March 7, 2021: No American likes China; More semiconductor thoughts

Hello Interconnected Readers:

I’m flying back to the US from Mexico this weekend, wrapping up my six-week trip. I will organize my learning and publish my thoughts on Mexico’s tech ecosystem (and to the extent applicable, LATAM’s) in the coming weeks. Please stay tuned…

Last Thursday, I wrote “China's ‘Semiconductor Theranos’: HSMC”, which was shared by leading analysts of the semiconductor industry and China tech. Please give it a read if you missed it.

Now let’s jump into this week’s Interconnected Weekly, which has additional news on the semiconductor industry in China.

[If you’d like to skip ahead to the six news stories and commentaries from last week – three from English language sources, three from Chinese language sources -- here are this issue’s items:

• “China, Russia Images in U.S. Hit Historic Lows” (English Source: Gallup)
• “Key details from fifth plenum of China's Communist Party” (English Source: Reuters)
• “U.S. Blacklisted China’s Xiaomi Because of Award Given to Its Founder” (English Source: Wall Street Journal)
• “SMIC purchases $1.2 billion of ASML products; Does not include EUV lithography equipment” (Chinese Source: 36Kr)
• “ASML clarifies SMIC volume purchase agreement: only related to DUV lithography technology” (Chinese Source: IC News)
• “Neil Shen’s six proposals” (Chinese Source: China Venture)]

Kevin

“China, Russia Images in U.S. Hit Historic Lows” (English Source: Gallup)

My Thoughts: This Gallup poll, along with a Pew Research poll, made news this week by highlighting Americans’ all-time-low opinion of China -- 20% favorable. The previous low points during the last 42 years this Gallup poll was conducted were 1989, 1997, and 2020.

The only two countries that have a lower favorable rating than China are Iran and North Korea. The Pew poll also has an open-ended answer section. Among the people who submitted answers, this 52-year-old man expressed a level of nuisance that few in Congress exhibit regarding America’s China policy. This level of sophistication is sadly few and far between.

“The Chinese people as individuals are no different than other people, but their government is a totalitarian Communist regime bent on conquering its neighbors and land-grabbing, as shown by their takeover of Hong Kong.” – Man, 52

“Key details from fifth plenum of China's Communist Party” (English Source: Reuters)

My Thoughts: This Reuters article provides a good summary of the outcome of China’s Fifth Plenum, which sets guidance for the country’s development direction for the next five years. For me as a technology investor, the most important part is a reaffirmation of technological self-sufficiency as “strategic support” for national development, going as far into the future as 2035. One thing I’ve been thinking about lately is where will the next phase of China’s growth come from. Much of it will come from developing rural China or what Rui Ma calls “developing China.” Another engine of growth could very well be reinventing many of the “technological wheels” -- like semiconductors -- that used to make more sense to buy in a free trade world, but are no longer possible.

“U.S. Blacklisted China’s Xiaomi Because of Award Given to Its Founder” (English Source: Wall Street Journal)

My Thoughts: Xiaomi was blacklisted by the US Department of Defense during Trumps’ lame duck period back in early January. Based on a DoD filing explaining its action, the Department’s rationale was at least partly connected to Lei Jun, Xiaomi’s founder and CEO, receiving an award from the Ministry of Industry and Information Technology. The standard applied to this blacklist has been mysterious and a moving target. If receiving this Chinese government award is part of the standard, applying it consistently could become awkward for US officials. One previous award recipient is Wang Chuanfu, who founded the electric vehicle maker BYD -- a favorite investment of Warren Buffett and Charlie Munger.

“SMIC purchases $1.2 billion of ASML products; Does not include EUV lithography equipment” (Chinese Source: 36Kr)

My thoughts: a SMIC disclosure filing to the Hong Kong Stock Exchange made news by announcing its additional $1.2 billion USD purchase of equipment from the world-leading lithography maker, ASML. In this positive reporting of the news from 36Kr, the purchase is seen as a huge boost to SMIC’s capacity, possibly generating more business during the current global chip storage. That being said, the purchase is only for the lower-end DUV equipment, not the more advanced EUV equipment. As I’ve discussed in a previous post, DUV can only make chips as dense as 25nm, while EUV is capable of making chips denser than 10nm. Yet, SMIC claims in its filing that these new equipment can be used to make chips as dense as 14nm. Another dubious impression from this filing is how “new” this batch of purchases really is. Apparently, it’s not new at all -- something ASML immediately issued a press release to clarify. Please read on...

“ASML clarifies SMIC volume purchase agreement: only related to DUV lithography technology” (Chinese Source: IC News)

My thoughts: Apparently this SMIC purchase order is an extension of a previous agreement made back in January 1, 2018. I don’t know enough about the contracting and delivery process of lithography equipment (if you do, please educate me!). However, this clarification is clearly a painstaking step taken by ASML to distance itself from SMIC.

“Neil Shen’s six proposals” (Chinese Source: China Venture)

My thoughts: Neil Shen is not only the head of Sequoia China and one of the most successful VCs in the industry, he is also a member of China’s National People’s Congress. In fact, he is the only representative from China’s VC industry in the NPC. As part of his responsibility during the just-concluded Fifth Plenum, he submitted a proposal of six (very granular) areas of innovation that are important to the country’s future. Here are the six:

• Capping carbon emission
• Farming seed development and farmland preservation
• Digitization of logistics
• Medical device companies going public on the Shanghai STAR market
• Volume purchase of high-value medical supplies
• Policy protection for domestic innovation in information technology applications

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