strategic investments so far, the field has also seen a stream of government and VC funding in recent times. Baidu and Alibaba have also moved into chip design themselves.

These new chip firms generally fit into three main categories—pure fabless semiconductor startups (which outsource manufacturing), algorithm startups that are moving into chip design, and internet firms that are exploring design too.

In total, I can think of at least 20 Chinese companies that fit into these categories, all of which are designing AI chips. I am sure there are a lot more of them out there in the vast industrial landscape. Traditional fabless design companies in China are also increasingly designing their own AI chips, making the market ever-more competitive.

It isn’t just China though where we see non-traditional chip companies like Baidu and Alibaba moving into design. In the US, countless listed giants, including Tesla, Google, Amazon, Microsoft, Facebook, and Apple, are designing their own AI chips, specific to their required applications. How can AI chip startups from both China and the US alike expect to live long when they face competition from behemoths that boast such technical and economic strength?

This vertical integration is not just a threat to startups but also to traditional chip designers that previously considered internet companies their customers. This dynamic will shape the industry in both regions for years to come.

These startups have moved quickly from burning VC cash to coming up with architectural innovations, and now they are tasked with actually finding customers in a very competitive market. Industry voices say it is becoming increasingly difficult for them to differentiate themselves and any start-up late to the party will struggle to bring anything unique, new, or different to the table.

Those that really do innovate and pursue emerging technologies like analog computing, in-memory computing, and neuromorphic computing warrant attention but have to deal with a much longer path to get a commercial product to market.

‘Chinese’ chips

From a hardware design perspective, these Chinese AI chips aren’t necessarily all that Chinese. As most of the companies work to tight deadlines, they tend to license an IP rather than develop in-house. The majority with which I have spoken will gain authorization to use networks that link design parts together, known as on-chip interconnect. They also rely on development and debug tools from companies like Lauterbach. That’s not to mention that the higher-end chips mostly use TSMC for fabrication. Of course, a large proportion of designs also use Arm cores. Some I have spoken with have developed their own GPU or custom neural network core, but the majority have neither the time nor luxury to do so. The bottom line is VCs want to see returns fast!

Returns come much faster in other industries. With the typical design process for a semiconductor taking 18 months and requiring tens of millions of dollars to finance just the first few designs, there is a real need to seek out customers from the get-go.

Some more experienced chip-focused VCs in the country understand this and are more patient, but we can expect to see some of these startups die off over the next couple of years as the pressure from VCs builds. The sector will consolidate for other reasons as well though. Industry mainstays are expected to snap up those new firms that look the most promising. The trend has been seen already when America’s Xilinx, the world’s leading designer, and supplier of programmable logic devices, acquired Beijing chip unicorn DeePhi last year. Other players will resort to acquisitions as a means to enter the market, as was seen when Alibaba took over C-Sky.

At this point, I think it’s safe to say the necessity to have dedicated AI hardware is here to stay. Most chips have some kind of ‘AI’ functionality, and this will only increase with time. Sure, some design teams will have to decide how much effort they dedicate to AI, but given that almost every major player is now involved, it is difficult to see such functions not becoming critical features of most future designs.

For China’s AI chip startups, it is a balancing act of getting to market first, being innovative, and having patient investors. The most successful will be acquired or secure more money, and the lame will die. The flipside for them is that AI and semiconductors are two areas of focus for the Chinese government in its push for technological independence. Those able to combine these verticals will garner a lot of attention. Despite this, the market is still approaching saturation, and only those that strike the right balance will survive.

A group of Chinese researchers has created a chip that combines conventional computing architecture with that inspired by the human brain, a development the team claims could lead to more generalized artificial intelligence (AI), according to research published this week in Nature.

Why it matters: China has laid out ambitious goals for its AI development, aiming to be a world leader in the technology by 2030. However, the country is largely dependent on foreign-made chips to provide the computing power for its intelligent platforms.

• While the researchers’ claim that the chip could lead to artificial general intelligence (AGI)—intellect that is typically at least on par with human-level cross-domain intelligence—is probably overblown, the processor does draw attention to China’s progress in developing chips designed to run AI algorithms.

“Our study is expected to stimulate AGI development by paving the way to more generalized hardware platform.”

— Authors of the research wrote in Nature.

Details: The chip, dubbed Tianjic, was developed by Shi Luping, an academic at Tsinghua University, along with a team of researchers largely based in China.

• The researchers demonstrated the capabilities of the hybrid chip in a self-driving bicycle (video above).
• The chip is able to simultaneously process algorithms on the dual architectures, enabling the bicycle to balance itself, avoid obstacles, track objects, and react to voice commands, the authors said.
• The researchers added that the separation of a computer science-based approach and a neuroscience-based approach to AI is “retarding the development of AGI.”

Context: The US-China trade war has drawn attention to China’s dependence on foreign-made technology, with US lawmakers using this reliance as a bargaining chip.

• In May, the US put telecommunications giant Huawei on a trade blacklist, prohibiting American companies from selling components that could pose a national security threat if misappropriated to the Chinese company.
• Major chip designer Arm had to cut ties with Huawei as the company uses US-made technology in its products.
• While China is behind in traditional chipmaking, AI chips present a unique opportunity for the country. China could use its AI prowess and huge amounts of data to push ahead in designing chips to run AI algorithms.

Qualcomm and Tencent are cooperating on projects to optimize user experience for the Chinese company’s video games on devices powered by the US firm’s chips, as well as on creating a 5G version of a Tencent-backed gaming phone, they said on Monday.

Why it matters: Tencent, one of the world’s largest gaming companies, is seeking new areas for growth as gaming revenues flag amid increased scrutiny by Chinese authorities.

• The country’s publication watchdog, the State Administration of Press, Publication, Radio, Film and Television, suspended video game licensing in March 2018 until the end of the year, dramatically impacting Tencent’s game business.
• Tencent’s revenue from gaming fell 4% year on year in the third quarter of 2018 while fourth quarter revenues were flat compared with the same period a year earlier.

Details: Under the agreement, future Tencent games will be optimized for Android phones that run Qualcomm’s Snapdragon Elite gaming chips, the companies said.

• Tencent and Qualcomm plan to jointly develop a 5G version of a gaming phone which the Chinese company is developing with Republic of Games, the gaming division of Asustek Computer Inc. The gaming phone also runs on Qualcomm chips, according to the report.
• The companies said that they also plan to tweak game titles for US laptops powered by Qualcomm’s processors and connected to the internet via 5G, rather than traditional Wi-Fi chips, the report said.

China’s semiconductor-focused fund, the China National Integrated Circuit Industry Investment Fund, has raised RMB 200 billion (around $29 billion) in its second financing round, the China Securities Journal reported on Friday, as the country aggressively promotes self-reliance in high-tech sectors amid the US-China trade war.

Why it matters: China’s efforts in growing its semiconductor manufacturing sector to increase technological self-reliance, of which the fund is a major feature, have grown in significance and urgency following the US ban on Chinese telecom equipment giant Huawei.

• The new funding round is a notable increase from the first round, which raised RMB 138.7 billion from the Ministry of Finance, the China Development Bank Capital, as well as several other state-backed enterprises in 2014.

Details: The second fundraising round follows the same investment strategy as the first round, but it focuses more on semiconductor end-uses, the report said.

• The Big Fund was set up to invest in chip manufacturing and designing, and promote mergers and acquisitions, according to a statement published in 2014 on the website of the Chinese Ministry of Industry and Information Technology (MIIT), which supervises the fund.
• The China Securities Journal report has not been confirmed by the China National Integrated Circuit Industry Investment Fund. An emailed inquiry TechNode sent to the firm on Friday was not immediately responded to.

Context: China’s State Council published the “National Integrated Circuit Industry Development Guidelines” in June 2014, which initially proposed to set up a special national industry investment fund to boost the semiconductor industry.

• The state-backed fund, also known as the “Big Fund,” was set up in 2014 by the Chinese government in a bid to catch up in the global semiconductor industry by backing semiconductor startups and related research and development.
• The guidelines also pledged to stimulate dynamism and creativity in China’s semiconductor companies and accelerate the pace of China’s semiconductor industry to catch up with international leaders.
• Annual semiconductor imports by China reached $312 billion in 2018, rising from $200 billion in 2013, according to the China Semiconductor Industry Association.

Alibaba’s semiconductor affiliate Pingtouge released on Thursday a new RISC-V-based processor, a move that accelerates Chinese tech industry’s self-reliance amid the ongoing US-China trade war.

Why it matters: RISC-V, an open-source hardware instruction set architecture (ISA), is not covered by the US export restrictions, meaning Chinese firms like Huawei are able to use it without violating any export restrictions. The ISA is considered as a rival to commercial vendors of computer designs, such as ARM and MIPS.

• RISC-V is a globally recognized open-source standard, eradicating trust issues that may arise for Hangzhou-based Alibaba and Shanghai-based Pingtouge.
• Using RISC-V ISA is much more cost-effective because Pingtouge doesn’t need to license an expensive ARM core, Stewart Randall, head of electronics and embedded software of Shanghai-based consultancy Intralink, told TechNode on Thursday.

“Alibaba does not need to license any core from ARM, MIPS, or anyone else. They design their own core based on the RISC-V ISA and added extensions.”

—Stewart Randall

Details: Pingtouge says that the processor, dubbed Xuantie 910, is currently the most high-performance RISC-V processor in the industry.

• It can be applied to the designing of chips for the fifth-generation wireless networks, artificial intelligence, as well as autonomous driving, said the company.
• The processor could potentially double chip performance while reducing costs by 50%, said the company.

