Thu. May 19th, 2022


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Hello, Kenji here from Hong Kong. Our Big Story this week is a scoop by Nikkei Asia on Tsinghua Unigroup, a state-backed tech conglomerate that is ditching two big memory chip projects under pressure from US sanctions. SenseTime, a Chinese facial recognition leader, was also blacklisted by Washington right before its IPO, but its co-founder Xu Li is aligning his goals with Beijing’s to thrive (Spotlight). Ericsson, which was caught out in the US-China tech rivalry, has suffered losses in China (Our Take). Please take care and have a happy lunar new year.

The Big Story – Exclusive

China’s semiconductor master plan has suffered a significant blow. State-backed giant Tsinghua Unigroup has scrapped big memory chip projects in two Chinese cities after the debt-stricken company was hit by US restrictions on access to vital technology, according to this exclusive in Nikkei Asia.

Key developments: One of the memory chip projects being terminated is in the city of Chongqing.

Tsinghua Unigroup had brought in Yukio Sakamoto, the former chief executive of Japan’s Elpida Memory, to help build the company’s capabilities in dynamic random-access memory chips, a segment dominated by Samsung Electronics, SK Hynix and Micron Technology.

But Sakamoto left Tsinghua Unigroup late last year after the recruitment of a team did not go as hoped. The company has suffered financial difficulties as well as challenges sourcing chip production equipment amid tensions between Washington and Beijing.

The second project to be ditched was in Chengdu, where Tsinghua Unigroup planned to build a $ 24bn facility for 3D Nand flash memory chips, according to government documents and sources briefed on the matter.

Upshot: Tsinghua Unigroup was once seen as a great hope in China’s semiconductor self-sufficiency drive. As US-China tensions flared in 2018, Tsinghua chair Zhao Weiguo vowed the company would spend $ 100bn over the next 10 years to build a world-class domestic semiconductor industry. Such plans are now in tatters.

Nian’s top 10

  1. China’s internet censors have pledged to clean up online content during next week’s lunar new year festival as they aim for a “purificationOf cyber space. (FT)

  2. Chinese state media have implicated Jack Ma’s Ant Group in a corruption scandal, the latest in a wide-ranging crackdown that has wiped billions of dollars from his internet empire. (FT)

  3. Indian scooter company Ola Electric was valued at $ 5bn after receiving $ 200m in funding. The start-up has plans for the car market. (DealStreetAsia)

  4. South Korea’s LG Energy Solution is aiming for the electric vehicle battery crown with its supersized $ 10bn IPO this week. (Nikkei Asia)

  5. Exclusive: To eliminate pro-democracy resistance, Myanmar’s military government plans to reduce internet access by banning VPNs. (Nikkei Asia)

  6. TikTok owner ByteDance has dissolved its investment team as China tightens antitrust scrutiny of Big Tech groups. (FT)

  7. After failing to set up a plant in the US, Panasonic will start manufacturing batteries for Tesla in Japan. (Nikkei Asia)

  8. Thai crypto trading company Bitkub plans to expand into other south-east Asian markets. (FT)

  9. Japanese carmaker Toyota plans to increase output, targeting a record 11m cars in 2022. (Nikkei Asia)

  10. Two hospitals in Malaysia and Indonesia are tapping into the metaverse for better telemedicine services. (Nikkei Asia)

An electric vehicle operated by Indian ride-hailing company Ola at a charging station in Nagpur

An electric vehicle operated by Indian ride-hailing company Ola at a charging station in Nagpur © Aditi Shah / Reuters

Our take

If Huawei Technologies has been the main casualty of the US-China tech rivalry, its mirror image would be Ericsson. The Swedish company has suffered in China since Stockholm decided to exclude Huawei and its Chinese peer ZTE from its 5G telecoms auction at the end of 2020.

The numbers speak for themselves. Ericsson’s annual results, announced this week, showed sales in mainland China in 2021 dropped $ 832m compared to a year ago following an apparent retaliation by Beijing. Even though the 5G rollout is set to continue this year, Carl Mellander, chief financial officer, expects no increase in sales in China, which are set to “stay on this level”.

He added during a conference call that the company had already taken actions “to reduce cost and right-size the organization in relation to this new volume that we see in China”. He did not elaborate, but a statement said Ericsson had slashed 881 employees during the last quarter and noted the “decrease [was] mainly due to headcount reductions in mainland China ”.

However, Ericsson is fortunate to have been able to make back those China losses in other regions. Net income rose 30 per cent year on year thanks to profitable double-digit revenue growth in North America, Latin America and Europe. Ericsson is unusual among multinationals in that it could virtually lose China and yet increase profit at the same time. This is down to its unique global standing in the 5G arena.

So it seems that Ericsson is reaping rewards from being perceived as being on the US side. “Part of it can be explained by geopolitics,” said Borje Ekholm, Ericsson’s president and chief executive. But he quickly added that “market share gains in reality result much more from a competitive product portfolio and the big investment we made in R&D”.

– Kenji

Smart data

Bar chart comparing Global box office revenues (bn) with gaming revenues $ bn G0138_22X

Gaming is the big new tech battleground. “Fifteen years ago, you had about 200m gamers in the world and today you’ve got about 2.7bn,” said Neil Campling, tech analyst at Mirabaud Securities. “It’s become the biggest form of media.”

This chart shows the size of global gaming industry revenues compared to global box office revenues in 2021. Microsoft’s audacious $ 75bn move on games publisher Activision Blizzard, announced last week, has detonated a bomb under the industry. One of the big questions it raised was what the deal could mean for Japan’s Sony.

Sony’s PlayStation has long been in a competitive battle with Microsoft’s Xbox. This deal will only intensify that rivalry.

Spotlight

Xu Li, co-founder and chief executive of facial recognition giant SenseTime, could become China’s next tech star by following a strategy that aligns his goals closely with those of Beijing.

Although delayed, SenseTime’s successful IPO put the company’s market capitalization at $ 30.6bn – making Xu’s stake worth $ 784m. The IPO happened days after Washington placed SenseTime on an investment blacklist, accusing it of enabling human rights abuses against Muslim Uyghurs in China’s north-western Xinjiang region.

Xu is a fan of Yang Guo, the protagonist of a famous Chinese martial arts novel, whose subtle powers of persuasion win over followers and enemies alike.

He has needed such powers in his own unlikely story. SenseTime struggled to raise funds as investors thought of it as an expensive academic endeavor with little hope of commercial success. But eventually, SenseTime made its way to Chinese smartphones and security cameras, gaining 40 percent of its revenue from government contracts for smart cities.

Xu promised a “clear path to profitability” by lowering the cost of research and development and finding new customers for its artificial intelligence. As Beijing attacks its leading internet companies over regulatory issues, nothing might be more important than a bit of government support.

Art of the deal

China’s state-linked investors have become the frontrunners in backing the country’s top start-ups, boosting Beijing in its rivalry with Washington for tech supremacy.

State-backed investors participated in almost 30 per cent of the 100 biggest start-up investments in 2021, marking threefold growth from a decade ago when their contribution to start-up transactions was less than 10 per cent, according to data compiled by investment bank Taihecap.

China’s state-linked investors include government bodies, central and regional government-led investment funds and state-backed insurers and financial institutions.

“For nearly a decade since the inception of Taihecap, participants in China’s investment market have been predominantly financial and strategic investors. We often did not work directly with state investors, ”said Rachel Mei, partner at Taihecap.

“But starting from 2019, we have seen a significant increase in dealmaking activity by government-backed investors.”

State investors are increasing deployments in the tech sector, especially in sectors such as carbon neutrality, which Beijing has deemed strategically important to national development.

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