August 16, 2020: TSMC, CFIUS, iQiyi Fraud, ByteDance Ambitions, Apple, Beke

This issue covers the period between August 9 - August 16, 2020 with six news stories – three from English language sources, three from Chinese language sources. Disclaimer: all translated article titles are done by me, not official translations from the media outlets.

“China hires over 100 TSMC engineers in push for chip leadership” (English Source: Nikkei Asian Review)

My Thoughts: Back in May, when the newest round of US sanctions against Huawei was announced (the one where all chips made or designed by US technologies must be approved), there was a lot of fear and paranoia about an impending war or military takeover of Taiwan by Mainland China. The fear, voiced by some fairly influential people in tech like Steve Blank, stems from the fact that Taiwan is home to the world’s most advanced chip foundry, TSMC, thus there’s motivation to do so, both for the chip making technology and to achieve a much longer-standing territorial objective to “reunify”. As we’ve seen in this news though, money is a much easier method than military force if the goal is to acquire technology. The two Chinese chip foundries mentioned, QXIC and Hongxin, are paying 2 to 2.5x more to lure TSMC engineers back to the “motherland”. As I’ve explained in a previous deep dive, “RISC-V, China, Nightingales”, there are many intricate ties between Chinese foundries and TSMC; Hongxin’s current CEO, Chiang Shang-Yi, was TSMC’s very first CTO. Both QXIC and Hongxin (or HSMC) have the backing of local governments, but are relatively small players even in China. The national champion is SMIC, which has billions of dollars in funding and recently listed on Shanghai’s STAR market.

“Trump Orders ByteDance to Divest TikTok, Destroy US User Data in 90 Days” (English Source: PingWest)

My Thoughts: This is a late breaking news with much legal ambiguity and room for interpretation still. Friday is usually the day when an organization releases news that it does not want lots of coverage on, the proverbial “Take Out the Trash Day”. Thus, releasing this finalized CFIUS order against TikTok on a Friday night is curious. Then again, news cycles have been 24-hours non-stop for many years now, so the trash-taking practice is perhaps outdated. (Side note: kudos to all the reporters who sacrificed their Friday nights to cover this story.) The most noteworthy portion of this CFIUS edict is that it’s ordering ByteDance to wipe out all American user data collected by TikTok or Musical.ly. Myself and others have analyzed TikTok the product at length; it’s primarily algorithm-driven, less social-driven. The fuel of any algorithm-driven product is its users’ data. Putting the practicality of this order aside for now (deleting data from all of TikTok’s servers in both the US and Singapore would be quite a technical feat), TikTok would be essentially worthless without its data. What price would Microsoft pay to buy it then? Would this change also make both Twitter and Snap more credible acquirers? Currently, TikTok’s rumored price is around $30 billion, while Twitter and Snap’s market caps as of Friday’s closing are $29.7 billion and $31.7 billion respectively. Snap CEO Evan Spiegel’s admiration for China’s best of breed tech products is well-documented and, at least in part, caused Snap’s infamous product redesign fail in 2018. Tencent has also been a key investor of Snap for many years. Many interconnections indeed.

“Chinese Netflix-style service iQiyi tanks by 18% after U.S. regulators investigate fraud allegations” (English Source: CNBC)

My Thoughts: This SEC investigation is instigated once again by Wolfpack Research, whose work famously took down Luckin Coffee earlier this year. iQiyi was originally born out of Baidu, and Baidu is still a majority shareholder of iQiyi. Baidu has not been known for its ethical business practices, with its fraudulent ad business in healthcare being the most infamous example. If and how this investigation will add fuel to American legislators to ramp up scrutiny on Chinese companies publicly-listed in New York is important to watch, especially as a counter narrative to the slew of new companies that IPO’ed on Wall Street in a redhot capital market. Some recent examples include: Dada, Blue, Li Auto, Agora, and now Beke (see more below).

“ByteDance’s ambitions are all hidden in its job postings” (Chinese Source: DT Finance)

My thoughts: This is a fascinating piece that extrapolates just how ambitious ByteDance is as a company by looking at what kind of talent it's hiring for. The observation that close to 40% of its openings are for R&D engineering positions is standard for a high-growth tech company. What’s more interesting is that beyond its successful series of algorithm-driven apps, ByteDance is actively investing, acquiring, and developing products in the B2B enterprise space, as well as education. I highlighted its acquisition of CaiCloud two weeks ago, as an important step towards developing more robust infrastructure technology offerings in the cloud. Looks like ByteDance has plans to eventually build a public cloud, similar to AWS, Azure, Alibaba Cloud, which would be an impressive accomplishment.

(This chart breaks down all of ByteDance’s investments by industry category from 2014-2020. The top three are: entertainment & media, enterprise software, education.)

“95% of Chinese users are willing to give up iPhone for WeChat” (Chinese Source: Weibo)

My thoughts: Since this is a “poll” done on Weibo, take it with a giant grain of salt, just as you would with any survey done on Twitter or Facebook. However, the general sentiment reflected in this “95%” is quite clear. Greater China accounts for roughly 10% of Apple’s revenue -- significant though decreasing from close to 20% just a couple of years ago (see chart below). Apple has also been mentioned frequently as a target of retaliation if the Trump administration does go ahead with an outright ban on WeChat and TikTok. This retaliation may not be even necessary, if the consumers express their opinions with their dollars (or RMB).

“Beke lands on the NASDAQ; How did it succeed in real estate with Alibaba and JD.com failed?” (Chinese Source: 36Kr)

My thoughts: Beke’s IPO this week on the NASDAQ is a fairly sizable one -- more than $2 billion USD. This piece does a good job of analyzing the company’s history and evolution from a typical real estate agency with a website, to a full-on platform that both provides technology (e.g. VR house viewing) and backend services (e.g. listing aggregation) for other real estate agents while also facilitating its own transactions. This platform strategy is similar to Amazon and JD.com’s “frenemy” approach, working with 3rd-party merchants while selling its own competing products directly to consumers at the same time. I hesitate to draw direct analogies between Chinese and American tech companies, because the Chinese ones tend to look more like conglomerates, while American ones tend to stay in clearer lanes. At the moment, Beke looks closest to a mashup of Redfin, Zillow, and...something else. Beke’s rise also coincides with China’s big and growing real estate market in the last two decades, which appears to be a bubble that just doesn’t pop.

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