Context: The US government in May put Huawei on a trade blacklist, barring American companies from selling the Chinese telecom equipment giant any components containing technology it deems a national security threat if misappropriated.

• UK-based chip-designer ARM was forced to sever ties with Huawei following the US sanctions as the company utilizes American technology in its products.
• Huawei is also a member of the RISC-V Foundation, an organization that directs its development and adoption, and is thus also able to use the open-source architecture.

RISC-V, the instruction-set architecture out of UC Berkeley, has been making waves in the semiconductor sector. Some even say that it could threaten industry heavyweight ARM in the long run.

The key difference between the pair’s respective products, which basically define the way in which software talks to a processor, is that RISC-V is open-source. It is this aspect that could be of particular interest to Chinese companies as such products are not directly subjected to US sanctions.

The RISC-V Foundation, which promotes the ISA’s use, features leading global players including Microchip, Western Digital, Google, Nvidia, and Qualcomm, to name just a few. Through collaborative and independent projects, several members are working to create RISC-V based designs.

China’s growing interest

Over the past few years, and especially in 2019, I have witnessed a huge increase in Chinese interest in RISC-V. Three years ago when mentioning the ISA, most engineers would look at me puzzled. Then, two years ago, they had at least heard of it though most would mispronounce it (it’s Risk-Five by the way).

Fast-forward to today and not only does every company I meet know of it, but the majority are actively researching it. Whether they have taped out an actual RISC-V based chip or are currently designing one, the interest is clearly there.

Today the foundation includes more than 25 Chinese companies, and what’s more, as of last year China now has two of its own RISC-V industry alliances with more than 185 members. Some of the most well-known Chinese members include Huawei, Sanechips from ZTE, Bitmain, Alibaba, and Xiaomi’s wearables partner Huami.

So, what’s all the fuss about? Why are so many large global companies jumping on the bandwagon, and what does RISC-V mean for China?

RISC-V provides an open-source ISA which users can build upon. As its a frozen ISA, software designed to run on one RISC-V processor will run on any other. It also provides a processor business model similar to that of Linux. Commercial vendors can build on the open-source ISA, or open-source cores to create their own IP to license and support.

It is important to note that whilst RISC-V is open-source, any serious product is probably going to want to license a commercial RISC-V core. Alternatively, companies with the resources and expertise can design their own. Often people may misunderstand RISC-V to be free. It isn’t but it is cheaper. Some commercial core suppliers do not ask for royalties, and license fees can be low, especially as these suppliers try to gain market share.

The main barrier to entry in the RISC processor world has been less technical and more ecosystem-related. Whilst ARM has a much more mature and sizeable ecosystem, that of RISC-V is growing fast and within these short few years, there are already products based on the ISA in the market and a supporting ecosystem.

While India has adopted more of a central government approach, China’s local authorities appear to actively compete in the semiconductor space, and we are now seeing RISC-V specific investments in the form of grants from the Shanghai and Nanjing governments among others. While what the Indian government is doing is great, China and its large number of semiconductor designers and household names are much better placed to take advantage of opportunities presented by RISC-V.

Sanction-proof

An interesting aspect of RISC-V to China is that it is not covered by the US Entity list as it is open-source. This means Chinese companies can use it without any fear of losing access in the future. Even SiFive, the first commercial RISC-V core company, and from the US, can still license to Chinese players. The Chinese unit is a completely separate entity that has allowed them to circumvent any export restrictions.

Even if somehow SiFive was prevented from licensing to certain Chinese firms, there are several non-US alternatives, even some domestic players. These include Andes, PTG from Alibaba, Syntacore, and Nucleisys. There are also free open-source cores available online.

We have seen that the entity list has the potential to limit ARM’s cooperation with Huawei’s HiSilicon despite it being a UK company owned by Softbank. With RISC-V, such risks are eliminated for Chinese firms. Additionally, it provides a globally recognized open-source standard for the country’s chip designers to latch onto. This removes any trust issues that would undoubtedly arise if China were to push its own closed ISA globally to compete with ARM or Intel.

This year I expect to see several Chinese companies taping out RISC-V based IoT chips as well as AI chips which include the ISA’s cores somewhere in the design. Whilst RISC-V has started with simpler IoT designs or low-power chips like Greenwaves’ GAP8 or the Chinese Kendryte, over the coming years I expect larger, more powerful versions to emerge.

Similar to how ARM boasts a range of cores covering low-power IoT to servers, RISC-V has the potential to do the same. I understand that many RISC-V cores struggle in terms of design size compared with ARM equivalents. However, there is no denying the benefits of this open-source, more customizable ISA that is also more cost-effective. The ecosystem is growing, results are improving, and the competitors are beginning to sweat, even if it is just a little.

Samsung estimates operating profit more than halved in 2nd quarter – Financial Times

What happened: Samsung Electronics expects its second-quarter operating profit to fall 56% year-on-year to KRW 6.5 trillion (around $5.55 billion), according to earnings guidance released by the company on Friday. The South Korean electronics giant said its revenue would likely fall 4% quarter-on-quarter to KRW 56 trillion. It will release a finalized earnings report later this month. The lowered earnings guidance came as global chip prices fell due to a supply glut and US sanctions on China’s Huawei, a major Samsung client, analysts said.

Why it’s important: Samsung is the world’s biggest maker of semiconductors and smartphones, as well as a major producer of display screens. The US campaign against Huawei has hurt chip demand, but Samsung is expected to see benefit in smartphone and telecom equipment sales. Analysts estimate Samsung could sell 37 million more smartphones annually if the Huawei woes continue. Samsung is also expected to increase its share of the global 5G network equipment market as global telecom operators boycott Huawei.

Advanced Micro Devices, known as AMD, has denied any wrongdoing for a deal that transferred key semiconductor technology to Chinese supercomputer manufacturers, universities, and supercomputer manufacturers affiliated with the military.

The Wall Street Journal reported that a joint venture signed in 2016 that led to AMD chips “rolling off Chinese production lines” had been inked without adequate regulatory oversight. The complex system of joint ventures set up by AMD in China put the transfer of chip intellectual property in a legal grey area that, until last week, remained outside the usual purview of US controls on tech transfer.

AMD responded to the claims on Friday, saying that the report made several factual errors and that it had been in touch with the Department of Defense and Commerce Department since 2015, the year before the joint venture was signed. It added that recent developments have made the topic sensitive in a way that it wasn’t at the time of the deal.

The California-based semiconductor designer licensed its proprietary designs of x86 processors for $293 million dollars plus any royalties coming from new chip designs. The chips, invented by Intel, are the foundation for modern high-speed computing and can be found in both consumer devices and state-of-the-art supercomputers.

In February 2016, AMD had set up a joint venture along with Chinese state- and privately owned companies under the name Tianjin Haiguang Advanced Technology Investment Co. Ltd. (THATIC). The newly set up company was co-owned by AMD, the Chinese Academy of Sciences, and other Chinese private and public companies.

AMD then set up another two companies in China, HMC and Hygon. AMD holds a 51% stake in Hygon, according a company filing. In 2018 Hygon produced Dhyana, a CPU processor almost identical to AMD’s EPYC model. More recent online reports say that AMD owns 30% of Hygon and 51% of HMC.

According to anonymous sources cited in the story, the Pentagon and the US Department of Commerce suspected that the joint venture violated export controls over national security risks that are reviewed by the Committee on Foreign Investment in the United States (CFIUS). They tried to block it by attempting to convince company representatives to submit the deal for review. However, the US Treasury Department, which has the final say in the CFIUS review process, agreed that AMD’s joint venture deal fell outside of its scope.

As of June 21, all three of AMD’s joint ventures in China are subject to the extended export ban. Sugon, one of AMD’s Chinese partners, “publicly acknowledged a variety of military end uses and end users of its high-performance computers,” thus US authorities decided that it is acting contrary to national security interests and placed it on the entity list.

According to the US Department of Commerce, Sugon, which manufactures half of China’s fastest supercomputers and is affiliated with the military, owns a majority stake in THATIC and minority stakes in HMC and Hygon. Sugon has used the Dhyana processor in its supercomputers, which are used by the Chinese military, the Department of Commerce said.

According to the report, AMD licensed its technology to THATIC which in turn passed it on to Hygon and HMC which produced processors and devices respectively.

In addition to the complex company structure, the Wall Street Journal reported that AMD intentionally stripped the x86 semiconductors from features that would definitively place it under export controls, such as encryption protocols.

AMD did not respond to TechNode’s requests for comment on Monday.

In 2016, AMD was struggling. Shares of its biggest competitor, Intel, was valued six times higher and the company was dependent on outsourcing the manufacturing of its IP. Under the guidance of a new CEO, it decided to monetize its precious IP to save itself from its financial problems.

The IP of semiconductors is guarded closely by manufacturers and governments alike, since design remains one of the most important and difficult aspects of the technology. Their importance in the development of supercomputers, which are used for military and other state functions, also makes them a highly coveted.

The year before AMD set up the intertwined joint ventures, the Obama administration stopped Intel from selling its Xeon processors to a supercomputer facility in China.

U.S. Tech Companies Sidestep a Trump Ban, to Keep Selling to Huawei – The New York Times

What happened: A number of the biggest American chip makers including Micron and Intel have sold millions of dollars of products to Huawei despite its placement on a trade blacklist. These American suppliers began selling components produced overseas to Huawei about three weeks ago, permissible for American goods which are not made in the US and do not contain technology that can pose national security risks. People with knowledge of the sales said the blacklist on Huawei caused confusion and many executives of American suppliers who lacked deep experience with US trade controls initially suspended shipments to Huawei.

