Index > Briefing
Tuesday, May 23, 2023
Geopolitical and Market Risks in Chip Investments of Chinese Enterprises
He Jun

Chinese smartphone maker OPPO's chip subsidiary Zeku has been closed down, and while the hype surrounding it in the country’s public opinion has gradually cooled down, the shock it has caused in the industry has far from being subsided. With over 3,000 employees, billions of dollars in investment, and four years of time span, the sudden termination of its chip research and development has left the market baffled about the reasons behind it.

According to Zeku, the company's revenue has fallen far short of expectations, making it unable to bear the massive investment required for chip development. The decision has no relation to the quality of work by the Zeku team, stated the company. OPPO also remarked that this difficult decision was made in response to the uncertainties in the global economy and the mobile market. There are alternative interpretations in the market regarding Zeku's closure of its self-developed chip business, such as possible pressure from the United States, as OPPO's chips could disrupt American companies' market share. However, there is currently no tangible evidence to support such views.

In the view of researchers at ANBOUND, compared to finding out the reasons behind Zeku's closure of its chip business, the more valuable and worthy question is the impact of this event on Chinese enterprises engaged in chip development. How will the future geopolitical, industrial, and market environments affect China's chip industry?

Chinese financial and economic news platform Caixin reported that an anonymous integrated circuit expert mentioned Zeku's decision to close its chip business could have a domino effect, leading to some of the country’s chip-making companies relying on external financing to cease operation. Such a perspective is certainly a pessimistic one.

As it stands, Chinese companies primarily focused on the smartphone industry will face significant difficulties and challenges when venturing into self-developed chip manufacturing. The most pertinent challenges stem from market and business considerations. Aiming for efficiency and profitability, companies would allocate resources to research and development (R&D) with the objective of establishing a technological foundation for long-term growth and improved outcomes. Market analysts assert that entering or exiting the chip industry cannot be simply classified as "right" or "wrong" for companies. Initially, companies invested in chip development due to a favorable environment conducive to independent research, with the goal of bolstering their technological and industrial capabilities through self-developed chips to attain greater market profits. However, the evolving landscape has led companies to abandon this pursuit. The current environment is no longer conducive for smartphone-focused companies to engage in self-developed chip research. Persisting along this path could result in a situation where a large-scale chip business capable of market profitability is not achieved, potentially adversely impacting the company's core operations, such as smartphone manufacturing. Considering these factors, Zeku's decision to discontinue self-developed chips aligns with business management practices.

However, engaging in the chip business in China is never merely a market-oriented endeavor. It serves as both a goal for enterprise development and reflects the country's objectives, including industrial security, national security, and independent innovation. Due to the significant importance of the chip-making in industrial sector, information technology, and national competition, it is often closely intertwined with geopolitical issues. The chip industry is frequently targeted in trade sanctions, technological blockades, and intellectual property rights restrictions between countries, becoming the subject of geopolitical maneuvering.

In 2014, China’s State Council issued the "National Integrated Circuit Industry Development Promotion Outline” on guiding the entry of capital, talent, and other resources into the semiconductor industry. In the same year, the National Integrated Circuit Industry Investment Fund was established with an investment of billions of yuan. It served as a strong impetus to encourage more social capital to participate and injected vitality into the still-developing Chinese semiconductor industry, leading to the emergence of numerous start-up companies. However, the United States quickly began suppressing China's integrated circuit industry development. After 2018, ZTE and Huawei were successively subjected to U.S. sanctions. Under the threat of chip supply disruptions, the expectations of "domestic substitution" have grown stronger, and national policies have intensified their efforts in this regard. With the support of policies and capital, chip projects have been launched in various regions. It has been reported that over 3,000 chip design companies are currently in China. However, there are also many unfinished chip industry projects in various regions. According to incomplete statistics, the investment losses due to unfinished chip projects in the country in recent years may amount to hundreds of billions of yuan.

Considering both the market situation and geopolitical landscape, the decision for China to develop its chip industry in 2019 was relatively late. With the hype for China’s own products as substitutes gaining momentum and self-developed chips showing potential for high profits, it was also the time when the U.S. intensified its efforts to exert pressure on Huawei through sanctions. Influenced by factors such as escalating geopolitical tensions, the U.S. implemented a series of restrictive policies, including bans and sanctions, over the past three years to impede China's progress in the high-tech field, with particular emphasis on the chip industry. These "non-market factors" have imposed external constraints on all participants in the Chinese chip industry, creating geopolitical risks that are beyond the control of enterprises.

Huawei’s experience is sometimes cited as an example of a non-chip company entering the chip industry. However, in the realm of self-developed chips, Huawei's case is not representative of the general situation. The company leveraged its strong capabilities and extensive research and development experience in the field of telecommunications network equipment to develop its own chip design capabilities over a long period. It then entered the domain of smartphone chip design. However, it should be noted that Huawei's subsidiary HiSilicon has been involved in chip design for nearly 30 years. Prior to venturing into smartphone chip design, HiSilicon had already designed chips for various communication devices, surveillance equipment, and televisions, which contributed to Huawei's accumulated expertise in this. Despite having such a strong foundation, Huawei has faced significant setbacks under comprehensive suppression by the U.S. Ultimately, it had to withdraw from the ranks of independently developing high-end chips and relinquish the lucrative smartphone industry.

In conclusion, companies from outside the chip industry that venture into this field are currently encountering mounting obstacles. Firstly, they face a market barrier. The chip industry is currently in a downturn, with major companies grappling with inventory backlogs and reduced investments. This presents significant challenges for newcomers in terms of profitability and their ability to invest in research and development. Secondly, there is a geopolitical barrier. The chip industry is not solely driven by market forces; it is intricately linked to geopolitical dynamics, national security, and industrial security. The complex security landscape can trap companies, making it difficult for them to extricate themselves from such circumstances. Huawei's experience serves as a prominent example of this. Thirdly, there is a technological barrier. In the chip industry, profitability is closely tied to technological advancements. However, venturing into the high-end chip sector demands a high level of technological expertise and exposes companies to fierce competition for skilled talent. In recent years, the technological barrier has become increasingly daunting, making it progressively more challenging for less influential companies to participate in this arena.

Final Analysis Conclusion:

The challenges faced by enterprises from outside the chip industry entering this sector are increasing. Following the investment fervor witnessed in recent years, there is likely to be a bubble in chip-related investments within the domestic market. It will take a significant period of time for the demanding development environment in this realm to potentially experience a change.

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