October 18, 2020: Censorship, Apple in India, Huawei Selling Honor, Lithography, Chinese IPO

This issue covers the period between October 12 - 18, 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.

Before you go on, please check out last week's deep dive post: "China's Cloud Ceiling"

“A Senate committee wants to subpoena the tech CEOs over that New York Post story” (English Source: Protocol)

My Thoughts: The drama over how a New York Post story on Hunter Biden (Vice President Joe Biden’s son) was treated on Facebook and Twitter was big news last week. I won’t regurgitate what happened; there are better places on the Internet to go if you need to get caught up. I’m highlighting this impending Senate subpoena, led by three Republican Senators (Rubio, Graham, Hawley) of Zuckerberg and Dorsey, because it will be an important one to watch, arguably more important than the antitrust bonanza that featured Bezos, Cook, Pichai, and (again) Zuckerberg. While antitrust deals with the economic impact of tech, how to regulate tech companies’ proper role in moderating speech, expression, and information has a far-reaching impact on culture, democracy, and how a society should function. Needless to say Section 230 of the Communications Decency Act, where most social media companies harbor themselves safely, needs to be updated; the big question is how. As I’ve discussed a few months ago in “Algorithm is the Problem, Not Mark Zuckerberg”:

“While we aim our anger, frustration, and blame at these CEOs, the algorithms that fuel their social networks -- imbued with the features engineered by human beings with their own intentions, emotions, and biases -- have become far more powerful and well beyond their control. But these algorithms are faceless, opaque, and harder to reason about, thus harder for us to blame.”

Any updated regulation will have to grasp the algorithmic nature of both content recommendation and content moderation.

“This 2020 Apple iPhone may be assembled in India” (English Source: Times of India)

My Thoughts: The unveiling of iPhone 12 was the other big tech news last week. While the focus on these announcements usually center on new features and capabilities, where this phone will be manufactured could be the bigger long-term story. The conversation around “decoupling” from China’s manufacturing base has been going on for quite some time, intensified by the coronavirus pandemic. I was initially skeptical of how quickly this “decoupling” will occur, especially with regard to Apple, which I wrote about in “Is Leaving the China Supply Chain a Pipe Dream?”. Now, it looks like all of Apple’s major manufacturers -- Foxconn, Wistron -- are building factories to assemble more and more portions of the iPhone in India. To be clear, Apple’s desire to diversify the geography of its supply chain began a few years ago -- Wistron has been assembling low-end iPhones since 2017. But India’s manufacturing quality wasn’t good enough to make the latest models; perhaps that has changed. There’s also the simple business imperative to sell more iPhones. Non-iPhone smartphones have a 90% market share in India. India also has restrictions on selling smartphones that aren’t made domestically. That’s why lower-end smartphones from Samsung and Xiaomi already have a manufacturing base in India. To sell more iPhones in India, Apple needs to make more iPhones in India. Period. We shouldn’t over-apply geopolitics to explain everything.

“Huawei in talks to sell parts of its Honor smartphone business” (English Source: Reuters)

My Thoughts: This revelation by Reuters was a bit surprising to me, because Huawei’s Honor phone is its cheaper product line with lower margin but also lower performance requirements. If US sanctions are the reason for this possible sale, I would have imagined Huawei’s higher-end line -- Mate -- would be the one to go, because it’s much harder to buy the type of chips needed to power Mate than Honor. One possible explanation: Huawei is trying to keep Mate alive and competitive by consolidating its internal resources and R&D focus. The leading suitor of this sale, Digital China, is also surprising, because it’s a big Huawei’s product distributor, not a competing brand, like Xiaomi or Oppo, though they are part of the sale discussion as well. (More on Digital China below)

“Honor’s sale mystery: Digital China to participate in the takeover as distributor and brands save themselves?” (Chinese Source: Tencent Tech News)

My thoughts: Besides being skeptical of Honor’s sale, chalking it up as more rumor than real, this article summarized the long history of Chinese tech product distributors, like Digital China, to explain why a distributor would want to buy a brand like Honor. These distributors first got started helping foreign brands sell into China, like the gigantic Motorola cell phone. Then China’s domestic brands, which blossomed in 1998 when the government issued a policy to accelerate telecom advancement, came on the scene. The distributor’s relevance has been eroding in the last 10 years, and a big reason was Xiaomi’s innovative distribution model of going direct-to-consumer, e-commerce style, to sell its smartphones. Fast forward to today, Digital China, who was an OG in the distributor space and a public company listed in Shenzhen, is looking for ways to reinvent itself. Given Huawei’s current weakness and existing strong business relationship (Digital China also distributes Huawei Cloud), perhaps both selling and owning Honor doesn’t seem like such a strange idea after all. (For those readers who read Chinese, there are also a few fun puns in this article. I love puns!)

“Top lithography machines sell for nearly 1.2 billion RMB! Chinese companies can only buy a different type.” (Chinese Source: China Securities Journal)

My thoughts: The Dutch company, ASML, is the market leader in lithography equipment -- a crucial element in advanced semiconductor manufacturing. Based on this article’s digging of ASML’s latest earning call, its topline EUV equipment cost 1.2 billion RMB a piece (~$180 million USD). Also, Taiwan made up 47% of its revenue (up 26%), mainly generated by TSMC, while South Korea’s portion decreased from 38% to 26%, quarter over quarter. More crucially, ASML’s EUV equipment appears to be off limits to Mainland China purchasers due to US sanctions. However, it can still sell its less-advanced DUV equipment to China. What’s the difference? DUV can only make chips as small as 25nm, while EUV is capable of making chips smaller than 10nm.

“MiniSo successfully went public in the US, opening day up over 23%! The world's largest private label retailer” (Chinese Source: iponews)

My thoughts:this new IPO by yet another Chinese tech company on the NYSE continues to challenge the narrative of “delisting”. I don’t know much about MiniSo, other than that it’s an e-commerce marketplace targeted at selling small, private brands. The larger story is perhaps Wall Street’s role in the ongoing US-China tension. It already lost the marquee listing of Ant Group, who chose to do a dual-listing in Hong Kong and Shanghai instead. Regardless of how much Washington hates Chinese companies, New York bankers will continue to fight for the huge business of taking companies public -- many of which will come from China.

If you like what you've read, please SUBSCRIBE to the Interconnected email list. To read all previous posts, please check out the Archive section. New content will be delivered to your inbox (twice per week). Follow and interact with me on: Twitter, LinkedIn.