Why it’s important: Sales to Huawei comprise significant portions of revenue for many American chip makers; Huawei said it spends around $11 billion in technology from US companies each year. Micron’s shares rose as much as 10% on Tuesday after the company said it had resumed some microchip shipments to Huawei. Meanwhile, the trade blacklist effect on Huawei may be lesser than expected as chip makers grow increasingly savvy about US trade policy.

Huawei 7nm Kirin 810 Beats Snapdragon 855 and Kirin 980 on AI Benchmark Test – Synced

What happened: Huawei’s new 7nm System on a Chip (SoC), the Kirin 810, outperformed Qualcomm’s competing Snapdragon 730 and 855 processors in an artificial intelligence (AI) benchmark test and one run by the Antutu benchmarking software. The chip powers Huawei’s newly announced Nova 5 smartphone, and boasts 64% higher transistor density and 28% higher power efficiency than a 10nm processor. While Huawei has positioned the Kirin 810 as a solid processor for its mid-range handsets, the chip also managed to outperform the flagship Kirin 980 in the AI benchmark test.

Why it’s important: According to Synced, the Kirin 810’s new embedded neural processing unit (NPU), built on Huawei’s Da Vinci architecture, will be of interest to the machine learning community for its ability to more efficiently work with FP16 and INT8 data types. Additionally, Huawei’s significant gain on Qualcomm in mobile computing power should put the chip maker on notice that the Chinese tech giant’s own HiSilicon-developed processors can compete with the world’s fastest. It is possible that the Kirin 810 will be Huawei’s last ARM-designed chip, however, after the two companies cut ties in May.

Server maker Super Micro to ditch ‘made-in-China’ parts on spy fears – Nikkei Asian Review

What happened: Server maker Super Micro Computer has asked its suppliers to stop manufacturing parts in China, according to Nikkei Asian Review. The California-based company’s U.S. customers have reportedly requested motherboards that were not produced in China, following claims in October that malware-infected chips were planted by Chinese spies in motherboards that made their way to U.S. government servers.

Why it’s important: The October claims by Bloomberg were contested by Super Micro, saying there was a “lack of proof” indicating their motherboards had been compromised during the manufacturing process. Nevertheless, it agreed to undergo a review of its products, and according to Nikkei, independent testing showed no evidence of cyber espionage. Super Micro has committed to expanding its in-house manufacturing capabilities and doesn’t seem to be alone in leaving China: between 2017 and 2018, the number of Chinese-made motherboards in the world’s servers dropped from approximately 90 percent to 50 percent.

The Shanghai Stock Exchange unveiled last Friday the first group of nine companies that were eligible to file for initial public offerings on China’s new Nasdaq-style high-tech board, the Sci-Tech Innovation Board (STIB).

The list consists of four electronic equipment makers, three high-end equipment manufacturers, and two companies from emerging industries such as new material and biology.

The STIB was initially launched by Chinese President Xi Jinping in his keynote speech at the opening of the first China International Import Expo in Shanghai last November, aiming to experiment a registration-based IPO system.

China’s securities watchdog, the China Securities Regulatory Commission (CSRC), has said that the new sci-tech board in the Shanghai Stock Exchange would focus on companies in high-tech and strategically emerging sectors such as new generation information technology, advanced equipment, new materials and energy, and biomedicine, according to state-run news agency Xinhua.

The CSRC released regulation details on the STIB on March 1, under which eligible companies can become listed by filing required documents, instead of bidding for approval from the securities regulator. Which means the new board also allows companies that haven’t generated a profit to register for an IPO.

Among the nine companies that are ready to go public on the STIB, Jiangsu-based semiconductor manufacturer Hejian Technology is the only one that is not yet profitable. The company seeks to raise RMB 2.5 billion (around $370 million) in its IPO. It reported a net loss of RMB 146 million for the year ended December 31, 2018, and has shown deficits for three years running, according to the prospectus (in Chinese) that the company filed to the exchange.

China is racing against time to establish its own technological intellectual property, particularly in the semiconductor industry. The moves come amid growing pressure on Chinese tech companies overseas, underscored by the recent arrest of Huawei CFO Meng Wanzhou and punitive measures by the US on Huawei rival ZTE.

This time around, China appears to be taking a more discreet approach, pursuing more low-profile strategies rather than eye-popping, state-led partnership initiatives such as the National Integrated Circuit (IC) Industry Investment Fund, which was set up in 2014 and raised RMB 138.7 billion ($20.1 billion) in its initial phase.

“Sino-US tensions are pushing China into a corner,” the head of an integrated circuit trading company told TechNode, requesting anonymity because of the sensitivity of the topic. As a result, he said, there’s been a shift in policies at both national and local levels where greater emphasis is being placed on investing in the semiconductor industry. “We are seeing increasing integration of government budget and private money in good projects,” he added.

“China will increase support to the semiconductor industry, while target projects and allocation of capital will see more subtle shifts,” said Kyna Wong, head of Credit Suisse’s China Technology team.

Wong pointed to the recently announced Shanghai-based tech board plan as a sign of new efforts to bring in individual investors and developing companies into the world of tech investment.

For semiconductor and other projects requiring long-term capital injection in research and investment, and fixed assets such as factories and labs, a stock exchange allowing flexible capital exit could benefit private investment.

In contrast to listed A-share stocks which should report earnings before IPO filling, the registration-based tech board will have no profit requirement for IPO candidates. This is likely to encourage R&D driven projects characterized by high investment risks but also high returns.

Meanwhile, the Chinese government is extending material support to early stage semiconductor projects developed by students and educational institutions.

Earlier this month, for example, during the final of the Beijing University of Aeronautics and Astronautics’ global innovation competition, the top prize for early stage projects was awarded to a project that focuses on chip security, while the prize for the growth-stage projects was given to a team that is developing non-civil communication chips. Both winners will be given access to an undisclosed amount of private capital.

Chinese semiconductor companies also are aggressively investing in open source projects. One example is instruction set architecture (ISA) RISC-V. ISA works between hardware and software, and defines how a computer is programmed.

In April, Ni Guangnan, a member at the Chinese Academy of Engineering Science, said that Chinese companies should pour the whole country’s resources into chip-making. He drew parallels to the mission of those who dedicated their lives to develop significant national projects such as developing China’s own nuclear weapons.

In November, during China’s Wuzhen Internet Conference, Ni was assigned as the general director of China’s own RISC-V alliance. At another technology forum held in the same month in the southern Chinese city of Shenzhen, Ni mentioned that Intel and ISA ARM are dominating the core chip-making technology. “If we could work together on RISC-V, under the current situation, we can be the third major power,” Ni was cited in Chinese media as saying.

“The government is very interested in the technology,” Fang Zhixi, former global vice president at Intel and now the chairman of RISC-V Foundation’s consultancy committee in China, told TechNode prior to the Wuzhen Internet Conference. “I have been getting in touch with high government bodies including the Cyberspace Administration of China (CAC) and Ministry of Industry and Information Technology (MIIT). We see no problem organizing talks or having both Chinese and international researchers and universities working together.”

Fang explained that the Chinese government’s interest in RISC-V is due to an open-source technology’s “natural advantages.” Tech companies may build their own applications on the “open and free” fundamental tech standards, and produce commercial projects with no extra-legal pressure such as patent disputes imposed by external parties.

“Open-source [solutions and communities], in fact, can be a way to avoid tensions in the tech sector,” Fang added.

Rick O’Connor, executive director at RISC-V Foundation, the official non-profit organization of ISA RISC-V, told TechNode in the same interview as Fang’s that IoT and AI, two major Chinese national strategic industries, were also eagerly looking for open source solutions.

Nevertheless, Wong believes China still has a long way to go.

“From the perspective of policy, support to open source technologies can be easily done. However, one concern is communication across standards. China still has to tackle challenges when racing with players leading mainstream tech games in many fields.”

Wong believes China’s intention is to establish its own intellectual properties in mainstream tech games. If it were not for the purpose, China could always pay for US patents’ use right and projects built on open source platforms, as the US tech entrepreneurial ecosystem is highly commercial.

“[Therefore] open source is not always enough, though it will produce positive outcomes,” Wong added.

Taiwan-based chipmaker TSMC has received the green light to build what is said to be the world’s first 3-nanometer manufacturing plant.

TSMC, currently the world’s largest contract semiconductor manufacturing firm, has been cleared to begin the construction of the new chip factory at the Southern Taiwan Science Park in Tainan, according to Taiwan News report.

The new factory passed the Environmental Protection Administration (EPA)’s environmental impact assessment on Wednesday. There had been concerns about the factory using up an excessive amount of water and power sources. The chipmaker previously promised that the new fab would use 20% renewable energy and 50% recycled water.

TSMC is pouring NTD 600 billion (around $19.5 billion) worth of investment into the construction of the new plant, which is planned to begin in 2020. The chipmaker is expected to enter production trial run in 2021 and begin mass production as early as 2022.

TSMC is building a 5nm chip plant at the same site, which is expected to be completed and running by late next year or early 2020.

The Taiwanese chipmaker reportedly kept the 3nm production schedule confidential in order to prevent its rivals such as Samsung from accelerating investment in 3nm chip production. However, talks about the company’s new 3nm fab have been going on for a while.

