September 6, 2020: China’s Semiconductor Woes and Investments, India’s New Apps Ban

This issue covers the period between August 31 - September 6, 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: "What is TikTok Worth to Whom and Why?"

“Trump administration weighs blacklisting China's chipmaker SMIC” (English Source: Reuters)

My Thoughts: if SMIC is officially blacklisted, it’ll be a death knell to China’s fledgling semiconductor sector in the short-term, in much the same way that the previous three rounds of sanctions have been a death knell to Huawei. SMIC, the “national champion” of semiconductor manufacturing, has already faced “unofficial sanctions”, like the Trump administration’s lobbying of the Dutch government to not allow a sale of lithography equipment (for chip manufacturing) by ASML to SMIC. Meanwhile, HSMC, another Chinese chip foundry that has attracted a ton of investment and government subsidies, is not pulling its weight (more below).

“India Bans 118 Chinese Apps as Indian Soldier Is Killed on Disputed Border” (English Source: New York Times)

My Thoughts: India’s latest round of Chinese app ban made the news in many outlets last week. The most headline-grabbing ban among the apps was the popular battle-royale style game, PlayerUnknown’s Battlegrounds (PUBG), whose South Korean maker has close ties to Tencent. But even more benign apps, like one that scans business cards, were included in this ban. Coupled with ongoing border tension, India is basically off limits as an expansion and investment destination for Chinese tech companies in the short-term. The animosity appears both serious and shrill. To get a feel of the emotion, I recommend you watch a short clip of Indian cable TV news I included (above) talking about this ban. Indian cable TV is known for its theatrical debates, drama, and anxiety-inducing headline animations – CNN and FOX looks quiet and tame by comparison.

“China to Plan Sweeping Support for Chip Sector to Counter Trump” (English Source: Bloomberg)

My Thoughts: While we won’t know all the details of the 14th five-year plan until later this year, $1.4 trillion dollars look to be the price tag China will commit to its domestic chip sector in the next five years, in order to establish technological self-sufficiency. The focus will be on the third generation of semiconductors -- chips that go into 5G equipment, electric and/or self-driving vehicles, and military equipment. China has been importing $300 billion worth of semiconductors for the last two years and is on pace to do the same this year (graphic below), though we don’t know if all the US sanctions will artificially lower that amount. Regardless, the vulnerability of being so dependent on foreign technology is painfully obvious. The money will clearly be there, but will the people deliver?

“Doubtful Cloud Shrouds HSMC: Constructions Halted, More than 500 Employees Still Working” (Chinese Source: First Finance)

My thoughts: If you read the previous section before this one (like I hope you would), then you will notice that this article is a direct foil to the Bloomberg one. Reporters on the ground have been digging into what’s happening at HSMC (Wuhan Hongxin Semiconductor Manufacturing), and things don’t look so...productive. HSMC, one of the more high-profiled chip foundry upstarts, has attracted 128 billion RMB (roughly $18 billion USD) of investment and subsidies since its founding in 2017 and hired a legend in the semiconductor space, Chiang Shang-Yi, to be its CEO. (Chang was TSMC’s first CTO, a topic I explored in-depth in “RISC-V, China, Nightingales”.) Yet, its factory location in Wuhan has not been worked on for eight months due to payment delays to the contractors. Meanwhile, a makeshift office was put up 500 meters from the construction site (see picture below), where employees continue to “do work”. This reporting further revealed that the majority owner of HSMC is a Beijing-based company, whose founders and team have no experience building a chip foundry (or anything of scale). Yet, the same company also spun up another chip maker in the city of Jinan in 2018, called Quanxin Integrated Circuit Manufacturing (QXIC). Both HSMC and QXIC have been aggressively luring TSMC engineers with 2 to 2.5-times their current salary, which was reported by the Nikkei Asian Review and discussed in a previous Interconnected Weekly issue. Besides hiring and roping in more investments and government subsidies, neither of these two foundries have done much chip-making. Is this what China’s semiconductor future looks like?

“Did we really have a late start?” (Chinese Source: Quantum School)

My thoughts: This commentary by Quantum School, a WeChat public account focused on the natural sciences, is a critical self-reflection of why China is lagging so far behind on semiconductor technology and infrastructure software, like operating systems. A common excuse shared in the Chinese tech community is that “we [China] had a late start”, which the author thinks is total BS. According to this piece, China began planning to develop a semiconductor sector in 1956 (two years before Japan did) and started building lithography equipment in 1965. During this current wave of massive investment (and nationwide insecurity), HSMC used a hefty amount of government subsidy to purchase top-tier lithography equipment from ASML to publicly show off its conviction, but later loaned off the same equipment to pay off debt. It’s difficult for me to independently verify all the claims made in this post. But for what it’s worth, this critique was widely shared and read, having reached the “100k+ Reads” threshold on WeChat within two days of publication.

“Absorbing TikTok will not be easy: Hard to sell core technology and team” (Chinese Source: InfoQ)

My thoughts: This article makes a good complement to my deep-dive post last week “What is TikTok Worth to Whom and Why?” With China updating its own “entity list” to include technologies that most certainly exist in TikTok, whoever buys TikTok will likely not get the app’s AI algorithms and recommendation engine. Even though having the users and data is still valuable (arguably more valuable than in the algorithm in my opinion), operating TikTok in this “hybrid” fashion is practically impossible. To make the app work (before the buyer builds a new recommendation engine), American user data will have to be transferred to China, so the algorithms can be “trained” continuously and generate recommended videos to serve up, which defeats the whole purpose of protecting the American people’s data from Chinese access. At this moment, I would not be surprised if the whole deal falls apart and TikTok just gets banned outright.

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.