Last year, it was rumored that TSMC was considering moving the new facility to the US, lured by incentives offered by Trump administration to bring more manufacturing into the country.

According to local media reports, analyst Wang Zhao Li reckons that the powerful 3nm chip’s main applications will be in cloud computing, artificial intelligence, and 5G. Apple, Huawei, Google, and Nvidia would likely be the potential customers for TSMC’s new chip.

Apple is the Taiwanese company’s largest client, which is said to account for nearly 20% of the company’s revenue.

U.S. chipmaker Nvidia to provide AI platform for Chinese EV start-ups – Reuters

What happened: Chipmaker Nvidia will provide its computing platform and Xavier, the company’s leading AI chip, to Chinese autonomous driving startups XPeng and Singulauto. With Nvidia’s help, XPeng hopes to equip its products with Level 3 autonomous driving starting from 2020. Singulauto aims to partner with Nvidia to accelerate development and application of Level 4 autonomous driving.

Why it’s important: Global fundamental tech and infrastructure suppliers are increasingly entering into China’s IoT and industrial sectors. The sectors are part of China’s national strategy to upgrade public and micro infrastructure and facilities. China wants to build a broad range of domestic use cases. Partnerships with global solution providers can help it achieve that goal by providing the talent and tech knowhow that China lacks.

US chipmaker giant Intel will step up its activities in China through partnerships and investment particularly in the realm of artificial intelligence, executives of the company said Wednesday. The move comes as competition in the sector heats up with more players’ elbowing to be part of China’s ambitious AI vision.

“We see our cooperation with others as supplementary collaboration, instead of pure competition,” said Ian Yang, president of Intel China. “In terms of massive potential use cases in China, we are in talks with some local companies for business cooperation, and even early investment [for AI projects],” he added without elaborating.

Yang and other Intel executives spoke to media during the company’s first developers’ conference for China, which runs through November 15 in Beijing.

In a keynote address, Yang said that by 2022, China’s AI is expected to be worth $9 billion. In 2017 that figure was $900 million, representing a compound annual growth rate of 58%, he said.

“AI is a marathon that just started—a race runs towards the future, and has no finish line,” said Yang.

Intel faces competition from both international and Chinese players, many of which are already in the AI game or are moving to shore up their positions in the field.

Baidu, for example—though partnering with Intel in route optimization for autonomous driving—is also collaborating with Xilinx, a US semiconductor company, for Baidu’s autonomous vehicle platform, Apollo, as well as for the recently announced Baidu Cloud machine learning program.

Xilinx is often seen a strong competitor of Intel’s, particularly in AI acceleration sectors.

Baidu is also into their own AI chip game, Kunlun AI, and holds regular conferences for developers and partners.

Meanwhile, the Chinese government is building up core technology capabilities, or fundamental technology, that could shape the industry from the bottom up, potentially creating new rivals for Intel.

On November 8, the official site for Chinese government affairs published an article (in Chinese) on the establishment of a new alliance for RISC-V, an open-source instruction set architecture (ISA), a key part deciding how software and hardware work together to function a device. The global ISA is now dominated by Intel’s ARM.

The move is widely interpreted as underscoring China’s ambition to lead any possible tech that will transform into new industry standard.

Asked about that development, Narveen Rao, General Manager at Intel’s AI Products Group said the company treats all threats carefully. “But what Intel has built up is not easy to replicate,” he said.

Rao added, that apart from Intel’s key technology and know-how, Intel’s strength in channel partners will allow the company to foster innovation and identify areas for joint AI efforts in China.

Chinese memory chip maker Fujian Jinhua says there’s been ‘no stealing of technology’ amid US export ban – SCMP

What happened: Chinese chipmaker Fujian Jinhua Integrated Circuit Co denied accusations it had stolen technology after the US Justice Department indicted the state-backed firm for stealing trade secrets from US semiconductor company Micron Technology. Jinhua was last week prohibited from working with US-based companies with officials citing national security concerns. In its first statement since the ban the company said it is pursuing “self-independence” and that there is “no stealing of technology from other companies.”

Why it’s important: Semiconductor development is an important goal for China in closing the gap between the country and the US in key technologies. So far, leaders in the sector are dominated by companies from Japan, South Korea, western Europe, and the US, with no Chinese firms making the top 20 companies in terms of chip sales. The US trade ban on Jinhua is similar to that which was placed on ZTE earlier this year, which nearly crippled the companies operations before it reached a settlement agreement with Washington in July. The move may stall Jinhua’s trial production of dynamic random access memory (DRAM) chips that it started earlier this year.

US senators demand probe into China’s alleged hacking of tech giants’ supply chains–South China Morning Post

What happened: In mid-October, SCMP reports, two US senators sent a letter to Department of Homeland Security secretary Kirstjen Nielsen and FBI director Christopher Wray, requesting that they look into allegations that China has used tiny chips embedded in motherboards to spy on major US tech companies. The letter also asks for a classified briefing on the matter no later than October 25. Both senators lead the Committee on Homeland Security and Government Affairs, which previously held a hearing on the hacking allegations. During the hearing, Nielsen and Wray suggested that there was insufficient proof of China infiltrating the US’ tech supply chain. A representative of one of the letter’s authors said that the request has been received and is being processed, although neither the Department of Homeland Security nor the FBI have commented to media on the matter.

Why it’s important: Although experts have cast doubt over whether the motherboard microchip hack is actually feasible, the aftershocks of Bloomberg’s explosive report earlier this month apparently still continue. In its story, Bloomberg BusinessWeek alleged that companies including Apple and Amazon have been hacked, and that motherboard supplier Supermicro was the unwitting key to the espionage effort. All three have vigorously denied the report. However, Bloomberg continues to stand by its story, which has gained considerable attention. That’s likely because it falls in line with a larger American narrative of tech trade secret thefts by China that have escalated the ongoing tariff battle.

China’s Commerce ministry condemns U.S. for adding Fujian Jinhua into ‘Entity List’ – Ecns.cn

What happened: The US Commerce Department on Monday unveiled plans to restrict American companies from exporting crucial software and technology to Chinese state-owned chipmaker Fujian Jinhua, saying that it poses a “significant risk” to the national security interests of the US. “China is opposed to the American generalized concept of national security, abuse of export control measures, unilateral sanctions and interference in normal international trade and cooperation,” the spokesman for China’s Ministry of Commerce has said in a press briefing today, condemning the US’ move against the chipmaker.

Why it’s important: The US is taking the ongoing trade war with China to the next level with the export restriction. The ban could significantly impact Fujian Jinhua’s operations and exacerbate US-China trade tension. The US is reportedly planning to announce new tariffs on Chinese imports as early as December. In April, the US made a similar move against Chinese telecom equipment maker ZTE by blocking it from sourcing products from US suppliers.

Shenzhen government takes control of China’s leading chip maker Tsinghua Unigroup – SCMP

What happened: The southern Chinese city of Shenzhen will take a 36% stake in chipmaker Tsinghua Unigroup. Tsinghua Holdings, which is owned by Tsinghua Univesity, has agreed to transfer the stake to Shenzhen Investment Holdings—owned by Shenzhen’s government agency overseeing state assets. Tsinghua Holdings will retain a 15% stake after the transfer.

Why it’s important: China’s Communist Party policy formulation body released a guideline in May calling for greater supervision of school-affiliated enterprises, as well as increased separation between schools’ education and business operations. The move followed a campaign last year in which the Party’s corruption watchdog found that such companies posed “high corruption risks” and “mismanagement problems.” The government’s answer has been to transfer company stakes to government-owned investment platforms. It’s a big blow for the renowned university. Tsinghua Unigroup shipped 3.4 billion smartphone chips last year, making it the third largest mobile chipmaker in the world, according to company CEO Zhao Weiguo.

“矿机”起家比特大陆再发AI终端芯片 聚焦安防 – Tencent Tech

What happened: On October 17, crypto mining equipment producer Bitmain released AI chip BM1880. New hardware models including a smart server and a 3D facial recognition terminal were also launched. Prior to the launch, in the first quarter of 2018, Bitmain released smart chip BM1682. After the launch of BM1880, Bitmain will bring on new chip series CM1684 by the end of this year. The company expects its chips to show high performance in security, cloud computing, and infrastructure management.

Why it’s important: The world’s leading mining equipment producer is joining the chip game to diversify revenue portfolios, amid tightening domestic regulation and crypto price fluctuations. With good calculation power and rich experience in mining and security use cases, Bitmain’s chip will bring a competitive power to the industry. BM1880’s launch may encourage more crypto businesses to transfer their core technology to mainstream tech sectors for greater application cases and profitability opportunities.

Huawei’s Mate 20 flagship seen as crucial to showcase its tech prowess against rivals Samsung and Apple – South China Morning Post

What happened: China’s leading smartphone maker and 5G solution provider Huawei will soon release flagship Huawei Mate 20 series, the most expensive and up-to-date series produced by the company. A highlight of the new phones is Huawei’s very own Kirin 980 chip, a demonstration of the country’s chip production and R&D capability, and a potential bargaining chip to bring Huawei to the world’s premium phone club dominated by Apple and Samsung. Pre-orders will start at 10:08 am, October 17.

Why it’s important: The sales performance of the new Huawei Mate 20 series deserves attention, as the release closely follows Apple launch of the new phone model. In 2018, in terms of total handset shipment, Huawei already surpassed Apple as the second best (behind Samsung) company in the world, prior to Apple’s new release a few weeks ago. Meanwhile, amid Sino-US trade tension, a phone series with China’s own chip has strategic meaning: a demonstration of tech power, an announcement of non-dependence in the phone-making field, and a new test field and infrastructure building for Beijing’s upcoming 5G practices.

China’s Guangdong, Hong Kong, Macau Join Hands to Make Chips —Yicai Global

What happened: China’s Greater Bay Area, including Guangdong, Hong Kong, and Macau, has set up a semiconductor alliance to prop up the country’s chip industry. The Semiconductor Industrial Alliance will launch service platforms for chip testing, electronic design automation, intellectual property, talent training, incubation, and more.

Why it’s important: According to reports, 90% of the chips used in China are imported or made by foreign firms operating within its borders. The looming China-US trade war has made self-reliance a more important goal. Talent and investment are said to be the biggest obstacle to developing China’s chip sector. Investments are already happening: taught by ZTE’s ban on chip imports by the US, the Chinese government announced an RMB 300 billion ($47.4 billion) investment into China Integrated Circuit Industry Investment Fund in May 2018.

China’s Huawei Launches Self-Developed AI Chips To Boost Cloud Computing Business — China Money Network

What happened: Huawei unveiled two artificial intelligence chips Ascend 910 and Ascend 310 on Wednesday. The company also introduced cloud computing services and data centers for autonomous vehicles that will run on the new chips. Huawei presented its first AI chips under the name Kirin in 2017. This time, however, the company seems more determined to speed up its cloud business.

Why it’s important: Chinese companies including Alibaba have been investing more in chipmaking after local telecommunications company ZTE almost lost a huge part of its business because of US sanctions. Alibaba is already huge in cloud services and this year it has announced a chipmaking subsidiary as well as invested in several local chip companies. ByteDance, the company behind Jinri Toutiao and Douyin, and appliance maker Gree are among other Chinese companies looking to get into the chip business.

New Evidence of Hacked Supermicro Hardware Found in U.S. Telecom —Bloomberg

What happened: After Bloomberg Businessweek’s report on the discovery of hacked Supermicro hardware by 30 companies including Amazon and Apple, new evidence has emerged that compromised Supermicro hardware was discovered at an unnamed US telecommunications company. Security expert Yossi Appleboum told reporters that the company discovered the compromised components and removed them in August. The Sepio Systems executive said he has seen similar hardware manipulations made by contractors in China, not just products from Supermicro. Appleboum also said that the source of the software is likely Guangdong, China.

Why it’s important: Much like Amazon and Apple, the two biggest US telecommunications companies Verizon and AT&T have denied that their hardware has been affected. Chinese experts have also expressed doubts that China could pull off such a sophisticated hack considering that it lags behind in chipmaking technology comparing to some more developed nations. However, US Senator John Thune has requested staff briefings from the Apple, Amazon, and Supermicro noting that supply chain tampering by a foreign power must be taken seriously.

Experts question whether China has technical know-how to pull off chip hack – SCMP

What happened: Chinese technology experts have expressed their doubts about China’s capabilities in pulling off a spy chip hack as detailed in a Bloomberg Businessweek report last week. Chinese manufacturers were allegedly able to install microchips on Super Micro Computer motherboards that were later sold to be used in the servers of 30 US companies, including Apple and Amazon. However, experts have said that it would be near impossible for the country to incorporate all the required components onto a chip as small as the report alleges.

Why it’s important: Chips are a key part of the country’s “Made in China 2025” initiative. However, an increasing number of commenters have expressed doubts about China’s general technological prowess. In June, Chinese media outlets were ordered to downplay reporting on its technological development drive. The order coincided with Liu Yadong, editor of the Science and Technology Daily, saying authorities had been fooled by the hype surrounding China’s achievements. However, these comments may also have ulterior motives, whether it be trying to diffuse a trade war or mitigate possible fallout in the event of a high profile hack, all of which should be taken into consideration.

This year, China’s reliance on foreign technology was once again brought into the spotlight. While the country first began to ruminate over its dependence on international tech in 2013, Chinese telecommunications giant ZTE has brought the discussion to the fore.

After the company was found to have violated US sanctions on Iran and North Korea, it was banned from sourcing components from American manufacturers, which provided the majority of its chips. The ban has subsequently been lifted, but the collective contemplation remains.

Chinese tech companies have now begun announcing a slew of homegrown chips. From Bytedance—the owner of popular content aggregator Jinri Toutiao—to Alibaba. the Chinese chip industry has seen rapid development.

The latter has now set up a subsidiary to focus on chips. Alibaba Group chief technology officer (CTO) Jeff Zhang made the announcement at the company’s Cloud Computing Conference in Hangzhou today (September 19).

In April, the Hangzhou-based tech giant announced its neural network chip, the Ali-NPU, to be used in AI applications, such as image video analysis and machine learning. The company said its chip would be ten times faster than mainstream AI chips based on CPU or GPU architecture. The company plans to release the chip next year.

The new subsidiary, called Pingtouge (平头哥), is being formed by the company’s research and development unit DAMO Academy and Alibaba-owned chipmaker C-SKY Microsystems (中天微), which it acquired shortly after announcing the Ali-NPU.

Zhang also mentioned Alibaba’s interest in working on a quantum computing lab as well as quantum chips. In February, Alibaba teamed up with the Chinese Academy of Sciences to launch a quantum computing service on the cloud offering ten qubits. The company is seeking to compete with local rival Baidu, as well as international competitors IBM, Google, Microsoft, and Intel.

Numerous other tech companies have joined the call to develop homegrown core technologies. Last month,  appliance manufacturer Gree established a wholly-owned subsidiary focussing on chip development. The company said that the new subsidiary will be focusing on chip design for Gree’s key products such as air conditioners.

Rokid, a Hangzhou-based startup which specializes in robotics research and AI development, unveiled its voice-focussed Kamino18  AI chip earlier this year. The chip was in development for two years, and power consumption among equipped devices can be reduced by 30% to 50%, according to the company.

Nonetheless, Alibaba has made already made numerous investments in several chip companies, including China-based Cambricon (寒武纪), Kneron (耐能), ASR (翱捷科技), and DeePhi (深鉴), as well as California-based Barefoot Networks.

Huawei launches advanced 7-nanometre smartphone chip ahead of Apple, Samsung – SCMP

What happened: World’s largest telecommunications equipment supplier Huawei unveiled its new smartphone chip, the Kirin 980, ahead of Apple and Samsung Electronics in launching a new integrated circuit. Huawei’s new chip is a system on a chip built on the 7-nanometre fabrication process of Taiwan Semiconductor Manufacturing Company. The process will be used to power the new iPhone to be released in September.

Why it’s important: China has been promoting self-developed chips and a domestic semiconductor supply chain to become more competitive with US chip industry leaders.  More than 90 percent of the world’s smartphones, 65 percent of personal computers, 67 percent of smart televisions, are made in China. However, most of the chips used to make the phones are imported from abroad. Annual chip imports by China have reached $260 billion last year.

董明珠芯片团队曝光：格力电器10亿元注册集成电路全资子公司 —Ifeng Finance

What happened: Electronic appliance manufacturer Gree has established a wholly-owned subsidiary chip company, Zhuhai Zero-Boundary Integrated Circuit Limited, investing RMB 1 billion ($146 million). Gree said that the new subsidiary will be focusing on chip design for Gree’s key products such as air conditioners. Dong Mingzhu, CEO at Gree and one of the most powerful business gurus in China, said that to enter the field, Gree is willing to invest even RMB 50 billion.

Why it’s important: Capital injection in China’s chip design and manufacturing field has become a norm, but few thoughts are given to the question of whether just money can lead to tangible results. Before the establishment of Gree’s chip subsidiary, China’s tech industry suspected that Gree’s chip dream is just another fantasy. The discussion over China’s core technology capabilities ignited again after Redcore, a so-called “100% China-made” browser, was reported to be based on Chrome’s open source structure.

中国集成电路产业人才呈稀缺状态，去年底人才缺口达32万人 – The Paper

What happened: China Center for Information Industry’s recent research shows that China ’s integrated circuit industry is facing a talent shortage. The industry will demand 720,000 specialists by 2020. By 2017, China had a talent pool of 400,000 integrated circuit specialists only, facing a shortage of 320,000.

Why it’s important: The talent shortage implies one of the barriers on China’s way to promote the domestic chip industry. Every year, only 30,000 graduates in the relevant filed entered the industry, which is far from sufficient to meet the demand. As to the experts who have entered the industry, high turnover rates are also hindering the industry, which is due to unsatisfactory average wages compared with those of the people working in finance and mobile internet.

Bitmain, the world’s leading cryptocurrency mining company, is filing for an IPO in Hong Kong by September, CoinDesk reports. Bitmain expects to raise up to $18 billion, larger than Facebook’s $16 billion. The company’s new valuation would be $40 – $50 billion new valuation. If the filling process goes well, the company will go public by the end of this year or the first quarter of 2019.

Wu Jihan, founder of Bitmain, when asked about the IPO plan earlier this month, didn’t directly comment. “ICOs are alternatives to stocks. When other industries use IPO to raise money, the cryptocurrency industry leverage ICO to fund,” he said at a Huobi event in South Korea.

On August 4, one day after Wu’s comments, Bitmain formally completed its $1 billion pre-IPO investment registration. Tencent, SoftBank, and the country’s top investment bank China International Capital Corporation participated in the funding.

Bitmain’s full-year profit for 2017 was $1.1 billion. The record has been broken by the company’s first-quarter profit for 2018 already. The company predicts the 2018 full-year profit to be $2 billion.

However, the financial markets are not that optimistic about Bitmain’s IPO. Local crypto industry media Lieyun Finance reports (in Chinese) that the company’s mining service makes up over 90% of the total revenue and profits. Apart from other financing and development consideration, strict domestic regulation on cryptocurrency related businesses and fluctuation of cryptocurrency prices also accelerated the IPO plan.

Canaan Creative, Bitmain’s domestic rival computer hardware manufacturer and the world’s second-largest bitcoin mining hardware maker, is reported to have submitted its Hong Kong IPO plan in May to raise up to $2 billion. The company’s IPO would be the first from the cryptocurrency for Hong Kong. This weekend, the Chinese media massively reported on Canaan Creative’s 7nm ASIC chip for its product series Avalon A9.

Sources from the semiconductor industry say the new 7nm chip is still far behind the design of those used by Apple and Qualcomm, but they remain optimistic about the R&D input and progress achieved.

Ebang, the world’s third-largest mining hardware maker and a competitor to Bitmain and Canaan Creative, made its Hong Kong IPO application in June, one month after Canaan Creative’s filing.

Bitmain, the top in the crypto mining equipment industry, is the last of the leading three that has formally filed for an IPO. In addition to the industrial competition that will grow fiercer, The three equipment and chip manufacturers with similar businesses all going public in Hong Kong would bring huge operation and financial pressure to the companies, as the top three global giants compete to win investors in one regional market.

Meanwhile, Canaan Creative and Ebang have been showing strong financing willingness. Canaan Creative considered an IPO in the mainland by being acquired by electric equipment manufacturer Shandong Luyitong. The plan was turned down as regulatory units commented “great uncertainties.” Ebang was on China’s China’s National Equities Exchange and Quotations but was delisted due to inactive market response.

New technology that could influence competition results needs huge capital injection and other intangible input such as intelligent property. Market share, in the near future, will be a leading element for the mining companies’ development and growth. The market would provide valuable use cases for further research and product upgrade.

Nanjing is set to turn itself into a chip mecca by setting up a $20 billion investment fund for its integrated circuits industry. The historical capital of China is hoping that revenue from the sector will reach $150 billion by 2025.

The Nanjing Integrated Circuit Industry Investment Fund is expected to benefit chip manufacturers and downstream companies, which will gain economically from domestically produced chips. It will be guided by localization, specialization, and better use of capital, and aims to promote the local IC industry, local media reports. The timeline for the fund was not specified.

Nanjing has been the focus of growing attention in China’s chip-making industry. In early July, Huatian Technologies announced a three-phase development plan for an IC packaging an testing plant in the city. The company plans to spend a total of $8 billion on the project that will focus on memory and artificial intelligence chips, as well as microelectromechanical systems (MEMS).

In addition to Huatian, Taiwanese chipmaking giant TSMC and Tsinghua Unigroup have built plants in Nanjing. In 2016, TSMC signed an agreement with the municipal government to make a $3 billion investment in the city in the form of a design service center.

In the past few months, China’s reliance on foreign-made chips has called to attention. The temporary US ban on ZTE purchasing American-made components caused collective reflection on the county’s use of technology that was not domestically made. Local experts said the company should have been more self-sufficient (in Chinese).

Additionally, Chinese officials launched investigations into American and South Korean chipmakers for suspected price-fixing. Investigators were concerned about the increasing prices of chips from Samsung, SK Hynix, and US-based Micron.

China currently sources around 90% of the semiconductors used in domestically-produced products from foreign companies, accounting for 60% of the world’s chip purchases.

AMD (Advanced Micro Devices) has revealed the 2^nd gen Ryzen Threadripper processor and 7nm Radeon Vega GPU, both set to launch later this year. The US chip maker also unveiled new updates on EPYC processor at its fully-loaded Computex press conference this morning.

“Our upcoming 7nm and 12nm products build on the momentum of our Ryzen, Radeon, and EPYC processors, positioning AMD to lead the next generation of high-performance computing in markets from premium devices and gaming to machine learning and the data center,” AMD CEO Dr. Lisa Su said.

The company publicly demonstrated for the first time the Radeon Vega GPU based on 7nm process technology, which is built specifically for professional and datacenter applications.

The company also announced EPYC server updates, including their new partnership with Cisco, the leading OEM in the industry, and Tencent Cloud, who announced (in Chinese) that it is now using AMD’s EPYC processor moments before the press conference.

China, the world’s largest consumer of semiconductor and electronics products, is an important market for the US chipmaker. AMD has collaborated with JD.com, Tencent, and Baidu on its EPYC datacenter initiative.

Read more: Nvidia unveils world’s first computer designed for robotics at Computex 2018

On top of exciting product updates, the company also detailed new partnership with Chinese tech giant Huawei on Ryzen-powered laptop, Matebook, and further collaboration with its OEM partners including Acer, Dell, Asus, and Lenovo.

AMD’s long-time rival, Intel, teased a new 28-core PC chip, the company’s most powerful desktop CPU, at its Computex keynote on Tuesday. The new chip is said to go toe-to-toe with AMD’s Threadripper processor.

Nvidia has unveiled a line of new products and announced a ten-year collaboration with the Taiwanese government at Computex 2018 pre-show press conference.

“AI is the most powerful technology force of our time,” Jensen Huang, founder and CEO of Nvidia, said. “Its first phase will enable new levels of software automation that boost productivity in many industries. Next, AI, in combination with sensors and actuators, will be the brain of a new generation of autonomous machines.”

Among the most exciting news is the launch of Nvidia ISACC robotics platform, which Huang said will be used to power the new generation of autonomous machines, bringing AI capabilities to manufacturing, logistics, agriculture, construction and other industries.

Nvidia also introduced Jetson Xavier, which is said to be the world’s first intelligent machine processor designed for robotics. With the size not much bigger than the palm, Jetson Xavier will be priced at $1299. A workstation equipped with GPUs that has roughly the same processing power usually cost around $10,000. The Jetson Xavier Devkit will begin early access in this August.

Nvidia also announced today that it is deepening its collaboration with Taiwan’s Ministry of Science and Technology (MOST) to advance Taiwan’s AI capabilities. The company said the ten-year partnership aims is to build up local deep learning and AI-related technologies. The two will collaborate in multiple areas to advance AI application in local industries and accelerate research and development on the island. Huang said the collaboration “starts with building a supercomputing infrastructure in Taiwan,” adding that the two will also be working on self-driving cars as well as intelligent machines.

Last year, Nvidia unveiled the collaboration with the Taiwanese government to accelerate the development of AI in the island’s commercial sector in support of the “AI Grand Plan,” which aims to help foster domestic AI-related industries.

Computex, Asia’s largest tech expo that opens on June 5th in Taipei, is a springboard for some of the year’s most exciting tech launches and announcements. During the five-day expo, global tech leaders will take the opportunity to flaunt their new chips, gaming gear, VR, laptops and more.

This week, Chris and Nicole discuss their recent pieces about data privacy and how cryptocurrency is fuelling a boom in Taiwan’s semiconductor industry.

Links

• Victims of the market: The battle for data privacy in China
• Taiwan’s semiconductor industry is going through blockchain-powered boom

Podcast information

• iTunes
• RSS feed
• Music: “Taking the Day Off” by Lee Rosevere, Hold Music

Download this episode

The rise of artificial intelligence (AI), Internet of Things (IoT), big data, autonomous driving, and cryptocurrency mining—applications that all require immense processing power—has been fueling a rally in the semiconductor industry.

In 2017, the surge of cryptocurrency prices spurred the cryptomining frenzy worldwide and created explosive demand for cryptomining hardware, like the high-end GPU and ASIC (Application Specific Integrated Circuits) chips used to power the mining machines. This is not only driving growth in foundries and chip manufacturers but also related businesses all the way down the semiconductor industry’s supply chain—design, packaging, assembly, etc.

As the world’s manufacturing backyard, Taiwan’s exports rose by 16.7% to a record US$30 billion in March, which, according to the Ministry of Finance, is “driven by strong demand for high-performance chips, cryptocurrency mining, and artificial intelligence applications.”

Taiwanese companies cashing in on the “crypto gold rush”

TSMC (Taiwan Semiconductor Manufacturing Company) is the world’s largest chip foundry, responsible for over 55% of the world’s chip production and is profiting heftily from the cryptomining boom.

Since the second half of 2017, TSMC has been seeing strong demand from cryptocurrency-related businesses—the company’s fastest-growing segment—which could account for as much as 10% of TSMC’s revenue by the end of 2018.

C. C. Wei, co-chief executive of TSMC, said at the company’s Q1 2018 earnings call that the first quarter revenue of $8.46 billion was “mainly driven by a strong demand from high-performance computing such as cryptocurrency mining and increases from both automotive and IoT.” The company also noted that cryptomining gave a timely boost that offset weaker demand for smartphone sales. In April, the company cut its sales target due to the lackluster performance of Apple’s iPhones.

“TSMC is generating about 6-7% of its sales from the ASICs from customers like Bitmain and also some of the GPUs being used from AMD and NVIDIA,” Randy Abrams, head of Taiwan research and regional semiconductors at Credit Suisse, told TechNode.

Bitmain—the Chinese startup dominating the mining industry—may have made as much as chipmaker Nvidia did last year, according to Bernstein, an investment research firm, estimates.

The foundries are not the only ones reaping profits. The entire semiconductor supply chain—from chip design services to OSAT companies (third-party assembly and test services) to equipment and materials comapanies—have also profited from the rising demand for processing power. Taiwan’s ASE (日月光), the world’s largest OSAT company that handles the back-end packaging and testing orders, has seen strong demand, particularly in high-end GPU and ASIC chips. Abrams says that some of the early chip design companies, despite being China suppliers, still need to do most of their advanced assembly and testing in Taiwan.

Other Taiwanese hardware makers like Gigabyte, MSI, and Asustek—all of which sell graphics boards used in mining machines—have also seen revenue growth. In 2017, Gigabyte sold 4.5 million graphics cards, up one million units on the previous year.

Uncertainties loom over the volatile crypto market

Despite cryptomining-led growth in the semiconductor industry, not many have full faith in it. Crypto is still a nascent market with fluctuating prices and new currencies popping up every week. There is still a lot of speculation about whether the momentum will remain sustainable.

Bitcoin, for example, shows just how much crypto-prices can fluctuate—the price rallied more than 1,400% in 2017 but fell by almost half in early 2018. Collapsing prices could lead to a sudden plunge in graphics cards sales and other collateral damage.

The fluctuating prices of cryptocurrencies are the biggest uncertainties, but other factors could contribute to even more volatility. For example, the demand of mining cards from miners reportedly took a huge plunge in early April because many were waiting for the Ethereum mining machines by Bitmain to come out in the third quarter.

The change in mining technique, reward system (proof of stake) and other speculative demands are all factors that could potentially impact the entire market. Abrams said some companies see the growth continuing, but “we take a discount in our forecasts due to the uncertainty and model it flat, but it could very much swing either way.”

In the first quarter earnings report, TSMC announced that they have modified the forecast for 2018 overall revenue growth from the previously indicated 10% to 15% down to the more conservative 10% in part due to the uncertainty in cryptocurrency mining demand.

“TSMC does not want to invest in much capacity that is unable to be converted to other uses,” Abrams explains. “The market still needs to mature and have more certainty before more suppliers dedicate or invest in specific capacity for mining.”

The shift from GPU to ASICs is another factor that will likely impact the entire crypto market. Unlike the general-purpose GPU chips capable of handling graphics on computers as well as for mining, ASICs are designed to carry out a single task more efficiently: mining cryptocurrency.

Clark Tseng, senior manager for market analysis at the global industry association SEMI, told TechNode that with an array of new cryptocurrencies emerging, the demand will likely shift from GPU to specialized ASIC chips. Tseng said it is hard to tell how quick this transition is going to be, but it is definitely a trend he is seeing. In early 2018, Samsung decided to move into mass production of ASIC chips and claims to have already begun to yield dividends.

The future is larger than crypto

While the impact of cryptomining cannot be underestimated, it would be an overstatement to say that mining is the sole driving force of future semiconductor industry. Applications in AI, IoT, autonomous driving continue to be key drivers of semiconductor revenue. Tseng says that high-performance computing like AI, autonomous driving, and cryptomining will continue to be the key drivers for TSMC and other chip manufacturers for the next 3 to 5 years and companies like Bitmain are likely to foray into other areas other than just cryptomining but AI applications. Bitmain, for example, is moving onto a new trajectory making specialized chips for deep learning and AI applications.

While the crypto market may still be in its infancy, it has already made waves in the global economy. For now, the semiconductor industry is enjoying, perhaps most of all, the soaring profits from the mining craze.

In April, the US announced a 7-year ban on ZTE. This China’s leading communication player was found to have violated a ban on shipping US technology to Iran. The sanctions will bar ZTE from purchasing essential US components. 

President Xi, summarizing lessons learned from the ZTE case, stressed the concept of “core technology” (in Chinese), referring to fundamental research and high-tech innovations that play a vital role in keeping China strong and independent.

“The US ban on ZTE is a wake-up call for China. China should be more focused on developing core technology, otherwise, we would further lose our voice [in technology],” said Ruan Zongze, vice-director of the China Institute of International Studies. He went on to say: “We have the talent and have resources to do it.”

Big powers will have to deal with persistent obstacles such as research, talent, and ecosystem building. Flexible startup businesses, on the other hand, may demonstrate greater potential amid steadily increasing market needs and the growing IoT field.

Inconvenient truths for big powers

To transfer core technology from thoughts to products, China has to face great challenges.

Money, however, is the last obstacle. China spent $279 billion on research in 2017, a 14% year-on-year increase. The huge volume made up 2.1% of China’s GDP. On 26 April, 2018, China’s state-backed semiconductor fund was “near to closing a $18.98 billion investment round for a second fund”, the first round of which raised $22 billion.

However, other areas don’t look that good. The overall research and talent environment is still weak. In 2015, there were 1,113 researchers per million people in China, 4,231 in the US, 6,899 in South Korea and 8,255 in Israel, according to UNESCO Institute for Statistics.

“There are Chinese companies such as Phytium and ShenWei that are into high-performance chips. The products are currently at the pre-mass production stage. Their chips do have a way to go to catch up with Intel’s best chips. To fill the gap between world leaders and our players, years of experience is one thing, and the leaders’ own manufacturing plants for key chip components such as wafers is another thing,” Guo Xiongfei, Design Director at Jinglue Semiconductor told us.

China’s desire to build up chip production can to some extent mix technology needs with nationalism. It’s rare, though, to see a state’s will absent from core technology and other strategic country-backed innovation plans.

“In terms of core technology, we can neither rely on foreign sources nor imports. The problem can only be solved by strengthening innovation power, and pursuing the spirit of scientists’ who created ‘atomic bomb, H-bomb, and satellites (in Chinese: 两弹一星) as well as China’s manned space project (in Chinese: 载人航天),” Ni Guangnan, member of the Chinese Academy of Engineering Science, said in a recent interview (in Chinese).

The state will have to inject massive funding and other resources to core technology field particularly chips. But, there are too many types of chips and it’s not quite clear where the priorities are.

Research, talent, and ecosystem building cannot succeed overnight. Setting proper expectation for or quantify the progress in the near future will also be impossible.

Wu Jinglian, China’s economic reform expert and former adviser to high-level leaders including Deng Xiaoping, said at a conference in April 2018 (in Chinese): “China should ask whether our disputes [with the Trump government] can accelerate the implementation of opening up policies. A phenomenon rising from the internet apparently implies a danger by giving in to nationalism. It’s leveraging administrative power to back industries involved. An example is a slogan called ‘developing the chip industry at any cost’.”

This can also be dangerous for players who hope to be just another lucky kid: not all will win. There is no standard or predictable measurement of material investment and non-material investment such as R&D, time, human capital or even global non-technology disputes.

Space for startups

Beyond all this, interestingly, few are talking about  the role for startups. In core technology fields, startups and emerging independent groups are already acting. Emerging players are gradually building up their power to transform a larger ecosystem.

One example is moves in instruction set architecture (ISA), the crucial interface that serves between hardware and software. ISA also defines how to program a computer. Many developers believe that RISC-V, the fifth open source RISC generation created at Univerity of California, Berkeley, will be another global standard.

Dr. Song Wei is a deputy researcher at the Institute of Information Engineering, China Academy of Science. He co-founded CNRV, RISC-V’s non-official community in China. “CNRV is a community where developers communicate and contribute,” he told TechNode. “What we are observing is that startups, small companies, and individual developers are very proactive while big companies are mainly observers.”

Guo is also the community manager for CNRV and an individual member of the official RISC-V Foundation—the first open and collaborative RISC-V community of software and hardware. The Foundation host over 70 members, including Google, NVIDIA, Qualcomm, Samsung, and C-Sky—the chip company recently acquired by Alibaba.

“RISC-V is very promising and it can theoretically do everything as long as you dare to think, everything CPU-relevant. But this needs patience and support to see more tangible results,” Guo explained. “Our people love big things. When you create, people expect you to make something among the best around the world overnight. Innovation is not defined by the rank of your creation. Our ecosystem demonstrates very low tolerance level to those who are encountering hardships. We need to accept failure and learn from rich experience to progress.”

Building the core technology

Startups and individuals can be faster than heavy hitters who are often slow to shift strategies. However, desire for quick money, huge opportunity costs, and repeated experiments hide many pioneering small players from public eyes.  Among the 151 unicorns in China, few, if any, create core technology.

“For some emerging highly-professional innovation projects, it’s common to have very small internal circles. It’s also a sad reality that in China sometimes their voices carry little weight,” Guo added.

But the ZTE case is gradually changing this situation in China.

“In the past years, China’s private equities and venture capitals valued business models. Now we are seeing both governmental and private institutions patiently moving toward core technology. ZTE’s case will further educate the Chinese risk-investment community which very often eye fast money,” Hu Linping, Director at Zhengxuan Investment and a former Huawei veteran, told us.

Investors’ increasing patience will mean a lot to Chinese startups. More importantly, an huge existing market and vibrant startup ecosystem are natural advantages for Chinese startups. Chips and core technology cannot thrive on their own. Developers’ tools, devices, algorithms, and applications all have to be there to function a complete IoT system.

According to Accenture, by taking additional actions to “absorb IoT technologies and increase IoT investment”, China can increase the cumulated GDP by $18 trillion by 2030. We are already seeing startups leveraging China’s massive social needs to empower practice of IoT ecosystem building.

“We purchase our chips from a Chinese chip-maker. The chips’ original use was far from our current use in medical sector. And the power of the chips can satisfactorily meet our needs,” Ma Jiliang told TechNode. Ma is a “Forbes 30 Under 30 in China” award-winner and CEO of Extant Future, a Chinese company that launched a wearable medical device called Modoo. Ma’s team developed their own passive monitoring technology which allows the device to continuously monitor fetal movement and heart rate.

“A chip to us is a tool. Global specialization means highly-efficient opportunities, and hence startups don’t have to be that concerned about self-made chips when it comes to serving mass social needs,” he said.

“A populous China holding massive consumer needs is a paradise for startups. The ecosystem includes startups with diverse potentials – this can be the best time in history for us,” Ma added. “We need communities like Y Combinators and WeWork that truly understand the ecosystem and resource allocation. Local communities can empower us too.”

Chinese local communities are thinking alike. Hosting innovative players will improve the communities’ mini ecosystem and establish collective identity power. Some are building close partnerships with state-backed institutions for members to maximize resource channels and reduce any unnecessary policy costs.

“We formed a strategic partnership with Ministry of Science and Technology of P.R.C’s Technology Resource Sharing Center for Engineering Technology Research,” Josh Zhang, Chief Strategy Officer at Ucommune, one of China’s biggest co-working spaces and community-based incubators, told us. “This will allow our members to use national-level big data. It’s also the first time that national-level big data has been opened for public sharing. We aim to bridge the gaps between members and research institutions to transform research into products for business.”

“More than 30% percent of our members are high-tech startups. We are also seeing rising numbers of patent-holders joining us,” Josh added.

While China’s heavy hitters will have to balance technological pursuits and politics, startups have more free space. The startup ecosystem will provide more options for emerging powers to decide for which part of the huge Chinese market they hope to play. Should there be innovations that hold potentials to grow into global solutions, there is high chance they will be from the startup ecosystem.

The recent US ban on selling components to China’s state-owned communication technology ZTE has become a boon for China’s chip makers. Bytedance—the company behind AI-powered news aggregation platform Jinri Toutiao—has set its eyes on developing its own AI chips.

“Bytedance has the largest number of users in the world whose videos need to be analyzed and processed and uploaded, and we are purchasing a large number of chips. At present, we are actively seeking breakthroughs in the chip-related field,” Vice-President of Bytedance Yang Zhenyuan told 36Kr (in Chinese). He did not, however, provide any specifics on the products being developed.

The news comes only a few days after Alibaba announced the creation of its neural network chip, the Ali-NPU, which will be used in AI applications for businesses through the Ali Cloud. Just one day after the announcement, Alibaba also revealed it will fully acquire local chipmaker C-SKY Microsystems.

Yang also told reporters that although the “ZTE event” reflects the weakness of China’s high-tech industries in key chips and core components, the country still has the opportunity to seek new breakthroughs in the emerging direction of AI chips. However, it will take a long time to reach international levels in the high-end chip field; the R&D cycle will be very long, Yang added.

In the short term, China has the ability to achieve a balanced situation through some areas of leadership (such as artificial intelligence, software ecology and other fields), which can lay the foundation for long-term independent research and development, Yang added. While the US technology giants Facebook and Google are independently developing AI chips, domestic internet giants are also laying out a map, he noted.

Bytedance is not just eyeing AI development, it is also preparing an aggressive expansion overseas. CEO of Bytedance Zhang Yiming revealed at the sixth anniversary of Toutiao that the main keyword for the company in 2018 will be globalization. Their goal is to have more than half of their users from overseas in the next three years.

After announcing its very own neural network chip, Alibaba has made another step towards strengthening its new AI chips business. The e-commerce giant announced on April 20th that it will fully acquire local chip designer C-SKY (中天微), according to QQ News.

“Acquiring C-SKY is an important step for Alibaba’s microchip layout,” said Alibaba’s CTO Jeff Zhang (Zhang Jianfeng). Zhang added that IP core is the heart of basic chip capability and that entering the field of IP core means realizing an “autonomous, controllable” foundation for China’s chips. In electronic design, an IP core refers to a chip layout design that is the intellectual property of one party.

Hangzhou C-SKY Microsystems is an integrated circuit design house. The company has developed 7 types of CPUs covering applications including IoT, digital audio and video, information security, network and communications, industrial control and automotive electronics.

This is Alibaba’s first takeover in the chip business although the e-commerce giant has so far invested in several chip companies. On April 19, the company announced its own Ali-NPU chip which will provide services for businesses through the Ali Cloud.

News of Alibaba’s foray into chip design comes at a particularly turbulent time after US Department of Commerce put a seven-year ban on US companies selling components to Chinese state-owned ZTE. Network communications equipment manufacturer ZTE heavily relies on imports of US-made chips.

China has been lagging behind US chipmakers: in 2016, the country imported $230 billion worth of chips. However, thanks to its AI development plan and the “Made in China 2025” industrial upgrade plan, China has been slowly increasing its self-sufficiency in chip manufacturing. In 2014, the government set up a subsidy program called China’s National Integrated Circuits Industry Investment Fund which is aiming to raise at least RMB 150 billion for its second fund vehicle, according to Bloomberg.

The US has been wary of China acquiring chip technology. In September last year, President Trump’s administration blocked the sale of US-based Lattice Semiconductor to Canyon Bridge Capital Partners, backed by China Venture Capital Fund over national security concerns.

Questions have also arisen over the future of Alibaba’s cloud service Ali Cloud in the US. Certain commentators believe that the US will retaliate against Beijing’s requirement that foreign cloud-computing firms, such as Amazon and Microsoft, form joint operations with Chinese companies and license their technology.

Qualcomm has formed a joint venture with Guangzhou province, touted as China’s upcoming hub for big data and cloud computing, in an attempt to extend their server chip business in the country. The venture will be worth 1.85 billion yuan (approximately $280 million USD).

The new semi-conductor company, Guizhou Huaxintong Semi-Conductor Technology Co. Ltd., will be 55% owned by Guizhou’s provincial government, while Qualcomm will hold the remaining 45%, they revealed at an event in Beijing on Sunday.

Qualcomm will also establish an investment firm in Guizhou, targeting further investments in China.

Intel currently holds a monopoly on the server chip sector in China, though they recently credited lackluster first quarter projections to caution in the Chinese market. While Qualcomm’s market share in server chips is comparably tiny, the new state-backed joint venture offers a potential fast-track to seizing some of Intel’s local business.

The new venture is also strategic in terms of Qualcomm’s relationship with the Chinese government. “The strategic cooperation with Guizhou represents a significant increase in our collaboration in China” said Derek Aberle, President of Qualcomm in a release.

“We are not only providing investment capital, but we also are licensing our server technology to the joint venture and assisting with R&D process and implementation expertise; this underscores our commitment as a strategic partner in China.”

Qualcomm scuffled with the government in the past over the country’s strict antitrust laws. Last February the company agreed to pay a $975 million USD fine, the largest in China’s corporate history, following a 14-month investigation.

Qualcomm continued to struggle  with delayed patent payments into late 2015, but has started 2016 on a better note in Asia, sealing deals with Audi and Samsung, as well as launching a Singapore-based joint venture with Japan’s TDK Corp. to manufacture components for radio-frequency technology including robotics and drones.

Brite Semiconductor, an emerging ASIC (application-specific integrated circuit) design services firm headquartered in Shanghai, China, announced today it has raised US$8 million in a Series C round of funding led by Norwest Venture Partners (NVP), Gobi Partners, and Semiconductor Manufacturing International Corporation.

Founded in Shanghai in 2008, Brite Semiconductor offers a comprehensive lineup of ASIC design services, from design specification through to packaged and final-tested integrated circuits. Committed to processor-based SoC (system on chips) designs, Brite provides front- and back-end design services supported by an expanding IP catalog targeting increasingly complex mobile and consumer applications.

“Building on our success in the China market, Brite Semiconductor is expanding into the U.S. to address its growth segments requiring increasing performance in complex ASIC designs,” said Dr. Charlie Zhi, company President and CEO. “To better serve our customers worldwide, we are expanding our IP and platform portfolio with a wider range of functions such as higher speed interfaces as well as adding employees to expand products and improve support. This latest round of funding will also allow Brite to enhance its R&D capabilities in the IoT market while exploring opportunities up the value chain into the cloud.”

Key to Brite Semiconductor’s success has been its close relationship with SMIC, the largest semiconductor foundry in China, also headquartered in Shanghai. As a dedicated partner to SMIC for design services worldwide, Brite Semiconductor offers in-depth knowledge and experience for customers when designing SMIC’s roadmap. “This gives us a unique position to work closely with our clients and minimize risk through the entire design process while creating market-optimized solutions for each customer,” said Dr. Zhi.

Norwest Venture Partners, a multi-stage venture capital and growth equity investment firm, holds in high regards the company’s innovative approach to ASIC design and ability to manage the entire SoC development and manufacturing cycle. “Brite Semiconductor’s solution offers system houses and fabless chip companies the opportunity to focus on specific application and market expertise. Brite’s customers can then focus on bringing differentiated products to market quickly, with economic choices,” said Promod Haque, senior managing partner.

Gobi Partners, the early stage venture capital firm, is also located at Zhangjiang Hi-tech park with Brite Semiconductor. The VC envisages that this round of funding will enable the company to expand further into the global ASIC sector. “Design service companies in China are responding to growing domestic and worldwide demand for SoCs. Through the company’s innovative services, Brite Semiconductor’s SoC designs are bringing electronic consumer products to life that serve the world’s markets,” Thomas G. Tsao, the managing partner at Gobi Partners, said.

Image Credit: Brite Semiconductor

Editing by Mike Cormack (@bucketoftongues)